Whether profits earned during the period of sickness and available for setting off under normal provisions of Income Tax are to be excluded from the ambit of book profit of non-sick years?

Singareni Collieries Company Ltd Vs ACIT (ITAT Hyderabad) – Whether book profits is to be computed with reference to each assessment year – Whether profits earned during the period of sickness and available for setting off under normal provisions of Income Tax are to be excluded from the ambit of book profit of non-sick years. – Assessee’s appeal dismissed. The ITAT held on various issues as under

IN THE INCOME TAX APPELLATE TRIBUNAL

HYDERABAD ‘A’ BENCH, HYDERABAD

BEFORE SHRI G.C. GUPTA, VICE PRESIDENT AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER

 The Singareni Collieries Company Ltd., The Assistant CIT

ITA No. 490/H/2007 : Assessment Year 2000-0 1

ITA No. 491/H/2005 : Assessment Year 2003-04

ITA No. 465/H/2005 : Assessment Year 2000-0 1

ITA No.1261/H/2003 : Assessment Year 2000-01

ITA No. 446/H/2006 : Assessment Year 200 1-02

ITA No. 447/H/2006 : Assessment Year 2002-03

ITA No. 464/H/2005 : Assessment Year 1997-98

ITA No. 243/H/2008 : Assessment Year 2004-05

The Assistant CIT Vs. The Singareni Collieries Company Ltd.

ITA No.249/H/2008

Assessment Year 2004-05

ORDER

Per Chandra Poojari, Accountant Member:

These appeals preferred by the assessee as well as by Revenue are directed against the different order passed by the CIT(A) – Vijayawada and pertains to the assessment years 1997-98, 2000-01, 2001-02, 2002-03, 2003-04, 2004-05.

2. The first common ground in assessee’s appeal in ITA No.1261/H/2003, 446/H/2006, 447/H/2006 and 491/H/2007 is with regard to disallowance of claim for reduction of profits earned during sick period while computing book profit u/s 11 5JA(2) (vii) of the IT Act 1961 which is relevant to assessment years 2000-01, 2001-02, 2002-03 and 2003-04. In these assessment years, the assessee has claimed that the amount of profit is to be deducted for the calculation of book profit because the assessee is a sick industrial company. But the assessing officer is of the opinion that the assessee company became sick unit during the assessment year 1992-93 and the entire net worth of the assessee company exceeded cumulative losses during the assessment years 1994-95 itself. So the deduction of impugned profit was not allowable as deduction in this assessment years because the relevant year in which the assessee’s net worth exceeded the cumulative losses in these assessment year 1994-95 and not these assessment years viz., 2000-0 1, 200 1-02, 2002-03 and 2003-04. Against this, the assessee is in appeal before us.

3. The Learned Authorized Representative for the assessee submitted that the assessee company is a public sector undertaking jointly owned by the AP State Govt. And the Central Govt. The AP state Govt. Owns majority of the shares in this undertaking. The company suffered loses for a number of years in the past and was declared a sick industrial company as defined under the sick industries companies (special Provisions) Act, 1985. In the assessment year 2000-01, while computing the book profits as defined in Explanation to section 11 5JA(2) of the IT Act 1961, the company reduced a sum of Rs.3,75,30,28,000 being the profits earned by the company during the period of sickness in assessment years 1992-93 and 1993-94.

4. He submitted that the company earned a profit of Rs.3,75,30,28,000/- during the period of sickness in assessment year 1992-93 and 1993-94. The facts relating to this claim are not disputed and he drew our attention to the provisions of S. 1 15JA of the IT Act 1961 which reads as follows:

1. Notwithstanding anything contained in any other provisions of this act, where in the case of an assessee, being a company 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, 1997 (before the 1st day of April, 2001) (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 percent of such book profit.

2. 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).

Provided that while preparing profit and loss account, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the profit and loss account laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act 1956(1 of 1956), which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling within the relevant previous year.

