Citation Codes

Equivalent Citations

citation codes

Case Number

Writ Petition Nos. 8060 and Batch

Advocates

For the Appellant: Murali Krishna Prasad, S.R.Ashok, S.Ravindranath Reddy, V.Parabrahmma Sastry, Advocates.

Judges

Syed Shah Mohammed Quadri
Y.V Narayana, JJ.

Acts

provisions of subsection (2) of Section 32 or sub-section (3) of Section 32-A or clause (ii) of sub-section (1) of Section 72 or Section 73 or Section 74 or sub-section (3) of Section 74-A or sub-section (3) of Section 80 J.8. By Finance Act, 1987
sub-section (3) or sub-section (3A) of Section 80 HHC or sub-section (3) of Section 80 HHD,
provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1
Companies Act, 1956 Profits under the Income-tax Act (1) (2)
SECTION 205 A COMPANIES ACT 1956
provisions of VI Schedule to the Companies Act, 1956,
Section 80 HHD or Sub-section (1) of Section 33 AC,
sub-section (1) of Section 115-J.15. Proposition (ii)
provisions in sub-section (1) of Sec. 115-J.11.
Sub-sec. (2) of Section 155-J 3,80,000 1984:
SECTION 115 J INCOME TAX ACT 1961
provisions of sub-section (1) of Section
provision of sub-section (1) of Section
Section 115-J (2), then Section 115-J (1)
profit.13. Sub-section (2) of Section
Section 205(2) of the Companies Act,
sub-section (2) of Section 115-J.7.
INCOME TAX ACT
Section 115-J (1).9. Sub-section (2),
sub-section (1) of Section 115-J,
sub-section (2) of Section 115-J,
provisions of Section 115-J (1),
Section 80 HHC or Section 80
Finance Act, 1987 Sec. 80 VVA
sub-section (3) of Section 33
Provision of Section 80 WA
provision of sub-section (1)
section, viz.., Section 115-J,
COMPANIES ACT 1956
FINANCE ACT 1987
Section 115-J (1)
Section 80 HHD)

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Smart Summary

Structured Summary of the Opinion (Syed Shah Mohammed Quadri, J.)

Factual and Procedural Background

Four writ petitions were filed challenging the constitutional validity of Section 115‑J of the Income‑tax Act, 1961. The petitions raised a common question and were heard together; the court referred to facts in W.P. No. 8060/92 for illustration.

The first petitioner is a public limited company registered under the Companies Act, 1956; the second petitioner is one of its equity shareholders. For the financial year 1989–90 the petitioner-company disclosed net profit as per accounts and filed returns claiming various unabsorbed allowances (depreciation and investment allowance) to be carried forward under the Income‑tax Act. After computation under the Income‑tax Act, taxable income for assessment year 1990–91 became Nil. Section 115‑J (inserted by Finance Act, 1987) introduced a concept of "book profit" and resulted in the company being assessed on book profit in that scheme; tax and surcharge were paid in terms of Section 115‑J for the relevant year.

For assessment year 1991–92 the company had taxable income under the general provisions; the company sought to set off the income on which it had suffered tax for 1990–91 (i.e., sought a carry forward/set off claim relating to the amount taxed under Section 115‑J), but the Income Tax Officer did not allow that set off. The petitioners therefore challenged the constitutional validity of Section 115‑J as violative of Articles 14 and 19(1)(g) of the Constitution of India.

The Revenue filed counter‑affidavit explaining the background to insertion of Section 115‑J (replacement of Section 80 VVA/80 WA, studies showing “prosperous zero tax companies”), the policy rationale, and contending that the petitioners' claims of double taxation and discrimination lack substance.

