In a landmark judgment Commissioner of Income Tax, Chennai Versus Chemplast Sanmar Limited – 2009 -TMI – 33295 – MADRAS HIGH COURT involving a question of law Honorable Court of Madras (Chennai) has upheld the decision of honorable Tribunal in the matter of CHEMPLAST SANMAR LTD. Versus DEPUTY COMMISSIONER OF INCOME TAX.

Facts of the Case:

Assessee is a company engaged in the manufacture and sale of PVC resins, caustic soda, chloromethane, refrigerant gases, promotion of new ventures, undertakings, companies and operation of ships, etc.

For the asst. yr. 2002-03 the assessee filed its return of income on 31st Oct., 2002, admitting a taxable income of Rs. 32,90,54,720 and the tax payable thereon was determined at Rs. 11,76,77,896 including
the interest under s. 234C of Rs. 2,05,361.

The AO processed the return under s. 143(1) by intimation dt. 21st Feb., 2003, accepting the income returned. While computing the tax, the AO has not adjusted the carry forward MAT credit available to the assessee before charging interest under s. 234B of Rs. 1,17,64,830 and under s. 234C of Rs. 56,31,754 and raised a tax demand of Rs. 1,64,86,519. Further, the AO had not given credit for TDS of Rs. 4,49,527.

Contention of the Assessee:

As per Section 115JAA(4) tax credit shall be allowed to be set off in a year when tax becomes payable on normal computation and that the provision of Section 115JAA had to be applied first as it is a tax credit or prepaid taxes with the Government available to the assessee for set off, before applying the provisions of ss. 234B and 234C.

Contention of the Department

Department contended that the order of priority of adjustment of TDS, advance tax and tax credit under s. 115JA had not been spelt out in the Act, that one had to take recourse to the IT Rules, 1962, for this purpose, that rule 12(1)(a) of the IT Rules, 1962, lays down that in the case of a company the return of income required to be furnished shall be in Form No. 1.

Schedule G to Form No. 1 lays down the manner of computing the total tax payable by the assessee, that it also gives the order in which TDS, advance tax and tax credit under s. 115JAA, shall be given effect to, that Form no. 1 has been substituted by Income-tax (19th Amendment) Rules, 2001, w.e.f. 17th Aug., 2001, and that, therefore, there was no ambiguity w.e.f. 17th Aug., 2001, that interest under section 234B or 234C shall be first deducted and thereafter tax credit under s. 115JAA shall be given.

Decision of the ITAT

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Whether rule can prescribe order of priority of adjustment of TDS, advance tax and tax credit under s. 115JAA. The Act is silent about the same.

The CBDT gets the power of making rules by virtue of s. 295 of the IT Act. Generally, while various provisions of the legislative enactments contain the law broadly, principles and the main policy of the legislature on the relevant subject, the minute details and procedural matter are delegated to some authority for making subordinate legislation.

This is for the simple reason that procedural matters are best handled by the implementing authority and the Parliament can give its precious time for more important matters. Thus, the rule making power of the Board (Central Board of Direct Taxes) is the delegated or subordinate legislation only. In delegating powers to an administrative authority such authority cannot be given an arbitrary and uncontrolled discretion to make Rules.

The Rules made under the rule making power should strictly conform to the intention of the main provisions of the statute and be consistent therewith. A delegate is not entitled to exercise powers in excess of or in contravention of the delegated powers. If the aforesaid principles are not followed such rules are illegal, void or ultra vires.

It can be seen from the above section that the statute intends to allow set off in respect of brought forward tax credit (MAT credit) and it has to be allowed to the extent of the difference between the tax on its total income and the tax which would have been payable under the provisions of sub-s. (1) of s. 115JA. It may be seen that in this section the legislature has used the word ‘tax’ and not ‘tax and interest under ss. 234B and 234C of the Act’.

In such circumstances it is to be inferred that the intention of the legislature is to allow set off of the MAT credit from the ‘tax’ and not from the total amount including ‘tax and interest’.

Had it been the intention of the legislature it would have been specifically stated in the section itself. By exercising the delegated authority, the CBDT has framed the forms for filing the returns of income for the companies and while framing Form No. 1, the delegated authority, namely, the CBDT, has included Sch. G (statement of tax) to Form No. 1. While drafting this Schedule the Board has given the order of preference of adjustment of TDS, advance tax and tax credit under s. 115JAA. While doing so the Board has first prescribed charging of interest under ss. 234A and 234B and then has prescribed to give credit for MAT credit available under s. 115JAA of the Act.

In our considered view this method of prescribing the order of priority of adjustment of TDS, advance tax and MAT credit is totally against the intention of the legislature because the legislature by insertion of sub-s. (5) to s. 115JAA has intended to give set off of MAT credit against the difference between the tax on total income of the assessee and the tax which would have been payable under the provisions of sub-s. (1) of s. 115JA, and not on the total amount of tax and interest under ss. 234B and 234C as understood by the rule-making authority.

Hence in our considered opinion, Sch. G to Form No. 1 is totally against the intention of the legislature which has been clearly prescribed in s. 115JAA.

Decision of Madras High Court

While deciding the departmental appeal against the Judgment of ITAT, honorable High Court of Madras held that:

In the present case, the intention of the legislature is to give tax credit to tax and not to the tax and interest. Once the intention is clear, the revenue cannot rely on the Form-I to say that the MAT credit under Section 115JAA should be given only after tax and interest. Further we have answered the first question of law in favour of the assessee i.e. the MAT credit under Section 115JAA should be given effect to before charging the interest under Section 234B and 234C. Rule 12(1)(a) and Form-I cannot go beyond the provisions of the Act. Form-I cannot lay down the order of priority of adjustment of TDS, advance Tax, MAT credit under Section 115JAA which is contrary to the provisions of the Act. The order passed by the Tribunal is in accordance with law and we do not find any error or illegality in the order of the Tribunal so as to warrant interference.

Similar Decision of Delhi High Court

Honorable High Court of Delhi has also decided the similar matter in favor of assessee in the matter of COMMISSIONER OF INCOME TAX Versus JINDAL EXPORTS LIMITED and others decided by DELHI HIGH  COURT.

This discussion leads us to the conclusion that interest under sections 234B and 234C is to be charged after the tax credit (MAT credit) available under section 115JAA is set off against tax payable on the total income of the year in question. This being the position and rival stands taken by the revenue and the respondents as well as the decisions of benches of the Tribunal do indicate that the Tribunal was correct in law in holding that rectification could not be made by the Assessing Officer under Section 154 of the Income Tax Act, 1961 as the issue regarding charging of interest under Section 234-B of the Act without giving set off of MAT credit available to the Assessee was highly debatable. Consequently, we answer both the questions against the revenue and in favour of the respondents / assessees. The appeals are dismissed. The parties are left to bear their own costs.

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