Explanation: for the purpose of this section, ‘book profit’ means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub section (2), as increased by:

a) The amount of income tax paid or payable, and the provision therefore or

b) The amounts carried to any reserves by whatever name called or

c) The amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities or

d) The amount by way of provision for losses of subsidiary companies or

e)  The amount or amounts of dividends paid or proposed or

f) The amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter IIII applies

g) The amount or amounts set aside as provision for diminution in the value of any asset.

h) If any amount referred to in clauses (a) to (g) is debited to the profit and loss account, and as reduced by

i) The amount withdrawn from any reserves or provisions if any, such amount is credited to the profit and loss account.

Provided that, where this section is applicable to an assessee in any previous year including the relevant previous year, the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April 1997 but ending before the 1st day of April, 2001 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation: or

ii) the amount of income to which any of the provisions of Chapter III applies, if any such amount is credited to the profit and loss account; or

iii) The amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account

Explanation: for the purposes of this clause: –

a) The loss shall not include depreciation

b) The provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation is nil: or

iv) the amount of profits derived by an industrial undertaking from the business of generation or generation and distribution of power; or

v) the amount of profits derived by an industrial undertaking located in an industrially backward state or district as referred to in sub section (4) and sub section (5) of section 80IB for the assessment years such industrial undertaking is eligible to claim a deduction of hundred percent of the profits and gains under sub section (4) of sub section (5) of section 80IB or

vi) the amount of profits derived by an industrial undertaking from the business of developing, maintaining and operating any infrastructure facility as defined in the explanation to sub section (4) of section 80IA and subject to fulfilling the conditions laid down in that sub section: or

vii) the amount of profits of sick industrial company for the assessment year commencing from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses.

Explanation: For the purposes of this clause, ‘net worth’ shall have the meaning assigned to it in clause (ga) of sub section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) or

viii)         the amount of profits eligible for deduction u/s 80HHC computed under clause (a) (b) or (c) of s/s (3) or subsection (3A) as the case may be, of that section, and subject to the conditions specified in sub sections (4) and (4A) of that section;

The amount of profits eligible for deduction under section 80HHE, computed under sub section (3) of that section.

5. Further, he submitted that the computations of book profits involve the reduction of clauses (i) to (ix) of “Explanation to S. 11 5JA (2) and in particular to clause (vii) thereof of which the present appeal relates to. It may be noted at the outset that the assessee is not claiming “exemption” from the applicability of provisions of S. 11 5JA of the Income Tax Act, 1961. The relevant provisions also do not provide for exemption of any company from the rigours of book profit taxation. In this connection, he drew our attention of to the provisions of sub section (1) of S.1 15J of the Income Tax Act, 1961 which earlier related to the charge of “book profits” tax and which was succeeded by S1 15JA of the Income Tax Act, 1961 S. 1 15J (1) ready as under:

1 15J.(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 percent 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 percent of such book profit.

6. He submitted that where “exemption” is granted, the legislature is categorical in the charging section itself as in the case of power generating companies which were exempt u/s 11 5J of the income tax act, 1961. This comparison is made only to establish that the claim of the assessee is not for exemption from levy of book profit tax u/s 11 5JA of the income tax act, 1961. Consequently the obvious conclusions are that the claim of the assessee in the present case is not limited to the computation of book profits in the year of sickness. It is reiterated that the claim is for reduction of the impugned profit i.e. amount of profits earned during the assessment year commencing from the asst. Year relevant to the previous year in which the said company has become a sick industrial company under sub section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses as provided in clause vii of explanation to S. 11 5JA (2) of the IT Act, 1961 from the book profit of the assessment year under consideration.

7. According to the AR, the “book profit” means the net profit as shown in the profit and loss account for the relevant previous year, which in the instant case is the profit of the asst. Year 2000-01, the reduction from such book profits is always constantly the amount of profits of sick industrial company for the assessment year commencing from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub section (1) of section 17 of Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses which in the instant case is Rs. 375,30,28,000 being profits earned in the earlier asst. Years during the period of sickness. The year of assessment and the years of sickness need not be one and the same.

8. He drew our attention to the 3rd Para in Page No.14 of order of the CIT (A) where he has observed that:

“that the period has been prescribed in the Act itself and that period is the time frame of the previous year in which the company has become a sick industrial undertaking to the end of the asst. Year in which the company recovers from sickness or in other words, the net worth of such company becomes equal to or exceeds the accumulated losses. This is an unambiguous and clear time frame during which whatever profits earned by the company shall be deducted, if at all there is any profit during some period or some months or due to some other units of the same company, then for calculation of book profits u/s 1 15JA, such profits of the sick period of such unit and such months or year shall be deducted.’

