Credit for brought forward MAT is to be given from gross demand before charging interest u/s 234B

SUMMARY OF THE CASE LAWS

1. Credit for brought forward MAT is to be given from gross demand before charging interest u/s 234B. 2. Interest u/s 244A was allowable on the refundable taxes arrived at after giving credit of brought forward MAT from the gross demand.

CASE LAWS DETAILS

DECIDED BY: HIGH COURT OF BOMBAY,

IN THE CASE OF: CIT Vs. Apar Industries Ltd., APPEAL NO: ITA No. 1036 of 2009, DECIDED ON April 6, 2010

RELEVANT PARAGRAPH

This appeal by the Revenue arises out of an order of the Income Tax Appellate Tribunal dated 20-6-2007. The Tribunal passed an order that would govern appeals arising out of assessment years 1998-99, 1999-2000 and 2000-01. The appeal by the Revenue relates to assessment year 2000-01. the question of law which are raised in the appeal are as follows:-

a) Whether on the facts and in the circumstances of the case, the Tribunal erred in law in holding that credit for brought forward MAT is to be given from gross demand before charging interest u/s 234B of the Income-tax Act, 1961?

b) Whether on the facts and in the circumstances of the case, the Tribunal erred in law in holding that interest u/s 244A was allowable on the refundable taxes arrived after credit of brought forward MAT from the gross demand.

2. The issue that arises for the determination of the Court is whether Minimum Alternative Tax (MAT) Credit, to which the assessee is undisputedly entitled, must be given before computing interest payable by the assessee under section 234B of the Income-tax Act, 1961; or whether, as contended by the Revenue, the Credit is allowable after the liability to pay interest under section 234B is computed. For the purposes of this appeal, it would be necessary to note that there is no dispute before the Court either as regards the extent of the MAT credit or the tax that was paid by the assessee by way of Advance Tax or Tax Deductible at Source (TDS).

13. Section 140A provides for self assessment. Subsection (1) enunciates that where any tax is payable on the basis of any return required to be furnished under Sections 139, 142, 148, 153A or 158BC, “after taking into account the amount of tax, if any, already paid under any provision of the Act”, the assessee shall be liable to pay such tax together with interest payable under any provision of the Act for any delay in furnishing the return or any default or delay in payment of advance tax, before furnishing the return and the return shall be accompanied by proof of payment of such tax and interest. Subsection (1) of Section 140A, therefore, postulates that the assessee is liable to pay tax which is payable on the basis of the return of income, after taking into account the tax, if any, already paid under any provision of the Act. For the purposes of Section 140A, a tax which is paid under any provision of the Act must mean what it says, namely, that due account has to be taken of tax paid under any provision of the Income Tax Act, 1961. The tax which is paid under Section 115JA and the resulting credit to which an assessee may be entitled under Section 115JAA constitutes a tax which has already been paid under the provisions of the Act. Consequently, on the basis of a plain construction of subsection (1) of Section 140A, it is abundantly clear that the tax which the assessee has paid under Section 115JA and in respect of which he became entitled to a credit under Section 115JAA is required to be taken into reckoning for the purposes of computing the liability of an assessee to pay tax under Section 140A. The expression “such tax” in Section 140A refers to a tax which is payable on the basis of the return required to be furnished by the assessee after taking into account the amount of tax, if any, already paid under the provisions of the Act. Subsection (1B) of Section 140A stipulated that for the purposes of subsection (1), interest payable under Section 234B shall be computed on an amount equal to the assessed tax or, as the case may be, on the amount by which the advance tax paid falls short of the assessed tax. The expression “assessed tax” was originally defined in the Explanation in terms which were similar to Explanation (1) to Section 234B prior to its substitution by the Finance Act of 2006. By the Finance Act of 2006, the Explanation to Section 140A was also substituted in terms similar to the substitution which was effected to Explanation (1) to Section 234B. The effect of the substitution will be considered in a subsequent part of this judgment. At this stage, what is important to emphasize is that even prior to the substitution, in computing the liability of an assessee to pay tax under the self assessment provisions of Section 140A, the tax paid under any provision of the Act was liable to be reckoned. The question of interest under Section 234B arose if there was a short fall but in determining as to whether there was a short fall in the first place, the entitlement of an assessee to avail off MAT credit could not be ignored. This was evidently the position on a plain construction of the provisions of subsection (1) of Section 140A.