Legal Issues Presented

Whether Section 115‑J of the Income‑tax Act, 1961 is constitutionally valid, specifically whether it violates Articles 14 and 19(1)(g) of the Constitution.
Whether, under sub‑section (2) of Section 115‑J, a company may carry forward unabsorbed losses and unadjusted allowances equal in amount to the income determined as taxable under sub‑section (1) of Section 115‑J (i.e., whether the income treated as taxable under s.115‑J(1) should be available for set‑off or carry‑forward treatment).
Whether the operation of Section 115‑J results in double taxation (i.e., taxation of the same economic burden twice) or discriminatory treatment vis‑à‑vis other taxable units.

Arguments of the Parties

Petitioners' Arguments (as presented by Sri Ravi and Sri Muralikrishna)

Sub‑section (2) of Section 115‑J should be interpreted to permit carry forward of unabsorbed losses and unadjusted allowances equal in amount to the income taxed under sub‑section (1), otherwise the provision results in double taxation and violates Article 14.
If the taxable income is determined under Section 115‑J(1), that amount should form the basis for determining how much of losses/allowances (including scientific research expenditure etc.) can be carried forward and set off against income in subsequent years.
Relying on the example in Board's Circular No. 495 dated 22‑9‑1987, counsel argued that failure to allow carry forward of the portion equal to the income taxed under s.115‑J(1) would render s.115‑J(1) unconstitutional.

Revenue's Arguments (as presented by Sri S.R. Ashok)

Sub‑section (2) of Section 115‑J is a saving provision and does not confer any new or broader right to carry forward amounts beyond what is provided under the enumerated provisions of the Income‑tax Act (Sections 32, 32A, 72, 73, 74, 74A, 80J etc.).
Interpreting s.115‑J(2) in the petitioners' favoured manner would allow anomalous results because the various categories of carry forward (investment allowance, depreciation, business loss, Section 80‑J deficiency) have distinct statutory restrictions (time limits and computation rules); Parliament did not provide an overarching right to treat the Section 115‑J(1) amount as available for such set‑off.
The Board's Circular No. 495 represents the correct interpretation of s.115‑J(2). Section 115‑J(1) itself is not open to the constitutional attacks raised by the petitioners.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Jai Brothers v. Union of India, 1970 77 ITR 107	Legislature has larger discretion in fiscal enactments; classification for taxation is permissible if not singling out arbitrarily.	Cited to support the proposition that classification of companies for fiscal treatment (Section 115‑J applying to companies) is permissible and not necessarily discriminatory under Article 14.
I.T.O., Shillong v. Takin Roy Rymbai, 1976 103 ITR 92	The State has wide discretion in classification for taxation purposes; such classification is not vulnerable to attack on discrimination unless equity is transgressed.	Quoted to underline the wide latitude of legislative classification in fiscal matters, reinforcing that Section 115‑J's selective application to companies is within Parliament's competence.
R.K. Garg v. Union of India, 1982 133 ITR 239	Reiterates the principle of wide legislative discretion in fiscal classification.	Used to reinforce the consistency of the principle that fiscal classification is permissible and that differential treatment in taxation does not automatically equal discrimination under Article 14.
Kerala Hotel and Restaurant Assn. v. State of Kerala, 1990 2 SCC 502	Reiterates the rule concerning legislative classification and fiscal discretion.	Cited as further authority for the proposition that taxation classifications need not be identical across different categories to be constitutionally valid.
National Thermal Power Corpn. Ltd. v. Union of India, 1991 192 ITR 187 (Delhi High Court)	Held that Section 115‑J is not violative of Article 14 or Article 19(1).	The court expressed respectful agreement with this Division Bench decision and relied on it to support the conclusion that Section 115‑J is constitutionally permissible.
Jain Brothers v. Union of India (referred to as "1 Supra")	Noted that double taxation, by itself, does not necessarily render a provision invalid; fiscal measures can validly impose burdens even if they fall more heavily on some.	Cited to reject the argument that alleged double taxation automatically invalidates Section 115‑J.

