It was held that clause (iii) of Explanation 1 to section 115JB of the Income-tax Act, 1961 (“the Act”) cannot be said to be discriminatory and hence unconstitutional. This clause relates to set-off of unabsorbed business loss or unabsorbed depreciation, whichever is lower. The HC also held that the approach of reading down a provision by modifying the language of a statute to achieve the intention of the legislature, cannot apply to such a provision.
• The assessee, a private company incorporated in Scotland, U.K., was engaged in the business of prospecting, drilling, exploring, producing and generally dealing in minerals, oils, gas and other related by-products.
• The assessee entered into a Production Sharing Contract (“PSC”) with the Government of India and Oil & Natural Gas Corporation Ltd. (“ONGC”) for the exploration of natural resources, and formed an Unincorporated Joint Venture (“UJV”) with other co-venturers to carry out the operations under the PSC.
• The assessee, in accordance with the Guidance Note issued by the Institute of Chartered Accountants of India on Accounting for Oil and Gas Producing Activities, had accounted investment in an oil well as expenditure incurred in its financial statements. As a result, the assessee incurred a book loss in the financial years (“FY”) 2005-06 and 2006-07.
• The assessee, or the UJV, did not own any fixed assets. Whenever an asset was needed, it was hired by the UJV. As a result, the assessee had brought forward business loss, but no unabsorbed depreciation.
• The assessee assigned its participating interest in the UJV to a group company for a consideration equal to the exploration costs incurred up to the effective date of assignment. As a result, the profit and loss account for FY 2007-08 showed a net profit.
• No taxable income resulted in the hands of the assessee under the normal provisions of the Act. However, the Assessing Officer, under a strict interpretation of the provisions of section 115JB of the Act, held that there was a book profit in the absence of any unabsorbed depreciation. The assessee filed a writ petition with the HC to declare the provisions of clause (iii) of Explanation 1 of section 115JB of the Act to be beyond the powers of the Constitution.
Issue :- Whether the provisions of clause (iii) of Explanation 1 of section 115JB of the Act are beyond the powers of the Constitution, and whether the same can be read down.
Assessee’s contentions:- The assessee contended that:
• There was no commercial income available for the purpose of declaration of dividend. Clause (ii) of Explanation 1 to section 115JB of the Act read with clause (b) to the same Explanation is contrary to the purpose of enactment of section 115JB of the Act.
• The provisions of clause (ii) of Explanation 1 to section 115JB of the Act are discriminatory. The provision discriminates against the assessees who have taken plant and machinery on hire, and therefore have only unabsorbed business loss.
• The Court may modify the language used by the legislature in clause (ii) of Explanation 1 to section 115JB of the Act to achieve the obvious intention of the legislature and produce a rational construction.
Revenue’s contentions:- The revenue contended that:
• The tax on book profits under section 115JB of the Act is a tax on income introduced as a measure of equity in taxation. The legislature enjoys wide latitude in the matter of selection of persons, subject matter, events, etc. for taxation. The provisions are not unfair or discriminatory.
• The language of the provisions of clause (ii) of Explanation 1 to section 115JB of the Act is quite clear and unambiguous.
High Court Ruling:- After considering the contentions of the assessee and those of the revenue, the HC held that:
• The fact that the assessee did not have any unabsorbed depreciation or brought forward loss in its account books is a mere fortuitous circumstance. The legislature is not required to envisage every fortuitous circumstance that arises while implementing such a provision.
• Merely because, in a given circumstance, the provisions may act to the disadvantage of a particular assessee, that would not render the provision arbitrary or violate the equality clause.
• The provisions of section 115JB of the Act are not intended to make any classification between a capital asset infrastructure company and a capital intensive company with no capital assets. If, as a consequence of implementing these provisions, some companies are put to hardship, it would not mean that the legislature has created a distinct class of companies which are hit by these provisions and that section 115JB is discriminatory.
• Only after computing the income under the provisions of the Income Tax Act, if the income tax payable works out to less than ten per cent of book profits, the provisions of section 115JB of the Act would be applicable. This would not render the statutory provisions unconstitutional or invalid.
• The provisions of clause (iii) of the Explanation to section 115JB are clear and ambiguous and it is not possible to take two views as to the meaning of the statutory language. Hence, the reading down of the provisions would not be permissible.
Conclusion :-The decision provides guidance to tax payers liable to tax on book profits under section 115JB of the Act. The HC upheld the constitutional validity of clause (iii) of the Explanation to section 115JB. There are diverse judgements on the applicability of tax on book profits to a foreign company which was not the subject matter of the petition before the HC.
Cairn Exploration (No. 7) Ltd. Vs. U01 [2010-TII-19-HC-AHM-INTL]- Gujarat High Court