Introduction: S. 115JB(1) of the Income-tax Act, 1961 (Act in short) provides for payment of a minimum alternate tax in case the Income-tax computed on the total income falls short of 10% of the book profits of the company. For ensuring that companies do not adopt accounting practices to render the provision otiose, Ss.(2) requires the profit and loss account of companies to be prepared as per Parts II and III of Schedule VI to the Companies Act, 1956. Proviso to this sub-section further ensures that the accounting policies, accounting standards and the method and rates of depreciation adopted for the purposes of S. 210 of the Companies Act, are not varied while computing ‘book profit’ u/s.115JB.
Explanation to S. 115JB(2) defines ‘book profits’. It is on this book profit that the minimum alternate tax has to be computed U/ss.(1). The explanation states that ‘book profit’ is the net profit computed U/ss.(2) and adjusted for specific additions and reductions. The adjustments specified in the explanation are exhaustive and the Income-tax authorities have no right to make other adjustments while computing the book profits. [Apollo Tyres Ltd. v. CIT, (2002) 255 ITR 273 (SC)]
One of the items required to be added back to the net profit is “the amount of income-tax paid or payable, and the provision therefor”. [clause (a) of the Explanation]. In this article, an attempt has been made to examine the scope of this clause. The crucial words used in clause (a) of the explanation are ‘income-tax’, ‘paid’, ‘payable’ and ‘provision’. Understanding of the meaning of each of these words is sine qua non for examining the scope of clause (a).
(a) Income-tax :
Neither S. 115JB, nor any other provision of the Act defines the term ‘Income-tax’. To understand the meaning of this term, one has to refer to the definition of the term ‘tax’ in S. 2(43) of the Act. The definition of the term ‘tax’, which is exclusive in nature, is pertinent for our discussion. S. 2(43) defines the term ‘tax’ to mean Income-tax chargeable under the provisions of the Act and fringe benefit tax payable u/s.115WA. The charging section under the Act is S. 4. It provides that Income-tax shall be charged for a particular assessment year in accordance with and subject to the provisions (including provisions for the levy of additional Income-tax) of the Act, in respect of the total income of the previous year of every person, at the rate or rates of tax enacted by any Central Act for that year.
By jointly reading S. 2(43) with S. 4, one can define ‘Income-tax’ as “a tax on the total income of the previous year of every person at the rates prescribed by any Central Act. In addition to tax on total income, Income-tax also includes any additional Income-tax computed as per the provisions of the Act.”
(b) Paid :
The term ‘paid’ is the past tense of the term ‘pay’. The Shorter Oxford English Dictionary, fifth edition, 2002, volume 2, page 2126 defines the term ‘pay’ to mean “give (a thing owed, due, or deserved); discharge (an obligation, promise, etc.)”. The term ‘pay’ has many meanings attributable to it depending upon the context in which it is used.
When used in relation to tax under the Income-tax Act, the word ‘paid’ mean tax paid by or on behalf of the assessee to the Government. Apart from advance tax and self-assessment tax, it would cover tax deducted or collected at source from the assessee. For the purpose of the Income-tax Act, the deductor or collector of tax at source is the agent of the Government. Once the tax is deducted or collected at source, it is as good as paid.
In JCIT v. Saraswati Real Estates and Investments (P) Ltd., ITA No. 186/Del./2000, dated 5-12-2003, the Delhi Bench of the Tribunal held that whether the Revenue gives credit for the tax deducted at source or not, the Revenue by no means can enforce the payment of the tax on the assessee. The Tribunal noted that in view of the scheme of the Act, the entire liability rests upon the person who has deducted. It is such a person who is responsible for deposit of the same with the Central Government and it is such a person who is to be held to be an assessee in default. The assessee cannot be made to suffer on account of the default of such person who is performing the role of an agent of the Government as far as deduction of tax at source is concerned. The Tribunal observed :
“In view of what has been discussed above, we feel that whether the Revenue gives credit for the tax deducted at source or not, but we must say that the Revenue by no means can enforce the payment of the said tax on the assessee, as in view of the scheme of the Act, the entire liability rests upon the person who has deducted it and it is such a person who is responsible for deposit of the same with the Central Government and it is such a person who is to be held to be an assessee in default and not the assessee and that the assessee cannot be made to suffer on account of the default of such person who is performing the role of an agent of the Government as far as deduction of tax at source is concerned.”