Court's Reasoning and Analysis

The court's analysis proceeded in stages, closely following the text of Section 115‑J and the statutory scheme introduced by the Finance Act, 1987:

The court first set out Section 115‑J in full, noting its operation: where a company's total income (computed under the Income‑tax Act) is less than 30% of book profit (as defined and computed by prescribed adjustments), the company's total income for that year is deemed to be 30% of book profit (s.115‑J(1)). Section 115‑J(1A) prescribes preparation of accounts under Schedule VI to the Companies Act and the Explanation defines "book profit" with enumerated additions and reductions.
The court characterized sub‑section (2) as a "saving provision" that provides that sub‑section (1) shall not affect determination of amounts in relation to the relevant previous year to be carried forward under specified provisions (Sections 32/32A/72/73/74/74A/80J). In other words, sub‑section (2) preserves the statutory mechanism for calculating carry‑forwards under those provisions, unaffected by s.115‑J(1).
The court identified three possible interpretive propositions advanced in argument:
1. Proposition (i): s.115‑J(1) terminates the ability to carry forward losses/allowances.
2. Proposition (ii): amounts that remain to be carried forward under the regular computations continue to be carried forward unaffected by s.115‑J(1) (the Revenue's position and the court's view of s.115‑J(2)).
3. Proposition (iii): the income deemed taxable under s.115‑J(1) should be treated as available to offset carry forward items (petitioners' preferred interpretation), but the set‑off should be postponed to the next year.
The court held that sub‑section (2) gives statutory recognition to proposition (ii) and excludes (i) and (iii).
The court examined Board Circular No. 495 dated 22‑9‑1987 (and its numeric illustration) which demonstrated how carry forward items would continue to be computed under the Income‑tax Act and that s.115‑J(1) did not extinguish the carry forward rights. The court found no illegality in the Board's example and described it as consistent with the saving nature of s.115‑J(2).
The petitioners' core contention — that amounts equal to the income taxed under s.115‑J(1) should be treated as available for carry forward or set‑off — was rejected for three specific reasons:
- For Income‑tax Act purposes, the carried forward loss had already been partially adjusted under the ordinary computation (resulting in Nil taxable income under Income‑tax rules). The remaining unabsorbed loss is what stands to be carried forward under the Income‑tax Act; it is incorrect to claim a fresh separate carry forward equal to the s.115‑J(1) amount.
- Section 115‑J(2) is merely a saving provision and does not create any additional substantive right to treat the s.115‑J(1) deemed income as an amount available for set‑off.
- Allowing the petitioners' construction would frustrate legislative purpose: Section 115‑J was enacted to tax "prosperous zero tax companies" that showed large book profits but little or no taxable income due to concessions; permitting the claimed adjustment would nullify that object.
On the constitutional challenges (Articles 14 and 19(1)(g)) and the double taxation argument:
- The court relied on established authorities (Jai Brothers; I.T.O., Shillong; R.K. Garg; Kerala Hotel & Restaurant) to reiterate that fiscal classification is afforded wide legislative discretion and is not invalid merely because it taxes some categories and not others. The court found the contention of hostile discrimination without substance.
- The court adopted and expressed respectful agreement with the Division Bench of the Delhi High Court in National Thermal Power Corpn. Ltd. v. Union of India, which held Section 115‑J was not violative of Article 14 or Article 19(1).
- The court rejected the submission that Section 115‑J results in double taxation. It reasoned: (a) the tax under s.115‑J is upon an income determined under the special process established by the provision and there is no mechanism or provision re‑taxing the same income; and (b) double taxation alone does not necessarily render an otherwise valid fiscal provision unconstitutional (as illustrated in the cited authorities).
On the whole, the court concluded that Section 115‑J(1) and the saving operation of sub‑section (2) are consistent with the statutory scheme and policy objectives, and that the Board Circular's treatment comported with sub‑section (2).

Holding and Implications

Holding: The writ petitions were dismissed. The court's order concluded that the petitions were "without any substance" and were therefore dismissed, with no order as to costs.

DISPOSITION: The petitions are dismissed.

