The judgment of the court was delivered by
G.Chandraiah-At the instance of the Revenue, the Income Tax Appellate Tribunal, Hyderabad Bench-'A' (in short "the Tribunal") had referred the following questions of law as arising from the Tribunal's Order dated12.06.1996 made in I.T.A.No.460/H/92, for the assessment year 1989-1990:
"1) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was correct in law in holding that the computation of the loss to be carried forward cannot be an extension of determination of the profit u/s 115J of the Income Tax Act and accordingly upholding the order of the CIT (A)?
2) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was correct in law in holding that since the assessment order contained only a working for determination of book profit U/s. 115J, there is no infirmity in the order of the CIT (A) declining to deal with the other grounds raised by the appellant in relation to determination of loss in accordance with the other provisions of the Act?
3) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was correct in law in holding that there is no infirmity with regard to interpretation of the provisions of Sec.115J in respect of determination of carry forward losses and consequently the CIT(A) was correct in concluding that interpretation of Sec.115J(2) would not conflict with the provisions of Sec.115J(1) of the Act?
2) Having regard to the facts and circumstances of the case, both the counsel though three questions have been referred for the opinion of the Court, they confined to only seeking reference to the Question No.2. Therefore, this Court is not required to answer the Question Nos.1 and 3. In that view of the matter, the Question No.2 as set out hereunder is being considered.
"Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was correct in law in holding that since the assessment order contained only a working for determination of book profit U/s. 115J, there is no infirmity in the order of the CIT (A) declining to deal with the other grounds raised by the appellant in relation to determination of loss in accordance with the other provisions of the Act?"
3) Before answering the above question, it is appropriate to make a reference to brief facts of the case. Assessee is a company, in which the public are substantially interested. The assessee is engaged in the business of manufacture and sale of cement. Assessee filed its return of income disclosing 'nil' income after setting off of unabsorbed investment allowance of Rs.22,44,298/- and disclosing an income of Rs.30,56,600/- under the provisions of Section 115 J of the Income Tax Act, 1961 (in short "the Act"). The Assessing Officer while framing the assessment added back certain deductions claimed by the assessee. The Assessing Officer finally determined the income of the assessee at 'nil' after allowing the set off of investment allowance for the Assessment year 1988-1989 and 1989-1990 to the extent of Rs.51,16,367/-. In so far as the computation of book profit under Section 115J of the Act is concerned, he computed the total book profit at Rs.1,06,65,939/- by adding the provision for doubtful debts as well as prior period expenditure debited to the profit and loss account and 30% thereof is determined at Rs.31,99,780/-. The assessee carried the matter in appeal to the Commissioner of Income Tax (Appeals).
4) Before the Commissioner, Income Tax (Appeals), the assessee raised the issues relating to the disallowance of the deductions claimed by the assessee. The Commissioner (Appeals), did not go into the other claims, but determined the computation of the book profit under Section 115J of the Act. After considering all the contentions of the assessee, the CIT (Appeals) upheld the book profit as determined by the assessing officer. The CIT (Appeals) also observed while refusing to deal with the other grounds that the two processes are separate and independent and cannot be integrated as canvassed by the assessee. This was contested by the assessee before the Tribunal. The Tribunal after considering the assessee's contention upheld the order of the Commissioner of Income tax (Appeals). The Tribunal also observed that since the assessment order appealed against contained only a working for determination of book profits under Section 115J of the Act, the CIT (Appeals) declined to deal with the other grounds raised by the assessee in relation to determination of loss in accordance with the other provisions of the Act. According to the Tribunal there is no infirmity in the order of the CIT (Appeals). In so far as the addition of Rs.2,00,000/- being provision for doubtful debts to the book profits, the Tribunal confirmed the addition relying upon the decision of the jurisdictional High Court in the case of CIT Vs. Sileman Khan Mahabub Khan 174 ITR 200 as well as the amended provisions of Section 36, which were amended with effect from 01.04.1989.
5) Sections 115J, 115J(1), 115J(1A) and 115J(2) read as under: Section 115J - Special provisions relating to certain companies:
(1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee being a company (other than a company engaged in the business of generation or distribution of electricity), the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1988 but before the 1st day of April, 1991 (hereafter in this section referred to as the relevant previous year), is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit. (1A) Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956).
155J(2) Nothing contained in sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of sub-section (2) of Section 32 or sub-section (3) of Section 32A or clause (ii) of sub-section (1) of Section 72 or Section 73 or Section 74 or sub-section (3) of Section 74A or sub- section (3) of Section 80J.
6) Interpreting Section 115 J of the Act, the Hon'ble Supreme Court in a case of Karnataka Small Scale Industries Development Corporation Ltd., Vs. Commissioner of Income-Tax 258 ITR 770 had observed as follows:
"Section 115J, therefore, involves two processes. Firstly, an assessing authority has to determine the income of the company under the provisions of the Income-tax Act. Secondly, the book profit is to be worked out in accordance with the Explanation to section 115J(1) and it is to be seen whether the income determined under the first process is less than 30 per cent of the book profit. Section 115J would be invoked if the income determined under the first section (1) of section 115J gives the definition of 'book profit' by incorporating the requirement of section 25 of the Companies Act in the computation of the book profit. Brought forward loss or unabsorbed depreciation whichever is less would be reduced in arriving at the book profits. Sub-section (2), however, provides that the application of this provision would not affect the carry forward of unabsorbed depreciation, unabsorbed investment allowance, business losses to the extent not set off, and deduction under section 80 J, to the extent not set off as computed under the Income-tax Act.
A Division Bench of this Court in Suryalatha Spg. Mills Ltd., (1997) 223 ITR 713 had construed section 115J in favour of the Revenue, inter alia, because, "the very object of the provision of section 115 J is to tax such companies which are making huge profits and also declaring substantial dividends but are managing their affairs in such a way as to avoid payment of income-tax, as a result of various tax concessions and incentives and for that purpose, the taxable income is determined under sub-section (1) of Section 115J, if any loss equal to the income thus determined is allowed to be adjusted, then that would frustrate and nullify the very object of enacting the provision." The reasoning appears to us to be unexceptionable.
7) As a matter of fact, the Commissioner, Income-tax (Appeals) in his order had recorded as follows:
"Definitely, such determination of amounts to be carried forward has to be under the normal provisions of the I.T. Act and not under Section 115J(1). Accordingly, there has to be a separate determination of the same in accordance with the other provisions of the I.T. Act, either in the form of a separate order or note to be communicated to the assessee."
8) In spite of having observed as above, the Commissioner dismissed the appeal which was merely confined by the Tribunal. Now, in view of the settled law as enunciated by the Supreme Court, in the case of Karnataka Small Scale Industries Development Corporation Ltd., (2nd supra) the question of law is required to be answered in favour of assessee and against the revenue.
9) Having observed so, the Appellate authority failed to consider the same with reference to the application of Section 115J of the Act. In that view of the matter, the Question No.2, referred to, is answered in favour of the assessee and against the revenue.
10) Accordingly, the question is answered in favour of the assessee and against the revenue. No order as to costs. Miscellaneous Petitions, if any, pending shall stand disposed of.