S. 199 read with S. 205 supports the view that once tax is deducted at source, it as good as paid by the assessee. S. 199 provides that deduction of tax at source amounts to payment of tax on behalf of the assessee from whom the tax is deducted. However, credit towards the deducted tax will not be available to the assessee if the deductor fails to remit the amount of tax deducted from the assessee. By virtue of the protection extended to the assessee u/s.205, once tax has been deducted at source, the assessee cannot be called upon to pay the tax, whether or not the amount has been remitted to the Government.
The definition of the term ‘paid’ found in S. 43(2) of the Act is of no avail in the context of S. 115JB. This definition, which covers both actual and accrued payments, is applicable for the limited purposes of Chapter IV-D. Since Item (a) of the explanation to S. 115JB(2) provides separately for Income-tax payable, the word ‘paid’ has to be read in the context to cover actual payments only.
(c) Payable :
The word ‘payable’ refers to amounts that have accrued but not yet paid. The Madras High Court in Selvambal Ammal v. Venkataram, AIR 1966 Mad. 460, has defined the term ‘payable’ to mean the money payable in future. The same Court in Kothari Textiles Ltd. & Others v. CWT, (1963) 48 ITR 816 (Mad.) has defined the term ‘payable’ to signify an obligation to pay at a future time, but when used without qualification, ‘payable’ means that the debt is payable at once as opposed to owing. In the words of the Madras High Court :
“In the dictionary of English Law by Earl Jowitt, the meaning of the word ‘payable’ is thus rendered : ‘A sum of money is said to be payable when a person is under an obligation to pay it. Payable may, therefore, signify an obligation to pay at a future time, but when used without qualification, payable means that the debt is payable at once as opposed to owing.”
In Premier Agro Products (P) Ltd. v. State of Kerala, (2005) 139 STC 37 (Ker.), the High Court of Kerala, relying on several decisions, defined the term ‘payable’ to signify an obligation to pay at a future time as well as an obligation to pay at once. In light of these decisions, the word payable has to be understood as an obligation to pay, whether immediately or at a future time. The High Court observed :
“A Full Bench of this Court in M.R.F. Limited v. Assistant Commissioner, (Assmt.)-II, Sales Tax Special Circle (1995) 98 STC 233 ; (1995) 1 KLT 809 (FB) considered the validity of the provisions of S. 29A(2B) of the Act. In that context, the Full Bench considered the meaning of the expression ‘tax payable’ used in the said sub-section. In paragraph 14 of the said judgment, it is observed as follows :
“14. In the light of the above rival contentions, it is necessary to consider about the proper meaning to be assigned to the word ‘payable’ used in sub-section. According to Supreme Court, the word ‘payable’ is somewhat indefinite in import and its meaning must be gathered from the context in which it occurs (see New Delhi Municipal Committee v. Kalu Ram, AIR 1976 SC 1637). A Full Bench of the High Court of Madras has also held that the word payable has ‘both a primary and a secondary meaning’ or a ‘basic’ and ‘extended meaning’. After referring to the several dictionary meanings, the Full Bench has held that the term ‘payable’ has two meanings (i) owing, and (ii) payable at a particular point of time, and when the term is used without any qualification, payable means ‘payable at once’ [See Narayanan Chettiar v. Annamalai Chettiar, AIR (1961) Mad. 313]. The meaning of the word ‘payable’ has been given in Black’s Law Dictionary as thus :
“Payable — capable of being paid; suitable to be paid; admitting or demanding payment; justly due; legally enforceable. A sum of money is said to be payable when a person is under an obligation to pay it. Payable may therefore signify an obligation to pay at a future time, but, when used without qualification, term normally means that the debt is payable at once, as opposed to ‘owing’.”
It is clear from the above extract that the word ‘payable’ may signify ‘an obligation to pay at a future time’ as well as ‘an obligation to pay at once’.”
(d) Provisions :
To reiterate, the disclosure requirements of parts II and III of the VI schedule to the Companies Act are required to be complied with, in preparing the profit and loss account for S. 115JB(2). Therefore, the word ‘provision’ is to be understood in the sense found in Part III of the VI Schedule of the Companies Act. This part defines the word ‘provision’ in the following words :
“(i) The term ‘provision’ means any amount written off or retained by way of providing for depreciation, renewals or diminution in value of asset or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy.”
Under this definition, the word ‘provision’ means :
(a) any amount set aside out of the profits of any year to meet any known liability, or
(b) amount set aside or written off towards depreciation, renewals or diminution in the value of assets, in either case, the amount being not quantifiable with substantial accuracy.