Immediate legal consequences for the parties

Section 115‑J (as introduced by Finance Act, 1987) is upheld and the constitutional challenge to it (Articles 14 and 19(1)(g)) is rejected on the grounds presented in these petitions.
Sub‑section (2) of Section 115‑J is a saving provision preserving the statutory mechanism for computing and carrying forward unabsorbed depreciation, investment allowance, business losses and related items under the specified provisions of the Income‑tax Act. It does not give rise to a separate right to treat the amount deemed taxable under s.115‑J(1) as available for set‑off or carry forward contrary to the statutory scheme.
The Board's Circular No. 495 (22‑9‑1987) and its illustrative computation were held to be consistent with the statutory saving in s.115‑J(2); the court found no illegality in that approach.
No new judicial precedent altering the legal landscape was announced beyond these conclusions; the court's decision aligns with existing authority (including the Delhi High Court decision in National Thermal Power Corpn. Ltd.).

Note: This summary is strictly confined to the statements, arguments, statutory text and conclusions set out in the provided opinion; no external facts or inferences beyond the opinion have been introduced.

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Suryalatha Spinning Mills Ltd., Rep. By Its Chairman, Sri L.N Agarwal And Another v. The Union Of India, Rep. By Its Secretary, Ministry Of Finance, New Delhi And Another

Syed Shah Mohammed Quadri, J.:— In these four writ petitions the constitutional validity of Section 115-J of the Income Tax Act, 1961 is questioned. As the question raised in these writ petitions is common, they were heard together and are being disposed of by a common judgment. For appreciating the contentions raised in these writ petitions, we would refer to the facts in W.P No. 8060/92.

2. The first petitioner in this writ petition is a public limited company which is registered under the Companies Act, 1956. The second petitioner is one of the equity share holders of the first petitioner company. It is stated that under the provisions of the Companies Act, the petitioner is required to prepare the balance sheet and the profit and loss account in accordance with Schedule-VI of the said Act. For the Financial Year 1989–90 i.e, 1-4-1989 to 31-3-1990, the petitioner disclosed Rs. 65,52,925/- as net profit. The petitioner filed Income Tax returns for the said year claiming that under Section 32(2) of the Act, the company had unabsorbed depreciation allowance of Rs. 11,99,745/- which the petitioner was entitled to carry forward; the petitioner had also investment allowance computed in accordance with the provisions of Section 32(A) of the Act at Rs. 49,59,734/- which remained unabsorbed. After necessary adjustment of the other allowances, and expenses, the income for that year was determined at Rs. 61,59,479/-. But after setting of the brought forward depreciation and investment allowance for the assessment year, the income of the petitioner for the assessment year 1990–91 became Nil. The petitioner says that Section 115-J was inserted by Finance Act, 1987, and a new concept of book profit was introduced; and the provisions of Section 80-VVA were deleted. By virtue of the operation of newly inserted provision-115 J, the book profits liable to tax were determined at Rs. 29,25,878/- and tax of Rs. 14,62,939/- computed at 50% and surcharge of Rs. 1,17,035/- at 8% of the Income Tax, totalling to Rs. 15,79,974/- were paid along with returns of income for the year 1991. It is added that for the Assessment year, 1991–92, the petitioner had the profit of Rs. 1,10,64,691/-. After making necessary adjustments as per the Act and the rules framed thereunder, the taxable income was arrived at Rs. 18,63,394/- on which tax together with surcharge was paid at Rs. 8,57,160/-. The petitioner company deducted the income determined for the assessment year 1991–92 under the provisions of Section 115-J and claimed to set off the national income on which it has suffered tax for the year 1990–91. That was not allowed by the Income Tax Officer. The petitioner, therefore, challenges the constitutional validity of Section 115-J saying, it is unconstitutional and violative of Arts. 14 and 9(1)(g) of the Constitution of India.

