Companies Act Case Law M/s. Dynamic Orthopedics Pvt. Ltd. Vs Commissioner of Income Tax, Cochin, Kerala

Companies Act Case Law

M/s. Dynamic Orthopedics Pvt. Ltd.

Vs

Commissioner of Income Tax, Cochin, Kerala

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.8419 OF 2003
M/s. Dynamic Orthopedics Pvt. Ltd. …Appellant(s)
Versus
Commissioner of Income Tax,
Cochin, Kerala …Respondent(s)
O R D E R
S.H. KAPADIA,J.

A short question which arises for determination in
this civil appeal is – whether the Income Tax Appellate
Tribunal was, on the facts and circumstances of this case,
justified in upholding the order of the Commissioner of
Income Tax (Appeals) directing the Assessing Officer to
allow the claim of depreciation as per the Income Tax
Rules, 1962, for the purposes of computing the book profit
under Section 115J of the Income Tax Act, 1961?
In this civil appeal, we are concerned with
Assessment Year 1990-1991.
…2/-
– 2 –
The appellant-assessee is a private limited
cfxompany engaged in the manufacture and sale of
Orthopaedic appliances. In the Return of Income filed,
the assessee returned an income of Rs.1,50,730/-. In the
Profit and Loss Account, depreciation was provided at the
rates specified in Rule 5 of the Income Tax Rules, 1962
[`Rules’, for short]. While completing the assessment of
income, the Assessing Officer re-computed the book profit
for the purpose of Section 115J of the Income Tax Act,
1961, [`Act’, for short], after allowing depreciation as
per Schedule XIV to the Companies Act. The rates of
depreciation specified in Schedule XIV to the Companies
Act, 1956 [`1956 Act’, for short] were lower than the
rates specified under Rule 5 of the Rules. Being
aggrieved by the assessment order, the assessee took up
the matter before the Commissioner of Income Tax [Appeals]
[`C.I.T.(A)’, for short], who came to the conclusion that
the assessee was a private limited company. It was not a
subsidiary of a public company. Therefore, placing
reliance on Section 355 of 1956 Act, the C.I.T. (A) held
that Section 350 of 1956 Act was not applicable to the
assessee and, in the circumstances, the Income Tax Officer
had erred in providing depreciation at the rates specified
under Schedule XIV to 1956 Act. Consequently, the
C.I.T.(A) held that the assessee was right in providing
depreciation in its accounts as per Rule 5 of the Rules.
Aggrieved by the decision of the C.I.T.(A), I.T.A. No.115
of 1993 was preferred by the Department to the Income Tax
Appellate Tribunal [`Tribunal’, for short]. By judgement
…3/-
– 3 –
and order dated 13th January, 1999, the Tribunal held that,
since the assessee was a private limited company, Section
349 and Section 350 were not applicable to the facts of
the case and, in the circumstances, the Income Tax Officer
had erred in directing the assessee, which was a private
limited company, to provide for depreciation as per
Schedule XIV to 1956 Act, which was not applicable to the
private limited companies [See Section 355 of 1956 Act].
Consequently, the appeal filed by the Department before
the Tribunal stood dismissed.
Aggrieved by the said decision of the Tribunal, the
Department preferred I.T.A. No.66 of 1999 before the High
Court of Kerala which held that Section 115J of the Act
was introduced in Assessment Year 1988-1989 to take care
of the phenomenon of prosperous `zero tax’ Companies which
had continued despite the enactment of Section 80VVA of
the Act. These Companies were paying no income tax though
they had profits and though they were declaring dividends.
Consequently, Section 115J of the Act was inserted to levy
a minimum tax on book profits of certain Companies.
According to the High Court, Section 115J of the Act read
with Explanation clause (iv), as it stood at the material
time, was a piece of legislation by incorporation and,
consequently, the provisions of Section 205 of 1956 Act
stood incorporated into Section 115J of the Act, hence,
the Income Tax Officer was right in directing the assessee
to provide for depreciation at the rate specified in
Schedule XIV to 1956 Act and not in terms of Rule 5 of the
Rules. Hence, this civil appeal is filed by the assessee.
…4/-
– 4 –
To answer the controversy, we quote hereinbelow the
relevant provision(s) of the Companies Act, 1956, Income
Tax Act, 1961, as it stood at the material time, as also
Income Tax Rules, 1962:

“Provisions of the Companies Act, 1956:

205.(1) No dividend shall be declared or paid by
a company for any financial year except out of
the profits of the company for that year arrived
at after providing for depreciation in
accordance with the provisions of sub-section
(2) or out of the profits of the company for any
previous financial year or years arrived at
after providing for depreciation in accordance
with those provisions and remaining
undistributed or out of both or out of moneys
provided by the Central Government or a State
Government for the payment of dividend in
pursuance of a guarantee given by that
Government.

349.(1) In computing for the purpose of section
348, the net profits of a company in any
financial year–

[a] xxxx xxxx xxxx

[b] the sums specified in sub-section (4) shall
be deducted, and those specified in sub-section
(5) shall not be deducted.

xxxx xxxx xxxx

[4] In making the computation aforesaid, the
following sums shall be deducted:–

[a] to [j] xxxx xxxx

[k] depreciation to the extent specified in
section 350.
…5/-
– 5 –

Ascertainment of depreciation.