In light of the above, the question whether clause (a), i.e., ‘the amount of Income-tax paid or payable, and the provision therefor’ covers the following items is examined.
(A) Income-tax
(B) Surcharge
(C) Cess
(D) Interest on Income-tax
(E) Penalty and fine
(F) Fringe Benefit Tax
(G) Dividend Distribution Tax
(H) Deferred tax liability under AS-22
(I) Foreign taxes
(J) Wealth Tax and interest on Wealth Tax
(K) Credits to profit and loss account.
(A) Income-tax :
The term ‘Income-tax’, as discussed above, means the tax on total income of the previous year of every person and any additional Income-tax payable under the provisions of the Act. It is in this sense that the term ‘Income-tax’ has to be applied throughout the Act including in S. 115JB.
The Supreme Court in Bhogilal Chunnilal Pandya v. State of Bombay, AIR 1959 SC 356; K. N. Guruswamy v. State of Mysore, AIR 1954 SC 592 and Shamaro Vishnu Parulekar v. District Magistrate, Thana, AIR 1957 SC 23, has laid out the principle that when the Legislature uses the same word in different parts of the statute, subject to the context, the presumption is that the word is used in the same sense throughout that statute.
There is nothing in the context of S. 115JB to indicate that the word ‘Income-tax’ has to be understood in a manner different from its usage under the rest of the Act. Further, the language employed by entry (a) of the explanation is plain and simple and has to be applied as such. Income-tax paid or payable for the period or provision made for payment of income-tax for the year will have to be added to the net profits as computed u/s.115JB(2) for arriving at the book profits.
(B) Surcharge :
The Income-tax Act neither defines ‘surcharge’, nor contains any specific provisions relating to levy of surcharge. It is only in the Finance Acts that surcharge is specifically provided for. The source of the legislative power to impose surcharge on taxes is found in Article 271 of the Constitution of India which provides:
“Notwithstanding anything in Articles 269 and 270, Parliament may at any time increase any of the duties or taxes referred to in those articles by a surcharge for purposes of the Union and the whole proceeds of any such surcharge shall form part of the Consolidated Fund of India.”
The use of the words ‘at any time increase any of the duties or taxes referred to in those articles by a surcharge’ indicates that surcharge in an increase in the amount of taxes or duties covered by Articles 269 and 270 and thus form part of such tax or duties. While Article 269 covers taxes on sale and purchase of goods, Article 270 covers duties and taxes referred under the List-I (Union List) of the VII Schedule to the Constitution. Entry No. 84 of the Union list provides for taxes on incomes other than agricultural income, i.e., Income-tax. Surcharge on Income-tax is an increase in the Income-tax and therefore part of Income-tax. This position is supported by the decision of the Supreme Court in CIT v. K. Srinivasan, (1972) 83 ITR 346 (SC). The Supreme Court observed :
“The meaning of the word ‘surcharge’ as given in the Webster’s New International Dictionary includes among others ‘to charge; (one) too much or in addition . . .’ also ‘additional tax’. Thus, the meaning of surcharge is to charge in addition or to subject to an additional or extra charge. If that meaning is applied to S. 2 of the Finance Act 1963, it would lead to the result that Income-tax and Super-tax were to be charged in four different ways or at four different rates which may be described as (i) the basic charge or rate (In part I of the First Schedule); (ii) surcharge; (iii) special surcharge, and (iv) additional surcharge calculated in the manner provided in the Schedule. Read in this way the additional charges form a part of the Income-tax and Super Tax. It is possible to argue and that argument has been commended on behalf of the Revenue that the word ‘surcharge’ has been used in Article 271 for the purpose of separating it from the basic charge of a tax or duty for the purpose of distributing the proceeds of the same between the Union and the States. The proceeds of the surcharge are exclusively assigned to the Union. Even in the Finance Act itself it is expressly stated that the surcharge is meant for the purpose of the Union.”
The word ‘surcharge’ as used in S. 2(29C) and S. 113 of the Act also indicates that surcharge is a part of Income-tax. S. 2(29C) requires surcharge to be taken as a part of Income-tax for computing the maximum marginal rate. S. 113(2) requires the tax on undisclosed income of the block period to be increased by surcharge as applicable. This establishes that Income-tax includes surcharge, additional surcharge and special surcharge computed on the income of the current year. Therefore, ‘surcharge’ is covered by clause (a) of Explanation to S. 115JB.