14. The next provision to which it would be necessary to refer is Section 143(1). Subsection (1) of Section 143, prior to its amendment by the Finance Act of 2008 provided that where a return has been made under Section 139, or in response to a notice under Section 142(1), if any tax or interest is found due on the basis of such return, after adjustment of any tax deducted at source, any advance tax paid, any tax paid on self assessment and “any amount paid otherwise by way of tax or interest”, then an intimation would be sent to the assessee specifying the sum so payable which would be deemed to be a notice of demand under Section 156. If a refund was due on the basis of such return, it was liable to be granted to the assessee. Consequently, under Section 143(1) the tax or interest due on the basis of a return filed by the assessee had to be reckoned after adjustment not only of the tax deducted at source, the advance tax and the tax paid on self assessment but also after taking into account any amount paid otherwise by way of tax or interest. The expression “any amount paid otherwise by way of tax” obviously would refer to any amount paid by way of tax under the provisions of the Act which would include the credit to which the assessee was entitled under the provisions of Section 115JAA.

12. Section 234B (1) provided for a liability to pay interest where an assessee had either failed to pay the advance tax in its entirety or where the advance tax paid was less than 90 per cent of the assessed tax. Subsection (2) of Section 234B stipulated that where before the determination of total income under Section 143(1) or before completion of a regular assessment “tax is paid by the assessee under Section 140A or otherwise”, interest shall be calculated in accordance with the provisions of the Section up to the date on which the tax is so paid, and reduced by the interest, if any, paid under Section 140A. The effect of subsection (2) was that if the assessee paid tax either under Section 140A or otherwise before his total income was determined under Section 143(1) or by the completion of a regular assessment, the liability to pay interest would be reckoned up to the date on which the tax so paid. Once the tax was paid either under Section 140A or otherwise, interest could no longer be attracted under subsection (2) of Section 234B. Subsection (2) of Section 234B refers to the payment of tax by the assessee under Section 140A “or otherwise”. The expression “or otherwise” must mean a payment of tax under any other provision of the Act. Like Section 140A which requires account to be taken of the tax, if any, paid under any provision of the Act, subsection (2) of Section 234B similarly stipulates that the payment of tax under Section 140A or otherwise prior to the date of determination of total income under Section 143(1) or completion of a regular assessment would result in interest being calculated only up to the date on which the tax is so paid. This is to obviate the consequence which is provided by subsection (1) of Section 234B under which in the event of a short fall in the payment of tax, the liability to pay interest would arise and would continue to subsist up to the date of determination of total income under Section 143 or to the date of a regular assessment.

15. The provisions of Section 140A, Section 143(1) and Section 234B(2) leave no manner of doubt that the payment of tax by the assessee under Section 115JA would, where an assessee is entitled to a credit under the provisions of Section 115JAA, have to be reckoned in computing the liability to pay interest under Section 234B. Undoubtedly, Explanation (1) to Section 234B defined the expression “assessed tax” to mean the tax on the total income determined under Section 143(1) or on regular assessment as reduced by the amount of tax deducted or collected at source. However, to read the provisions of Explanation (1) to Section 234B, in isolation, by ignoring the provisions of subsection (2) would obviously lead to an unintended consequence. The credit to which an assessee is entitled under Section 115JAA is in respect of tax which has been paid prior to the due date. Consequently, MAT credit available under Section 115JAA represents tax paid by the assessee before determination of the total income under Section 143(1) or the completion of a regular assessment, within the meaning of subsection (2) of Section 234B. Both the advance tax, or as the case may be, the component of MAT credit available under Section 115JAA are towards tax payable on assessment. The consequence of the interpretation which has been suggested by the Revenue would lead to unintended results. Even though there is no short fall on the part of an assessee, as in the present case, in the payment of tax, having due regard to the advance tax paid, the tax deducted at source, and the MAT credit available under Section 115JAA, the Revenue would nevertheless assert that the assessee would be liable to pay interest under Section 234B only by reason of the fact that there is a short fall between the advance tax paid and the tax assessed beyond the extent specified in Section 234B. This would be unintelligible.