3. In the counter affidavit filed by the Revenue, it is stated that the minimum tax on companies was dealt with by Section 80 VVA which was inserted in 1983 but from the year 1988–89 that provision was deleted and Section, 115J was inserted. San??? le studies carried out by Central Board of Direct Taxes revealed that while the Provision of Section 80 WA have had the effect of subjecting the companies to minimum tax which they would not have otherwise paid, there were still companies which had no income tax liability despite substantial profits. This was due to the fact that the companies were availing depreciation in full under the Income Tax Act, and thus the phenomena of prosperous zero tax companies continued. There were about 650 of such companies during the relevant assessment year 1984–85. About 28% of the Companies (139 companies) accounting for net profit of Rs. 274/- crores showed no tax liability. So after conducting a careful study, by Finance Act, 1987 Sec. 80 VVA was deleted and Section 115-J was introduced by way of in independent Chapter XII-B in the Income-tax Act and it came into force from the assessment year 1988–89. It is only when the total income of a company under the provisions of Income-tax Act, in respect of any accounting year, of any company, is less than 30% of its book profits for purposes of charging income tax, 30% of book profit is treated as income. Subject to some adjustments, the book profits became the basis of taxation or assessability of income tax. The figures given by the petitioners' company in its return for the assessment year 1991–92 are not disputed. But it is stated that there is no rationality in claiming deduction of the income assessed under Section 115-J for the assessment year 1990–91 and there is no substance in the contention that there would be double taxation. It is not correct that Section 115-J creates any hostile discrimination as alleged. The Parliament in its wisdom chose the corporate sector for taxing under Section 115-J of the Act and the same is not open to challenge on the ground of discrimination. The Government policy of taxation strikes balance between promotion of investment in development and levy and recovery of taxes for the purposes of developmental activities and keeping in view these factors amongst others, the Government formulated the taxation policy. For these reasons, it is prayed that the writ petitions be dismissed.

4. Sri Ravi, the learned Counsel for the petitioners, who led the batch, concentrated on the question of carry forward of unabsorbed losses and unadjusted allowances under sub-section (2) of Section 115J when national income becomes the subject matter of assessment under sub-section (1) of Section 115-J of the Act. In other words his submission is that where the national income of a company is taxed, having regard to the provisions of Section 115-J (1), the unabsorbed loss and unadjusted allowances etc., of amount equal to the taxed income should be allowed to be carried forward, otherwise it would result in double taxation. He has elaborated his argument with reference to the example given in Board's Circular No. 495 dated 22nd September, 1987; if unabsorbed losses or unadjusted allowances equal in quantum to the income which is subject of tax under Section 115J (1), are not allowed to be carried forward to the next year, then submits the learned Counsel, the provisions of Section 115-J (1) would be liable to be struck down on the ground of violation of Article 14 as well as on the ground of double taxation so to save them from the vice of unconstitutionality it is necessary to interpret sub-section (2) of Section 115-J in such a manner as to make the carry forward of the unabsorbed losses and unadjusted allowances, equal in amount to the income calculated under Section 115J (1), permissible. Sri Muralikrishna, the learned Counsel appearing for the petitioner in W.P No. 2221 of 1993, while adopting the arguments of Sri Ravi, adds that once the taxable income of the company is determined under sub-section (1) of Section 115-J that should form the basis for the purpose of determining the unabsorbed depreciation, business losses and other allowances to be carried forward and set off against the income for the subsequent year, in other words he submits that on determining the taxable income under Section 115-J (1) the corresponding amount of the scientific research expenditure that could be absorbed against that income, should be allowed to be carried forward to the next assessment year under sub-section (2) of Section 115-J, if any other interpretation is given to Section 115-J (2), then Section 115-J (1) would be rendered unconstitutional.