(C) Cess :
Like the word ‘surcharge’, the word ‘cess’ has not been defined in the Income-tax Act. The Act does not contain any reference to the word ‘cess’ as levied on Income-tax, though reference to the word ‘cess’ in its general sense is found in S. 43B, S. 138 and S. 145A of the Act. Cess is levied u/s.2(11) and u/s.2(12) of the Finance Act, 2007. While S. 2(11) deals with ‘Education Cess’, S. 2(12) deals with ‘Secondary and Higher Education Cess’. These two sub-sections define the respective cess as additional surcharge. These two sub-sections are extracted below :
“(11) The amount of Income-tax as specified in Ss.(1) to Ss.(10) and as increased by a surcharge for purposes of the Union calculated in the manner provided therein, shall be further increased by an additional surcharge for purposes of the Union, to be called the ‘Education Cess on Income-tax’, calculated at the rate of two per cent of such Income-tax and surcharge, so as to fulfil the commitment of the Government to provide and finance universalised quality basic education.”
“(12) The amount of Income-tax as specified in Ss.(4) to Ss.(10) and as increased by a surcharge for purposes of the Union calculated in the manner provided therein, shall be also increased by an additional surcharge for purposes of the Union, to be called the ‘Secondary and Higher Education Cess on Income-tax’, calculated at the rate of one per cent of such Income-tax and surcharge, so as to fulfil the commitment of the Government to provide and finance secondary and higher education.”
As mentioned above, since Income-tax includes additional surcharge, ‘cess’ forms part of Incometax for the purposes of clause (a) of explanation to S. 115JB.
(D) Interest on Income-tax :
The term ‘Interest on Income-tax’ is not defined under the Act. In both general and legal usage, the terms ‘Income-tax’ and ‘interest’ have different meanings. Even under the Act, these terms are used in senses distinct from each other. In Bhor Industries Ltd. & Others v. CIT, (1961) 42 ITR 57 (SC), the Supreme Court held that there is nothing in the Act to show that interest on Income-tax is to be treated as tax. The Supreme Court held as under :
“The words of the sub-section are clear to show that interest as interest is added to the tax as determined. There is nothing to show that it is to be treated as tax, and it thus retains its character of interest, but is recoverable along with the tax. Indeed, S. 29 of the IT Act makes a distinction between tax, penalty and interest. Since S. 23A speaks of deduction only of Income tax and Super Tax, no deduction could be made in respect of this interest.”
The following arguments strengthen the view that interest and Income-tax are not synonymous :
(a) The charging section for Income-tax is S. 4 while charging section for interest are various, including S. 234A to S. 234D.
(b) S. 2(43) which defines tax does not cover interest. No other provision states that interest on tax constitutes Income-tax.
(c) Several sections of the Act use the words ‘tax’, ‘interest’, ‘penalty’ and ‘fine’ simultaneously. This indicates that these terms are used distinctly from each other in the Act. S. 156, S. 171, S. 229, S. 276C and S. 277A are a few of the sections which refer to these terms together. In Harshad Shanti Lal Mehta v. Custodian & Others, (1998) 231 ITR 871 (SC) the Supreme Court observed that tax, penalty and interest are different concepts under the IT Act.
(d) While Income-tax is levied to fund the State activities, interest is levied to compensate the Government for denial of use of the tax it was entitled to from the assessees.
(e) Charge of Income-tax is attracted irrespective of any default on the part of the assessee, while liability to interest arises only on default of the assessee in complying with the provisions of the Act.
(f) The rates of Income-tax are prescribed in the Finance Act, except in some special cases. On the other hand, the rates of interest are prescribed in the Act itself.
(g) While the CBDT has powers u/s.119(2)(a) to relax provisions relating to interest, it does not have specific powers to reduce the levy of tax.
(h) In case two interpretations are possible, the interpretation benefiting the assessee has to be selected. The argument that Income-tax does not include interest thereon is favourable to the assessee and must be adopted. The contrary interpretation will give an artificial meaning to the word ‘Income-tax’ and therefore has to be avoided.