Similar wordings has been given in the Income Tax Act enactment with regard to S2 (47)(xii) of the Income Tax Act.         That section deals with Transfer of land by a sick industrial company managed by workers’ cooperative and with effect from 1.4.1998, this newly inserted section 47(xii) states that any transfer of capital asset being a land of sick industrial company made under a scheme prepared and sanctioned u/s 68 of the Sick Industrial Companies (Special Provisions) Act, 1995 (1 of 1996) is not to be regarded for and from the assessment year 1998-99 as transfer for the purposes of capital gains tax levy, if such transfer made during the period:

Commencing from the previous year in which the said company has become sick industrial company u/s 17(1) of that Act and Ending with the previous year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses.

In that section, it may be seen that the wordings are similar and the periods are similar and the ‘net worth’ has also been defined in a similar way. The time frame given in that section is from the previous year in which the company became sick to the end of the previous year when the net worth of the company becomes equal or to exceed the accumulated losses. In such view of the matter, it is quite apparent that in section 11 5JA by virtue of similar wordings and similar use of phrases and definitions, the legislature has intended to have similar effect while acting on the provisions of the Act. In such a view of the matter, I find in section 47, when there is no ambiguity regarding the interpretation, why an ambiguity is unnecessarily created for interpretation of section 11 5JA.

Where a ‘transfer’ in certain circumstances stated therein should not be regarded as “transfer” for the purpose of capital gains tax. He therefore goes on to state that “In view of such matter, it is quite apparent that in sec. 11 5JA by virtue of similar wordings and similar use of phrases and definition, the legislature has intended to have similar effect while acting on the provisions of the Act. In such view of the matter, I find in Sec 47, when there is no ambiguity regarding the interpretation, why an ambiguity is unnecessarily created for the interpretation of Sec. 11 5JA”.

9. According to the AR, the above reasons given by Ld. CIT (A) is not very clear. He stated that the CIT(A) begins by stating that the profits earned by the company shall be  “deducted” according to the explanation S. 11 5JA (2) (vii) but does not say from what. Deduction or the word “reduction” used in the statute means that the same has to be reduced or deducted from a larger amount. He drew our attention to the meaning of “reduce” as given in Aiyar’s judicial dictionary 11th edition which reads as follows:

“Reduce to lessen in any way in size, weight, amount, value, price etc., to diminish, to lower as in rank or position, to decrease.

10. According to AR the word “reduce” is wide enough to include punishment or stoppage of increments in the future. [Longmal V Suptdt. Of Police, AIR 1967 Raj 214: LLR (1996) 16 Raj 861].” If reduction or deduction as used by the Ld. CIT (A) are taken as synonyms, then obviously the reduction from the net profit of the year as shown in the profit and loss account prepared according to the provision of S.11 5JA (2) of the Income Tax Act, 1961. Coming to the question of similar wording used in S.47(xii) of the Income Tax Act, 1961 it is submitted by the AR that the context in which they are used are entirely different. While S.47 (xii) is with reference to definition of “transfer” under capital gains tax during the period of sickness of the unit and is a positive act of alienation of property committed in that time frame, under Explanation to S.1 15JA (2)(vii), the context is with reference to “reduction” of profits during the period of sickness from the profits as shown in Profit and Loss account. It is an accumulation of results of the company during the period of sickness. In both cases, the obvious legislative intent is to provide sick companies with relief from certain rigours of income tax. He relied on the judgement of Hon’ble Supreme Court in the case of CIT Vs Venketeshwara Hatcheries (P) Ltd. 237 ITR 174 (SC) wherein the Hon’ble Supreme Court in para 13 and 14 of the said judgement refer to a salutary principle of law stated by Maxwell which is as follows:

“But the presumption is not of much weight. The same words may be used in different senses in the same statute, and even in the same section.” The same word if read in the context of one provision of the Act, may mean or convey one meaning and another in a different context. The legislature in its wisdom has chosen to place processed seeds and fish under the heading articles or things in the fifth schedule as legislature is competent to give artificial meaning to any word. We are, therefore, of the opinion that the meaning assigned to words “articles or things” in the fifth schedule cannot be assigned to the words “articles or things” used in ss. 32A and 80J of the Act. Thus the comparisons drawn by CIT (A) are misplaced.