5. Sri S.R Ashok, the learned standing counsel appearing for the Revenue, has contended that under the garb of interpreting sub-section (2) of Section 115-J, the assessee cannot nullify the purpose of legislation and the scheme introduced under Section 115-J (1) of the Act His contention is if sub-section (2) of Section 115-J is interpreted in the manner suggested by the learned Counsel for the petitioners, it would lead to anomalous consequences as the amounts that could be carried forward under sub-section (2) of Section 115-J would fall either under unabsorbed investment allowance or unabsorbed depreciation or unabsorbed loss or benefit under Section 80-J and each of them had its own restriction both with regard to time limit as also with regard to computation. Had the Parliament intended to provide such a relief under sub-section (2) of Section 115-J, it should have said so in that provision and it is not open for the petitioners to read in sub-section (2) something which has not been provided by the Parliament. He submits that the example given in Board's Circular No. 495 dated 22nd September, 1987, is the correct interpretation of sub-section (2) of Section 115-J. He has also contended that Section 115-J (1) is not open to challenge on any of the grounds urged by the petitioners.

6. We shall first deal with the contention of the learned Counsel for the petitioners in regard to carry forward of unabsorbed losses or unadjusted allowances etc., under sub-section (2) of Section 115-J.

7. It will be useful to read here Section 115-J which runs as under:

“115-J, SPECIAL PROVISIONS RELATING TO CERTAIN COMPANIES:—

(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.

(1-A) Every assessee, being a company, shall, for the purpose 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).

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 (1A), as increased by—

(a) the amount of income tax paid or payable and the provision therefor; or

(b) the amounts carried to any reserves other than the reserves specified in Section 80 HHD or Sub-section (1) of Section 33 AC, by whatever name called; or

(d) the amount by way of provisions for losses of subsidiary companies; or

(e) the amount or amounts of dividents paid or proposed; or

(f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies; or

(g) the amount withdrawn from the reserve account under Sec. 80 HHD, where it has been utilised for any purpose other than those referred to in sub-section (4) of that section; or

(h) the amount credited to the reserve account under Section 80 HHD to the extent that amount has not been utilised within the period specified in sub-section (4) of that Section;

(ha) the amount deemed to be the profits under sub-section (3) of Section 33 AC;

if any amount referred to in clauses (a) to (f) is debited or, as the case may be, the amount referred to in clauses (g) and (h) is not credited to the profit and loss account, and as reduced by:—

(i) the amount withdrawn from reserves (other than the reserves specified in Section 80 HHD) 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, 1988, 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 amounts (as arrived at after increasing the net profit by the amounts referred to in clauses (a) to (f) and reducing the net profit by the amounts referred to in clauses (i) and (ii) attributable to the business, the profits from which are eligible for deduction under Section 80 HHC or Section 80 HHD; so, however, that such amounts are computed in the manner specified in sub-section (3) or sub-section (3A) of Section 80 HHC or sub-section (3) of Section 80 HHD, as the case may be; or

(iv) the amount of the loss or the amount of depreviation which would be required to be set off against the profit of the relevant previous year as if the provisions of clause (b) of the first proviso to ub-section (1) of Section 205 of the Companies Act, 1956 (1 of 1956) are applicable.

(2) Nothing contained in sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of subsection (2) of Section 32 or sub-section (3) of Section 32-A or clause (ii) of sub-section (1) of Section 72 or Section 73 or Section 74 or sub-section (3) of Section 74-A or sub-section (3) of Section 80 J.”

8. By Finance Act, 1987 Chapter XII D containing a lone section, viz.., Section 115-J, extracted above, was inserted with effect from April 1, 1988. It replaced Section 80 WA and remained in force for three years, viz., 1988–89, 1989–90 and 1990–91. Section 80 VVA had placed certain restrictions on allowances of various incentives allowable under the Act. But the unabsorbed part of the allowances was allowed to be carried forward to the subsequent year; however, that does not cover depreciation allowances or setting off business losses. The object of insertion of Section 115-J is to ensure levy of minimum tax on what is known as “prosperous zero tax companies”. Such companies were showing huge profits in the profit and loss account and were also declaring dividends to the share holders but on account of various incentives and increase in depreciation rates, among so others, were showing very less or ‘Nil’ taxable total income. Under the scheme of the above section which is a self-contained provision, certain companies whose total income as computed under the provisions of the Income-tax Act, in respect of the previous year relevant to the assessment year after 1-4-1988, is less than 30% of their book profits the total income of such companies chargeable to income tax for the relevant previous year, is treated as an amount equal to 30% of such book profits and is taxed accordingly. It also provides certain adjustments by way of adding amounts and granting deductions for computing the chargeable income under Section 115-J (1).

