SURYALATHA SPINNING MILLS LTD Vs. UNION OF INDIA

JUDGEMENT

(1.) In these four writ petitions, the constitutional validity of section 115J of the Income-tax Act, 1961, is questioned. As the question raised in these writ petitions is common, they were heard together and are being disposed of by a common judgment. For appreciating the contentions raised in these writ petitions, we would refer to the facts in Writ Petition No. 8060 of 1992.

(2.) The first petitioner in this writ petition is a public limited company which is registered under the Companies Act, 1956. The second petitioner is one of the equity shareholders of the first petitioner-company. It is stated that under the provisions of the Companies Act, the petitioner is required to prepare the balance-sheet and the profit and loss account in accordance with Schedule VI to the said Act. For the financial year 1989-90, i.e., 1/04/1989, to 31/03/1990, the petitioner disclosed Rs. 65,52,925 as the net profit. The petitioner filed income-tax returns for the said year claiming that under section 32(2) of the Act, the company has unabsorbed depreciation allowance of Rs. 11,99,745 which the petitioner was entitled to carry forward; the petitioner had also investment allowance computed in accordance with the provisions of section 32A of the Act at Rs. 49,59,734 which remained unabsorbed. After necessary adjustment of the other allowances and expenses, the income for that year was determined at Rs. 61,59,479. But after setting off the brought forward depreciation and investment allowance for the assessment year, the income of the petitioner for the assessment year 1990-91 became nil. The petitioner says that section 115J was inserted by the Finance Act, 1987; and a new concept of book profit was introduced; and the provisions of section 80VVA were deleted. By virtue of the operation of the newly inserted provision 115J, the books profits liable to tax were determined at Rs. 29,25,878 and tax of Rs. 14,62,939 computed at 50 per cent. and surcharge of Rs. 1,17,035 at eight per cent. of the income-tax, totalling to Rs. 15,79,974 were paid along with returns of income for the year 1990-91. It is added that for the assessment year 1991-92, the petitioner had the profit of Rs. 1,10,64,691. After making necessary adjustments as per the Act and the rules framed thereunder, the taxable income was arrived at Rs. 18,63,394 on which tax together with surcharge was paid at Rs. 8,57,160. The petitioner-company deducted the income determined for the assessment year 1991-92 under the provisions of section 115J and claimed to set off the notional income on which it has suffered tax for the year 1990-91. That was not allowed by the Income-tax Officer. The petitioner, therefore, challenges the constitutional validity of section 115J saying, it is unconstitutional and violative of articles 14 and 19(1)(g) of the Constitution of India.

(3.) In the counter-affidavit filed by the Revenue, it is stated that the minimum tax on companies was dealt with by section 80VVA which was inserted in 1983 but from the year 1988-89 that provision was deleted and section 115J was inserted. Sample studies carried out by the Central Board of Direct Taxes revealed that while the provisions of section 80VVA have had the effect of subjecting the companies to minimum tax which they would not have otherwise paid, there were still companies which had no income-tax liability despite substantial profits. This was due to the fact that the companies were availing of depreciation in full under the Income-tax Act, and thus the phenomena of prosperous zero-tax companies continued. There were about 650 such companies during the relevant assessment year 1984-85. About 28 per cent. of the companies (139 companies) accounting for a net profit of Rs. 274 crores showed no tax liability. So after conducting a careful study, by the Finance Act, 1987, section 80VVA was deleted and section 115J was introduced by way of an independent Chapter XII-B in the Income-tax Act and it came into force from the assessment year 1988-89. It is only when the total income of a company under the provisions of the Income-tax Act, in respect of any accounting year, of any company, is less than 30 per cent. of its book profits for purposes of charging income-tax, that 30 per cent. of the book profit is treated as income. Subject to some adjustments, the book profits became the basis of taxation or assess ability of income-tax. The figures given by the petitioner company in its return for the assessment year 1991-92 are not disputed. But it is stated that there is no rationality in claiming deduction of the income assessed under section 115J for the assessment year 1990-91 and there is no substance in the contention that there would be double taxation. It is not correct that section 115J creates any hostile discrimination as alleged. Parliament in its wisdom chose the corporate sector for taxing under section 115J of the Act and the same is not open to challenge on the ground of discrimination. The Government policy of taxation strikes a balance between promotion of investment in development and levy and recovery of taxes for the purposes of developmental activities and keeping in view these factors amongst others, the Government formulated the taxation policy. For these reasons, it prayed that the writ petitions be dismissed.