11. He submitted that the CIT (A) has his second objection to the grant of the reduction from the profits states that if the intention of the legislature was to extend the period indefinitely they would have used the term “accumulated profits” or “carry forward profits” instead of the term “amount of profits”. In his view this distinction is necessary and workable because in case of a company going sick for large number of years like 50- 100 years, if presumed to have allowance of such profits by carrying it forward then a situation may arise when a company does not pay any tax for another 50-100 years and this would make the enactment impracticable particularly when 11 5JA needs immediate tax even from loss making companies or zero tax companies.

12. According to the AR, the objection of the CIT (A) is many rolled into a single objection. Firstly the CIT (A) has stated as objection certain words have been designedly omitted. He says that if the statute permitted the period indefinitely they would have used the word “accumulated profits” or “carry forward profits”. It is submitted that the objection of the CIT (A) on the words designedly omitted as stated by him are creation of his own imagination. The term “accumulated profits” is the same as amount of profits for the period covered by sickness. The term “carry forward profits” is a term unknown to statutes and definitely is not analogous to “carry forward of losses”. He drew our attention to the 7th edition of Craises on statute law, page 107, wherein it was stated that “sometimes, if the meaning of an enactment is not plain, light may be thrown upon it by assuming that certain words “have been” annulled. According to the AR, herein the meaning of the enactment is very plain and hence resort to “words designedly omitted” is not warranted.

13. He submitted that according to the CIT(A), interpretation placed by the assessee is also to be rejected and he has given the reasons that if a company is sick for a large number of years a company maybe not be paying tax for large number of years as according to CIT (A) “in case of a company going sick for a large number of years like 50-100 years, if presumed to have allowance of such profits by carrying it forward then a situation may arise when a company does not pay any tax for another 50-100 years and this would make the enactment impracticable particularly when 11 5JA needs immediate tax even from loss making companies or zero tax companies”.

14. He submitted that the CIT (A) has wrongly inferred that (a) the legislative intent is to collect tax from loss making companies and (b) if not an enactment like S. 11 5JA would become impracticable. It is submitted that the CIT (A) has grievously erred in inferring that legislative intent is collect tax from loss making companies. The AR made reference to departmental circular no. 496 dated 22 September , 1987 Explanatory notes on the Provisions of – the Finance Act, 1987 explaining the introduction of section 11 5J at para 36.1 to 36.6, 36.1 which reads as under:

(36.1) it is an accepted canon of taxation to levy tax on the basis of ability to pay. However, as a result of various tax concessions and incentives certain companies making huge profits and also declaring substantial dividends have been managing their affairs in such a way so as to avoid payment of income tax.

15. He submitted that the above explanatory notes clearly shows that the object of the legislation is not to tax loss/zero tax companies but companies which declare substantial dividends and make huge profits but due to incentives under the Income Tax Act, 1961 do not pay taxes. Hence the legislative intent as stated by the CIT (A) is wrong and erroneous and not borne out of facts. Secondly, here we are concerned with legislative intention in the enactment of S.11 5JA (2) (vii) giving relief for reducing of profits by “amount of profits” of an undertaking during the period of sickness. If the interpretation placed by the Ld. CIT (A) in respect of enactment of S11 5JA is accepted there is no scope for any reduction or deduction as stated in explanation to S.11 5JA (2) and they have to be ignored. The statutory rule in inferring legislative intention is stated succinctly in Craises on Statute Law Seventh Edition in page 65 as “where the language of an Act is clear and explicit, we must give effect to it, whatever may be the consequences, for in that case the words of the statute speak the intention of the legislature”. He submitted that the language of the Act is very clear as far as the reduction under explanation to S.11 5JA (2) (vii) is concerned. The ‘amount of profits’ of sick industrial company for the assessment year commencing from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses.