In relation to S. 115J the Kerala High Court in CIT v. Fertilisers and Chemicals Travancore Ltd., (2003) 261 ITR 484 (Ker.) and the Delhi Bench of the Tribunal in Insilco Ltd v. JCIT, (2004) 85 TTJ (Del.) 538 have held that interest on Income-tax cannot be added back. The Panaji Bench of the Tribunal in Salgaocar Mining Ind. (P.) Ltd. v. JCIT, (2006) 287 ITR 197 (AT), in relation to the S. 115JA, has held that interest on Income-tax is not Income-tax. The Tribunal concluded :
“The above discussions make it equally clear that the terms ‘Income-tax’, ‘interest’ have assumed and acquired separate meanings and are understood distinctly and differently from each other. For this reason also, it is not possible to treat ‘interest’ as part of ‘Income-tax.’ One of the well-recognised rules of interpretation is that where the statutory language is plain and clear, the task of interpretation can hardly be said to arise. The first and foremost elementary rule of construction is that it is to be assumed that words and phrases of a technical legislation like IT Act are used in their technical meaning which they have acquired. As already mentioned above, the term ‘Income-tax’ is understood in altogether a different sense than the term ‘interest’. It means the Income-tax which has been specified in Schedule 1 to the Finance Act, 1999 and hence, its meaning cannot be artificially extended to include interest. In our humble view, interest on Income-tax clearly falls outside the scope of the term ‘Income-tax’ as used in Expln. (a) to Ss.(2) of S. 115JA. Wherever the intention was to include interest, the legislature has specifically provided, as in S. 156, for inclusion of interest in the phrase ‘sum payable’. No provision of law has been brought to our notice to show that the term ‘Income-tax’ has been defined to include ‘interest’ within its ambit. We are, therefore, unable to artificially extend the scope of Income tax used in Expln. (a) to Ss.(2) of S. 115JA, so as to include ‘interest on income-tax’ also.”
S. 115JB has superseded S. 115JA and S. 115JA had superseded S. 115J. However, clause (a) of the Explanation to S. 115JB(2) has remained unchanged and is common to all these three provisions. Therefore, decisions rendered under the other S. 115J and S. 115JA are equally applicable to S. 115JB. In light of the decisions, one can hold that interest on Income-tax does not form part of Income-tax, and should not be added back to the net profits to determine book profits.
One should however note that the Courts have interpreted ‘interest on Income-tax’ as forming part of Income-tax for the purposes of disallowance u/s.40(a)(ii). The authorities on the point include Assam Forest Products (P.) Ltd v. CIT, (1989) 180 ITR 478 (Gau.); Parshuram Agarwal v. CIT, (2003) 130 Taxman 774 (Gau.); Orissa Cements Ltd v. CIT, (1993) 200 ITR 636 (Del.) and Mannalal Ratanlal v. CIT, (1965) 58 ITR 84 (Ori.). These decisions were rendered on the ground that interest is an accretion to tax and it was not expended to earn the business income. Since these decisions are rendered in a different context, they should be regarded as inapplicable in the context of S. 115JB.
(E) Penalty and fine :
Penalties and fines imposed under the Act are distinct in nature from Income-tax. The decisions of the Supreme Court in Harshad Mehta’s case (mentioned above) and CIT v. Hindustan Electro Graphites Ltd., (2000) 243 ITR 48 (SC) can be referred for the purpose. Penalty is levied by the Income-tax authorities for non-compliance with the provisions of the Act and the penalties can be waived or reduced u/s.273A. Similarly, fines are imposed by the Criminal Courts as a punishment for offences committed under the Act. In the Hindustan Electro Graphite’s case, the Supreme Court observed :
“S. 2(43) of the IT Act defined ‘tax’ during the relevant period as Income-tax and Super Tax chargeable under the provisions of that Act. Therefore, what is levied under the charging provision of that Act, i.e., S. 4 of the IT Act, alone can be called Income-tax. Interest, penalties and fines, which are also payable under the other provisions of that Act, cannot be termed as Income-tax. They are imposed in addition to Income-tax for the purpose of enforcing the levy of Income-tax.”
One can also rely on the decisions in Salgaocar Mining Ind. (P.) Ltd. v. JCIT (supra) and CIT v. Fertilisers and Chemicals Travancore Ltd. (supra), to hold that penalties and fines are not to be added back to the net profits to arrive at the book profits u/s.115JB.
(F) Fringe Benefit Tax :
Income-tax includes additional Income-tax charged under any other provision of the Income-tax Act. S. 115WA, the charging section for Fringe Benefit Tax (FBT in short) employs the words ‘additional Income-tax (in this Act referred to as Fringe Benefit Tax)’ indicating that FBT is an additional Income tax. If construed in this sense, FBT has to be added to the net profit to arrive at the book profits.
However, FAQ No. 103 of the CBDT Circular No. 8 of 2005, dated 29-8-2005 specifically provides that FBT need not be added back for computing book profits u/s.115JB. It states :
“103. Whether FBT would be allowable deduction while computing ‘book profit’ u/s.115JB ?