350. The amount of depreciation to be deducted
in pursuance of clause (k) of sub-section (4) of
section 349 shall be the amount calculated with
reference to the written down value of the
assets as shown by the books of the company at
the end of the financial year expiring at the
commencement of this Act or immediately
thereafter and at the end of each subsequent
financial year at the rate specified in Schedule
XIV.”

Provisions of Income Tax Act, 1961:

“115J.(1A).– 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).

[a] to [d] xxxx xxxx xxxx

[e] the amount or amounts of dividends paid or
proposed.”

Provisions of Income Tax Rules, 1962:

“Depreciation.

5.(1) Subject to the provisions of sub-rule (2),
the allowance under clause (ii) of sub-section
(1) of section 32 in respect of depreciation of
any block of assets shall be calculated at the
percentages specified in the second column of
the Table in Appendix I to these rules on the
written down value of such block of assets as
are used for the purposes of the business or
profession of the assessee at any time during
the previous year.”
In this case, the question which arose for
determination before the High Court was – whether the
…6/-
– 6 –
C.I.T.(A) was right in directing the Assessing Officer to
allow the claim of depreciation made by the assessee as
per the Income Tax Rules, 1962, for the purposes of
computing the book profit under Section 115J of the Act,
as it stood at the material time? The High Court allowed
the appeal filed by the Department holding that the
Assessing Officer was right in re-computing the book
profit for the purpose of Section 115J of the Act after
allowing depreciation as per Schedule XIV to the 1956 Act
and not as per the rates specified in Rule 5 of the Income
Tax Rules, 1962, as claimed by the assessee. This view of
the High Court, in the present case, was similar to the
view taken by it in the case of Commissioner of Income Tax
vs. Malayala Manorama Company Limited, reported in [2002]
253 I.T.R. 378 (Kerala), which High Court’s judgement
stood reversed by the judgement of this Court in the case
of Malayala Manorama Company Limited vs. Commissioner of
Income Tax, reported in [2008] 300 I.T.R.251.
In our view, with respect, the judgement of this
Court in Malayala Manorama Company Limited vs.
Commissioner of Income Tax, reported in [2008] 300
I.T.R.251. needs re-consideration for the following
reasons: Chapter XII-B of the Act containing “Special
provisions relating to certain Companies” was introduced
in the Income Tax Act, 1961, by the Finance Act, 1987,
with effect from 1st April, 1988. In fact, Section 115J
replaced Section 80VVA of the Act. Section 115J [as it
stood at the relevant time], inter alia, provided that
where the total income of a company, as computed under the
…7/-
– 7 –
Act in respect of any accounting year, was less than
thirty per cent of its book profit, as defined in the
Explanation, the total income of the company, chargeable
to tax, shall be deemed to be an amount equal to thirty
per cent of such book profit. The whole purpose of
Section 115J of the Act, therefore, was to take care of
the phenomenon of prosperous `zero tax’ Companies not
paying taxes though they continued to earn profits and
declare dividends. Therefore, a Minimum Alternate Tax was
sought to be imposed on `zero tax’ Companies. Section
115J of the Act imposes tax on a deemed income. Section
115J of the Act is a special provision relating only to
certain Companies. The said section does not make any
distinction between public and private limited companies.
In our view, Section 115J of the Act legislatively only
incorporates provisions of Parts II and III of Schedule VI
to 1956 Act. Such incorporation is by a deeming fiction.
Hence, we need to read Section 115J(1A) of the Act in the
strict sense. If we so read, it is clear that, by
legislative incorporation, only Parts II and III of
Schedule VI to 1956 Act have been incorporated
legislatively into Section 115J of the Act. Therefore,
the question of applicability of Parts II and III of
Schedule VI to 1956 Act does not arise. If a Company is a
MAT Company, then be it a private limited company or a
public limited company, for the purposes of Section 115J
of the Act, the assessee-Company has to prepare its profit
and loss account in accordance with Parts II and III of
Schedule VI to 1956 Act alone. If, with respect, the
judgement of this Court in Malayala Manorama Company
…8/-
– 8 –
Limited [supra] is to be accepted, then the very purpose
of enacting Section 115J of the Act would stand defeated,
particularly when the said section does not make any
distinction between public and private limited companies.
It needs to be reiterated that, once a Company falls
within the ambit of it being a MAT Company, Section 115J
of the Act applies and, under that section, such an
assessee-Company was required to prepare its profit and
loss account only in terms of Parts II and III of Schedule
VI to 1956 Act. The reason being that rates of
depreciation in Rule 5 of the Income Tax Rules, 1962, are
different from the rates specified in Schedule XIV of 1956
Act. In fact, by the Companies (Amendment) Act, 1988, the
linkage between the two has been expressly de-linked.
Hence, what is incorporated in Section 115J is only
Schedule VI and not Section 205 or Section 350 or Section
355. This was the view of the Kerala High Court in the
case of Commissioner of Income Tax vs. Malayala Manorama
Company Limited, reported in [2002] 253 I.T.R. 378
(Kerala), which has been wrongly reversed by this Court in
the case of Malayala Manorama Company Limited vs.
Commissioner of Income Tax, reported in [2008] 300
I.T.R.251.
For the afore-stated reasons, the Registry is
directed to place this civil appeal before the learned
Chief Justice for appropriate directions as we are of the
view that the matter needs re-consideration by a larger
Bench of this Court.

………………….J.
[S.H. KAPADIA]
………………….J.
[AFTAB ALAM]
New Delhi,
February 16, 2010.

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