16. According to the AR, this reduction/deduction as stated in the enactment should be taken as the legislative intent. In this connection he drew our attention to the judgement of Supreme Court in the case of CIT vs Sodradevi 32 ITR 615. The logic is not difficult to perceive. The legislature in its wisdom has excluded the profits earned by a sick industrial company during the period of sickness from the rigour of S.11 5JA of the Income Tax Act, 1961 as succour to such companies by treating such profits as capital and not revenue nature.

17. He submitted that the CIT (A) stated that the benefit of doubt is to be given to the tax payer when there is a doubt in the interpretation of a statute. According to CIT (A) there is no ambiguity because S.11 5JA never states that all the profits of all the years during the sickness period shall be adjusted against the profits of a future year for determination of book profits under section 11 5JA. According to the AR , the reliance placed by the CIT(A) in the judgement of Hon’ble Supreme Court in the case of CED vs Alladi Kuppuswamy (108 ITR 439 (SC) and in the case of CIT vs Ravi Talkies 137 ITR 176 (Orissa)) is misplaced. The principles enunciated in these cases are unexceptionable and the appellant does not dispute the ratio of those judgments. He contended that in fact the rationale of those judgments support the appellants case because the plain language of the enactment states that while computing the book profits the following steps are to be taken under S.11 5JA (2) read with the Explanation:

(1) Firstly, the net profit shown in the Profit and Loss account has to be taken and

(2) Increased by the amounts shown in clauses (a) to (g) if any of such amounts are debited to the profit and loss account and

(3)  Reduced by the amounts stated in clauses (i) to (ix) (here we are concerned with clause (vii)

18. He submitted that it is undisputed fact that the reduction of Rs. 3,75,30,28,000 is the amount of profits as computed under clause (vii).

19. He submitted that in fact there is no indication in the language of the statute that the net profit of the relevant previous year should be the same as the assessment year commencing from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses. The CIT (A) has stated that the rule of reasonable construction should be applied. Liberal construction should be avoided as it defeats the manifest object and purpose of the Act. Once he also says that there is no room for intendment or equity in matter of levy of tax. These principles as stated by CIT (A) are unexceptionable and the appellant has no quarrel with these time established principles of interpretation. But they do not give rise to conclusions which the CIT (A) drew in his order. The Learned Authorized Representative for the assessee further submitted that the plain language of S.11 5JA is not what the CIT (A) claims in his order. In fact S.1 15JA does not state the year in which the company suffers sickness is the appropriate year for claiming exemption of such profits earned during the period of sickness. According to the AR, the assessee is entitled to claim the amount computed under explanation to S.11 5JA (2) (vii) as claimed by it.

20. The learned DR submitted that as per the language of the provision that the deduction is with reference to year of commencement of sickness and cannot go beyond the year when the company ceases to be sick. This is applicable to a company which is on the road to recovery when operating profits are reported for the year on a stand alone basis. But net worth continues to remain negative on account of accumulated losses. Such amounts are not to be claimed year after year as interpreted by the assessee. This provision is meant not to encourage sickness but to ensure that operating profits of a company during its period of sickness are not to be taxed as a measure of relief. According to DR, there is nothing in sub clause (vii) of explanation 1 to section 11 5JB(2)

a) The year(s) to which the amount belongs and the year in which it is claimed need not be the same and

b)  The same amount can be claimed for more than one year

21. He submitted that the situation vide (a) above would militate against the scheme of computation of income in the Act. The situation vide (b) above would amount to a double/multiple deduction. It has been held by the Supreme Court in the case of Escorts Ltd. Vs Union of India 199 ITR 43 that a multiple deduction has to be expressly provided and can never be a matter of inference.

22. We have heard both the parties and perused the material available on record. We have also carefully gone through the orders of the lower authorities. For better understanding we will reproduce herein the Statement of profit available for set off, unabsorbed business loss and unabsorbed depreciation for the purpose of section 1 15JA/JB of I.T. Act, 1961. We take relevant figures for the accounting year 1990-91 to 2001-02.

Statement of unabsorbed business losses and unabsorbed business losses and unabsorbed depreciation for the purpose of section 1 15JA/1 15JB of Income-tax Act,