Ans. : FBT is a liability qua employer. It is an expenditure laid out or expended wholly and exclusively for the purposes of the business or profession of the employer. However, sub-clause (ic) of clause (a) of S. 40 of the Income-tax Act expressly prohibits the deduction of the amount of FBT paid, for the purposes of computing the income under the head ‘Profits and gains of business or profession’. This prohibition does not apply to the computation of ‘book profit’ for the purposes of S. 115JB. Accordingly, the FBT is an allowable deduction in the computation of ‘book profit’ u/s.115JB of the Income-tax Act.”
Circulars issued by the CBDT are binding on the authorities under the Act. This is the mandate of S. 119. The Supreme Court in CIT v. Vasudev V. Dempo, (1992) 196 ITR 216 (SC) and Tanna and Modi v. CIT & others, (2007) 292 ITR 209 (SC) has upheld the principle that executive interpretations of the Act issued by the CBDT in Circulars are binding on the authorities.
In Ellerman Lines Ltd. v. CIT, (1971) 82 ITR 913 (SC), K. P. Varghese v. ITO; [1981] 131 ITR 597 (SC) and Navnit Lal C. Javeri v. K. K. Sen, AAC, (1965) 56 ITR 198 (SC), the Supreme Court went ahead to hold that beneficial instructions and directions given by the Board are binding on the officers, even if they deviate from the provisions of the Act.
Therefore, an assessee can take advantage of the CBDT Circular and not add back FBT for computing book profits u/s.115JB.
(G) Dividend Distribution Tax :
Dividend Distribution Tax (DDT in short) like FBT is referred to as additional Income-tax. DDT is levied under the provisions of S. 115O of the Act. S. 115O(1) provides that “any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2003, whether out of current or accumulated profits shall be charged to additional Income-tax (hereafter referred to as tax on distributed profits) at the rate of fifteen per cent.” Since, Income-tax includes additional Income-tax, and DDT being an additional Income tax, is required to be added back to the net profits to arrive at the book profits.
However, in ACIT v. Balarampur Chini Mills Ltd., (2007) 14 SOT 372 (Kol.), the Kolkota Bench of the Tribunal has extended the benefit available to FBT under CBDT Circular No. 8 of 2005 to DDT. The Tribunal observed :
“In our considered opinion (tax) on distribution of profit payable as per provision of S. 115-O of the Act is of similar nature as Fringe Benefit Tax payable under Chapter XII-H of the Act, since both are payable at the time of incurring certain expenditure which are in the form of fringe benefit given to employees or dividend to shareholders, which are not otherwise taxable under the other provisions of the Act. Therefore, in our considered opinion, both Fringe Benefit Tax and tax on distribution of profits are similar in nature. Since Circular No. 8, dated 29-8-2005 issued by the CBDT makes it clear that Fringe Benefit Tax is an allowable deduction in the computation of book profit u/s.115JB of the Act while dealing in question No. 103, a copy of which is also available on record, in our considered opinion, the ld. CIT(A) has rightly treated the tax on profits distributed as dividend in similar manner as Fringe Benefit Tax and has thereafter rightly directed the Assessing Officer not to add back such tax on distributed profit in the computation of book profit for the purpose of S. 115JB. We, therefore, do not see any reason to interfere with such order of the ld. CIT(A) and accordingly uphold his order and reject the grounds raised by the Revenue.”
The above decision possibly does not represent a correct exposition of the law. The Tribunal has relied on FAQ No. 103 of the CBDT Circular No. 8 of 2005, in arriving at its decision. This FAQ states that Fringe Benefits Taxes are expenditure laid out wholly and exclusively for the purpose of business or profession of the employer. This is possibly because the underlying expenditure on which FBT is levied is incurred in the course of and for the purpose of earning profits from business. FBT inherently represents a tax on expenditure. The Circular states that Fringe Benefit Tax paid in relation to such expenditure, need not be added back u/s.115JB even though it attracts S. 40(a) disallowance.
Dividends are an appropriation of profits made at the sole discretion of the Board of Directors. Payment of dividends does not in anyway contribute to the profit-earning capacity of the company. It has no relation to the business of an entity. It is not an expenditure in the sense there is no obligation or liability to declare dividends. Dividends are paid out of ‘post-tax profits’. DDT being a liability attached to payment of dividends, is also paid out of ‘after-tax profits’. Payment of dividend and DDT thereon is not an expenditure laid out wholly and exclusively for the purposes of business or profession, nor is it a tax on expenditure. For these reasons, the benefit of the Circular in relation to FBT, should not be extended to DDT. DDT would then form part of Income-tax in clause (a) of explanation to S. 115JB.