16. MAT credit under Section 115JAA comprises of that portion of MAT which was not actually payable by the assessee but which nevertheless was collected by the exchequer. Interest under Section 234B is leviable on the short fall of advance tax paid during the previous year. The provisions of Section 234B are compensatory. They have been held to be compensatory in nature by the judgement of the Supreme Court in Commissioner of Income Tax V/s. Pranay Roy1. The same view was expressed in a judgement of a Division Bench of this Court in Commissioner of Income Tax V/s. Kotak Mahindra Finance Limited. The Division Bench held as follows :

“….. It is well settled that interest under section 234B is compensatory in character. It is not penal in nature. So also, interest under section 234C is compensatory in character. It is for this reason that section 234B does not envisage grant of hearing in so far as levy of interest is concerned. The levy is automatic on it being proved that the assessee has committed a default as governed by section 234B.”

17. Interest under Section 234B being compensatory in nature, the object underlying the levy of interest under the provision is to provide compensation to the exchequer for being deprived of the payment of advance tax, to which it was legitimately entitled. In a case such as present where an assessee has paid the minimum alternative tax and is in fact entitled to a credit under Section 115JAA in respect of excess tax collected by the exchequer, the basis and foundation for the levy of compensatory interest would not exist. Consequently, the submission which has been urged on behalf of the Revenue cannot be accepted, both having regard to the nature and purpose of the levy of interest under Section 234B and the unintelligible consequence that follow, if that interpretation were to be accepted.

18. Parliament substituted Explanation (1) to Section 234B by the Finance Act of 2006. The amendment which was brought into force with effect from 1 April 2007 now specifically contemplates that for the purposes of the Section “assessed tax” would be reckoned after taking due account of a tax credit allowed to be set off in accordance with the provisions of Section

115JAA. The contention of the Revenue is that this amendment has been brought into force with prospective effect from 1 April 2007 and cannot, therefore, apply to earlier assessment years.

19. The background in which the amendment was brought into force has been explained in a Circular issued by the Central Board of Direct Taxes (CBDT) (Circular No.14 of 2006) on 28th December 2006. The circular notes that it had been represented from several quarters that the tax credit allowed under Section 115JAA is no different from the tax paid in advance and credit for having paid the Minimum Alternative Tax should be allowed against the tax liability determined on assessment. The circular states that on a similar analogy, credit for taxes paid in a country outside India has also been recommended to be allowed so that interest is not charged on an amount that equals the taxes paid outside India. The circular issued by the CBDT binds the Revenue and no contention to the contrary has been urged. Be that as it may, the circular furnishes an explanation of the circumstance that led to the substitution of Explanation (1) by the Finance Act of 2006. Evidently representations were received to the effect that the tax credit allowed under Section 115JAA is no different from the tax paid in advance and consequently credit for the payment of MAT should be allowed. The substance of these representations was evidently accepted and Parliament stepped in to substitute Explanation (1) so as to specifically provide for account being taken of the tax credit allowed to be set off under Section 115JAA.