9. Sub-section (2), with which we are concerned, says that the provision of sub-section (1) shall not affect determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under: (a) sub-section (2) of Section 32; or (b) sub-section (3) of Section 32 A; or (c) clause (ii) of sub-section (1) of Section 72; or (d) Section 73; or (e) Section 74; or (f) sub-section (3) of Section 74-A; or (g) sub-section (3) of Section 80-J.

10. Sub-section (2) is only a saving provision. It provides that determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions, enumerated above, will have to be made unaffected by the provisions in sub-section (1) of Sec. 115-J.

11. It is argued that having regard to sub-section (1), determination of amounts to be carried forward of losses etc., referred to above, three propositions are possible, viz.,

(i) Once the income is determined under sub-section (1) in an assessinent year, from that year unabsorbed losses and unadjusted allowances etc., mentioned above, cannot be carried forward any more because by operation of sub-section (1) of Section 115-J, a new scheme has come into effect which puts an end to the carrying forward of losses etc.;

(ii) On the determination of the taxable income, under the relevant provisions of the Act, whatever amounts remain to be carried forward as per regular computation, either by way of unabsorbed losses or unadjusted allowances etc., the same be carried forward to the next year ignoring the fact that a national income is made taxable under subsection (1);

(iii) The taxable income arrived at under sub-section (1) of Section 115-J should be deemed as available for purposes of setting of unabsorbed losses or unadjusted allowances etc., in that assessment year but postponed to the next year without allowing the actual adjustment.

12. In our considered view sub-section (2) gives statutory recognition to the proposition (ii) and gives no scope to entertain propositions (i) and (iii). We would examine these propositions and the merits of the Board's Circular No. 495, dated 22-9-1987 interpreting sub-section (2) of Section 115-J. The Circular recites that 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, some companies which are making huge profits and also declaring substantial dividends, have been managing their affairs in such a way as to avoid payment of income tax and accordingly as a measure of equity Section 115-J has been introduced by Finance Act, 1987. Under the new provision, in the case of a company whose total income, as computed under the provisions of the Income-tax Act is less than 30% of the book profit, computed under the section, the total income chargeable to tax will be 30% of the book profit as computed. The book profit will be the net profit as shown in the profit and loss account prepared in accordance with the provisions of VI Schedule to the Companies Act, 1956, after certain adjustment. This provision involves two processes. First the assessing authority has to determine the income of the company under the provisions of the Income-tax Act and secondly the book profit has to be worked out in accordance with the explanation to Sec. 115-J (1), then it will have to be seen whether the total income determined under the first process is less than 30% of the book profit; if so, sub-section (1) would be invoked and the total income of such a company chargeable to income-tax for the relevant previous year shall be equal to 30% of such book profit.

13. Sub-section (2) of Section 115-J provides that the application of this process shall not affect the carry forward of unabsorbed depreciation, unabsorbed investment allowance, business losses deficiency under subsection (3) of Section 80-J to the extent not set off, as computed under the Income-tax Act. It is illustrated in the said Board's circular as under:

Book Profits for the purpose of the Companies Act, 1956 Profits under the Income-tax Act (1) (2) YEAR 1984 Loss excluding depreciation 5,00,000 Profit before depreciation 5,00,000 4,00,000 Less: Depreciation as per books 2,00,000 Less: Depreciation 1,00,000 3,00,000 Less: Business loss for 1984 80,000. Less: Deduction u/s 205(2) for the year 1984 1,00,000 Unabsorbed depreciation 20,000 20,000 2,00,000 C.F Business Loss 1984 3,00,000 NIL C.F Unabsorbed depreciation 1985 3,80,000