(H) Deferred Taxes under Accounting Standard 22 :
S. 211(3A) of the Companies Act, 1956 requires companies to follow the Accounting Standards in preparation of their financial statements. For this purpose, Accounting Standards means Accounting Standards prescribed u/s.211(3C). AS 22 — Accounting for Taxes on Incomes (Standard in short) issued by Institute of Chartered Accountants of India is one of the Standards now prescribed u/s.211(3C) for the purposes of S. 211(3A).
This Standard requires reconciliation between taxes computed on accounting income and taxable income as per the Income-tax Act and proper treatment and disclosure of the differences. Such differences may be either permanent or arising in one accounting year and capable of reversal in one or more subsequent periods. If they are capable of reversal in subsequent periods, a deferred tax asset or a deferred tax liability comes into existence. Where deferred tax liability arises, the Standard requires that it is properly provided for.
The Standard differentiates between deferred tax and current tax. ‘Current tax’ is defined in the Standard as the amount of Income-tax determined to be payable (recoverable) in respect of the income (loss) for a period, determined in accordance with the tax laws. On the other hand, ‘deferred tax’ is defined as the tax effect of difference between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods.
Deferred tax provisions are not ‘provisions for Income-tax’ meant to be discharged by payment in the subsequent period, but are meant for adjustment against incomes during one or more subsequent periods. Deferred tax represents a notional adjustment to mitigate a timing mismatch. It is therefore neither tax paid, nor payable. It may not also be a provision. A provision, as noticed already, warrants the existence of a known and identifiable liability. A liability in turn presupposes a financial obligation. A deferred tax liability cannot be equated to a financial obligation of the company to pay the Government, any amount in future as Income-tax.
Hypothetically, if a company were to go into liquidation, the amount to the extent of ‘deferred tax’ will not constitute any liability or dues to any creditor. A credit balance in the deferred tax account should therefore not be termed as a provision. The term ‘income tax’ referred to in clause (a) of the explanation to S. 115JB(2) is only current tax as defined in the Standard and not the deferred tax. The Kolkota Bench of the Tribunal in ACIT v. Balarampur Chini Mills Ltd., (supra) has also taken the view that deferred taxes are not required to be added back to the net profits to arrive at the book profits. The Tribunal held :
“It has been submitted by the ld. DR that the above deferred tax charge is nothing but is in the nature of Income-tax, which is liable to be added in view of clause (a) to the Explanation to Ss.(2) of S. 115JB. However, in our considered opinion, such objection raised by the Department is devoid of any merit, as deferred tax means the tax effect of timing difference due to differences between taxable income and accounting income for a period that originate in one period and is capable of reversal and, therefore, such deferred tax charge is a provision for tax effect of difference between taxable income and accounting income and not provision for Income-tax paid or payable, and therefore could not be covered under Explanation (a) to Ss.(2) of S. 115JB. We have also noted down that paragraph 30 of AS- 22 clearly says that deferred tax assets and liabilities should be distinguished from assets and liabilities representing current tax for the period. The Panaji Bench in case of Salgaocar Mining India (P.) Ltd. (supra) has also held that interest on Income-tax and Income-tax paid/ payable are to be treated separately, as they are separate and distinct from each other. Likewise deferred tax charge cannot be kept at par with Income-tax paid/payable as both are quite different. Apart from the above fact, we have also noted down the objective behind enacting AS-22 by the ICAI, as deferred tax charge was meant to remove the difference between taxable income and accounting income arising due to difference between items of revenue and expenses as appearing in the statement of profit and loss A/c. and the items which are considered as revenue expenses or deductions for tax purposes or there are differences between the amount in respect of a particular item of revenue or expense as recognised in the statement of profit and loss and taxable income. Therefore, it is absolute apparent that deferred tax charge could not be termed as Income-tax paid or payable, which has to be paid out of profit earned by the assessee for the year under consideration and, therefore, in our considered opinion, the first objection raised by the Revenue does not hold any merit.”
Further, clauses (i) to (vii) of the Explanation do not provide for deduction of deferred tax assets (if recognised and accounted) from the net profits. This indicates that the Legislature intended to leave deferred taxes outside the framework of S. 115JB. Therefore, provisions for deferred taxes are not provisions for income tax and the question of disallowing them u/s.115JB does not arise.