20. Having regard to the background in which the amendment was brought into force, it must be regarded as being clarificatory in nature. The amendment clearly removes a cause of ambiguity in the interpretation of Section 234B. As interpreted by us in the earlier part of this judgement, the provisions of Section 234B, more particularly subsection (2) as well as the entire scheme envisaged in Sections 140A and 143(1) clearly require due account being taken of the MAT credit to which the assessee was entitled under Section 115JAA. Consequently, even prior to the amendment the credit to which the assessee was entitled under Section 115JAA could not be ignored in determining the liability to pay interest under Section 234B. There was a certain element of ambiguity in the Explanation to Sections 140A and 234B. Parliament considered it appropriate to step in and resolve an area of ambiguity, particularly having regard to the circumstance that representations were received from several quarters, as noticed in the circular issued by the CBDT. An amendment which is intended to remove an ambiguity in the interpretation of a Section must of necessity be regarded as clarificatory. If it is clarificatory in nature, it is expressive of a position in law which Parliament intended to hold the field at all material times and must consequently be regarded as operating with retrospective effect. The fact that Parliament has brought the provision into effect from 1 April 2007 by the Finance Act of 2006 would not be dispositive of the question as to whether the amendment is clarificatory. If the amendment is clarificatory as we hold it is, it must apply in respect of the previous years as well.

21. In Commissioner of Income Tax V/s. Podar Cement Private Limited3, the Supreme Court considered the provisions of Section 27 of the Income Tax Act, 1961under which certain persons who were not otherwise legal owners are deemed to be owners for certain purposes. The Finance Bill of 1987 contained in its Memorandum a statement that as a measure of rationalisation, the Bill sought to enlarge the meaning of the expression “owner of house property” in clause (iii) of section 27 by providing that a person who comes to have control over the property by virtue of such transactions as are referred to in Section 269UA(f) will also be deemed to be the owner of the property. The Supreme Court held that from the Memorandum explaining the Finance Bill of 1987, it was crystal clear that the amendment was intended to supply an obvious omission or to clear up doubts as to the meaning of the word “owner” in Section 22 and it was, therefore, declaratory or clarificatory.

In Allied Motors (P) Limited V/s. Commissioner of Income Tax4, the Supreme Court held that a proviso which is resorted to remedy unintended consequences and to make a provision workable or one which supplies an obvious omission in the Section and is required to be read into the section to give it a reasonable interpretation has to be treated as retrospective in operation. In Keshavji Ravji and Company V/s. Commissioner of Income Tax5, the Supreme Court held that while there is no general theory as to the effect and intendment of an Explanation, it is true that an Explanation may “be introduced by way of abundant caution in order to clear any mental cobwebs surrounding the meaning of a statutory provision spun by interpretative errors and to place what the Legislature considers to be the true meaning beyond any controversy or doubt”. The same principle has been recently applied by the Supreme Court in Commissioner of Income Tax V/s. Alom Extrusions Limited, where the second proviso to Section 43B was held to be curative in nature, having regard to the fact that it was intended to bring about a degree of uniformity and to obviate problems in implementation. The principle has been recognised in the judgment of the Supreme Court in Commissioner of Income Tax V/s. Gold Coin Health Food P. Limited7, while construing the provisions of Section 271(1)(C).

22. Counsel appearing on behalf of the Revenue, however, sought to submit, by placing reliance on the judgement of the Supreme Court in Deputy Commissioner of Income Tax Vs. Core Health Care Limited, that since Explanation (1) to Section 234B was inserted by the Finance Act of 2006 with effect from 1 April 2007, retrospectivity cannot be read into the provision. Now, the decision in Core Health Care Limited dealt with an amendment to Section 36(1)(iii) of the Income Tax Act, 1961 by which Parliament had sought to restrict the area of interest allowable, by way of a proviso. Section 36(1) provided for a deduction in computing the income referred to in Section 28 of the interest paid in respect of capital borrowed for the purposes of business or profession. The proviso stipulated that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of an existing business or profession for any period beginning from the date on which the capital was borrowed for acquisition till the date on which such asset was first put to use, shall not be allowed as deduction. The Supreme Court observed that interest on moneys borrowed for the purposes of business is a necessary item of expenditure in a business. In order to allow a claim for deduction of interest under the section, all that was necessary is that the money should have been borrowed by the assessee; that it should have been borrowed for business; and that the assessee ought to have paid interest on the borrowed amount. The Supreme Court noted that its earlier view was that even though the machinery was not actually used in the business, at the time when the assessment was made, it was treated as a business asset and was purchased only for business purposes. Consequently interest paid on the amount borrowed for the purchase of the machinery was a deductible amount. It is in this background that the Supreme Court observed that the proviso which had been inserted by the Finance Act of 2003 with effect from 1 April 2004 would operate prospectively and not with retrospective effect. The basis of the decision of the Supreme Court in Core Health Care is, therefore, that a proviso which was inserted by Parliament could not be regarded as clarificatory in nature, when it brought about an alteration of the position in law as it then stood.

23. Similarly, the judgement of the Supreme Court in Vikrant Tyres Limited Vs. First Income Tax Officer on which reliance was placed by the Revenue, dealt with the question as to whether interest could be levied on an amount which was refunded to the assessee and on which there was no provision to levy interest. The Supreme Court held that on a literal construction of Section 220(2), the Department had no right to demand interest for the period commencing from the date of refund of the tax upon the appellate order till the taxes were finally paid after disposal of the reference. The case was, therefore, clearly distinguishable on facts. Similarly, the judgement of the Delhi High Court in Commissioner of Income Tax Vs. Rajasthan Mercantile Co. Limited, dealt with the insertion of Explanation (2) to Section 37(2A) of the Income Tax Act, 1961. The provision widened the scope of the concept of entertainment expenditure by including in its scope such expenditure, which was otherwise traditionally understood as routine business expenditure in connection with business hospitality. Consequently, the widened meaning could not be extended to past periods when the amended Explanation was not in operation. The judgement of the Delhi High Court, therefore, dealt with a situation where an amended provision of an Explanation was not obviously clarificatory because it widened the definition of the expression “entertainment expenditure” beyond its ordinary connotation.

24. For the reasons aforesaid, we are of the view that the amendment brought about by Parliament by the Finance Act of 2006 by substituting Explanation (1) to Section 234B was clarificatory or curative in nature.

25. In view of the aforesaid discussion, the first question of law as framed would have to be answered in favour of the assessee and against the Revenue.

29. In so far as the second question is concerned, Counsel appearing on behalf of the Revenue has conceded before the Court that it would be consequential to the determination of the first question. As already noted earlier in this judgement, as against the tax payable of Rs. 2.46 crores, the tax paid by the assessee amounted to Rs. 4.24 crores after giving due adjustment for MAT credit, TDS, advance tax and self assessment tax. The assessee was, therefore, entitled to a refund of excess tax paid for assessment year 2000- 2001 over and above the tax which was computed as being due and payable. Interest under Section 244A was allowable. As we have already noted, it has been stated on behalf of the Revenue during the course of the hearing that the answer to the second question would be consequential to the determination of the first question. Consequently, the second question shall stand answered in favour of the assessee and against the Revenue.

30. For the reasons stated earlier, the Appeal filed by the Revenue shall stand dismissed and the questions of law as framed would stand answered against the Revenue. In the circumstances of the case, there shall be no order as to costs.

1 (2009) 309 ITR 231 (S.C.)

2 (2004) 265 ITR 119 (Bom)

3 (1997) 226 ITR 625 (S.C.)

4 (1997) 224 677 (S.C.)

5 (1990) 183 ITR 1 (S.C.)

6 (2009) 319 ITR 306 (S.C.)

7 (2008) 304 ITR 308 (S.C.)

8 (2008) 298 ITR 194 (S.C.)

9 (2001) 247 ITR 821 (S.C.)

10 (1995) 211 ITR 400 (Delhi)