(I) Foreign taxes :
Income-tax is the tax on the total income computed under the provisions of the Income-tax Act, at the rate prescribed by any Central Act. It includes additional Income-tax as per the provisions of the Act. Foreign taxes are not levied under the provision of the Income-tax Act. They are levied under the laws of the respective countries.
However, foreign taxes are paid on incomes. The same form part of total income and subjected to tax in India in case of Indian companies. In general cases, credit for these foreign taxes is available while paying Indian taxes. Therefore, foreign taxes paid, payable or provision therefor subsumes into the Income-tax paid, payable or provision therefor. The foreign taxes can be either directly debited to the profit and loss account or adjusted along with Income-tax provision account. In either case, it has to be treated as Income-tax and added back to the net profits under Explanation to S. 115JB(2).
(J) Wealth Tax and interest on Wealth Tax :
S. 3 of the Wealth Tax Act, 1957 imposes the charge of Wealth Tax on the ‘net wealth’ of every individual, HUF and company as on the valuation date. While Income-tax is tax on income, Wealth Tax is tax on net wealth. These two taxes are levied under different statutes to achieve different purposes. Income-tax is levied on the income earned during the previous year; Wealth Tax is levied on net wealth as on the valuation date, i.e., last day of the previous year. While S. 40(a)(ii) deals with disallowance of Income-tax, S. 40(a)(iia) deals with disallowance of Wealth Tax. There is no material to treat them as synonyms. On the other hand, the Act itself differentiates between Income tax and Wealth Tax. Therefore, Wealth Tax cannot be treated as part of Income-tax and added back to the net profit u/s.115JB.
The decision of Special Kolkata Bench of the Tribunal in JCIT v. Usha Martin Industries Ltd., (2007) 288 ITR 63 (AT) rendered in the context of S. 115JA and the decision of the Bombay High Court in CIT v. Echjay Forgings Pvt. Ltd., (2001) 251 ITR 15 (Bom.) support this view. The Special Bench of the Tribunal in Usha Martin’s case observed :
“In the case of M/s. Usha Martin Industries Ltd., the A.O. has also made the addition of Rs. 1,25,000 in respect of provision for Wealth Tax. The same was deleted by the C.I.T.(A). The Revenue aggrieved with the order of the C.I.T.(A) is in appeal before us. We have heard both the parties and perused the material placed before us. We have already stated above that for the purpose of S. 115JA, the addition to the book profit, which is computed as per Parts II & III of Schedule-VI to the Companies Act, can be made only if it is permissible by items No. (a) to (f) of the Explanation to S. 115JA. We find that as per clause (a) to Explanation “any amount of income tax paid or payable and the provision therefore” is liable to be added to the book profit. However, there is no such provision for making the addition with regard to Wealth Tax. Since the provision for Wealth Tax does not fall within any of the items of Explanation to S. 115JA, we hold that the CIT(A) was justified in deleting the addition made by the AO in this regard. In view of the above, we reject the Revenue’s appeal in the case of M/s. Usha Martin Industries Ltd.”
Therefore, Wealth Tax paid, payable or a provision therefore cannot be treated on par with ‘Income-tax paid, payable or a provision therefore’. Wealth Tax is not to be added back to the net profits in arriving at the ‘book profits’.
Since ‘Wealth Tax’ nor ‘interest on Income-tax’ forms part of Income-tax for the purposes of S. 115JB, interest on Wealth Tax is also not required to be added back to the net profits while computing ‘book profits’.
(K) Credits to profit and loss account :
There are several items which may be credited on refund/reversal to the profit and loss account. For example, refund of Income-tax is usually credited to the profit and loss account, while Income-tax paid is debited to the profit and loss account. These items, if debited to the profit and loss account would have been added back to the book profits. Such items must be given the opposite treatment, namely, credits must be deducted from the net profits, if the debit of the same item is added back to net profits.
Conclusion:
The concept of ‘Income-tax paid or payable or provision therefore’ in S. 115JB has not yet received attention of the superior Courts in India. Some of the decisions referred above, rendered by the Tribunals across the country require further scrutiny at the hands of the High Courts and by the Supreme Court. The decisions of the Tribunal cannot be said to be the final word on the subject. In the absence of settled law on these points, one may follow a conservative approach while making provision or paying advance tax, but could take full advantage of the decisions while filing returns.
Author/s:
H. Padamchand Khincha
Badrinath Simha
Chartered Accountants