YEAR 1986 (1) (2) Net Loss as per books before depreciation (-) 10,00,000 Business loss(-) 10,00,000 Depreciation 2,00,000 ADD: Depreciation as per I.T Rules (-) 4,00,000 Business loss to be carried forward (-) 10,00,000 Unabsorbed depreciation to be carried forward (-) 2,00,000

YEAR 1987 (1) (2) Net profit 10,00,000 Profit before depreciation 10,00,000 Book depreciation 2,00,000 LESS: Depreciation as I.T Rules 8,00,000 LESS: Carried for-ward business loss for 1986 to the exent ad- 2,00,000 2,00,000 justed Assessed income NIL

APPLICATION OF SECTION 115-J Profit before Depreciation 10,00,000 LESS: Book depreciation 2,00,000 LESS: Deduction under Sec. 205(2) 8,00,000 2,00,000 Out of the amount whichever is less: 6,00,000

1984: Business Loss 3,00,000 1986: Business Loss 10,00,000 Total loss 13,00,000 1986: Depreciation 2,00,000 Assessable income 30% of Rs. 6 Lakhs i.e, Rs. 1. 8 Lakhs. Amount to be carried forward as per Sub-sec. (2) of Section 155-J 3,80,000 1984: Unabsorbed depreciation. 1986: Business Loss 8,00,000 Unabsorbed depreciation 4,00,000

14. The contents of the above circular read with the example given thereunder, extracted above, would make it evident that there is no scope for the revenue to contend that in view of the provision of sub-section (1), the unabsorbed depreciation allowance, unadjusted loss or deficiency etc., as the case may be, can no longer be carried forward to the subsequent year or years. The second proposition represents the stand of the Revenue while the assessee presses into service the third proposition. In the light of the example given in the circular of the Board, we shall consider these aspects. At the end of the year 1985, it is noted, the company was having carried forward unabsorbed depreciation of Rs. 3,80,000. In the year 1986, the company was having net loss of Rs. 10,00,000, depreciation of Rs. 2,00,000 and unabsorbed depreciation of Rs. 2,00,000 to be carried forward; further business loss to be carried forward in a sum of Rs. 10,00,000, thus it was having business loss of Rs. 10,00,000 and total depreciation of Rs. 4,00,000. But in the year 1987 the Company had net profit of Rs. 10,00,000 and book depreciation of Rs. 2,00,000; the depreciation as per Income-tax Rules was Rs. 8,00,000. After deducting depreciation under the Income-tax Rules, the income was reduced to Rs. 2,00,000. Against this income of Rs. 2,00,000, out of the unadjusted loss of 1986 amounting to Rs. 10,00,000, a sum of Rs. 2,00,000 would get adjusted leaving the assessable income as Nil. Now under the Companies Act, from out of the profits of Rs. 10,00,000 the book depreciation of Rs. 2,00,000 was deducted reducing the income to Rs. 8,00,000; under Section 205(2) of the Companies Act, a sum of Rs. 2,00,000 was deducted leaving the income of Rs. 6,00,000, after adjusting under the explanation, 30% of Rs. 6,00,000 i.e, Rs. 1.8 lakhs would be taxable under sub-section (1) of Section 115-J.

15. Proposition (ii) which is in accordance with sub-section (2) of Sec. 115-J would entitle the company to carry forward unabsorbed depreciation of Rs. 3,80,000/- unadjusted depreciation of Rs. 4,00,000 and business loss of Rs. 8,00,000. So far as the first two items are concerned, there is no controversy. Regarding the unabsorbed business loss of Rs. 8,00,000, what is contended is that out of carried forward business losses of Rs. 10,00,000, only Rs. 2,00,000 of business loss was adjusted as the amount of income was reduced to Nil; however, as the revenue is assessing the company to income tax on Rs. 1.8 lakhs, income arrived at under Section 115-J (1), whereas, in fact, income as per Income-tax calculations is Nil; the unadjusted depreciation and/or business loss which is available for adjustment but could not be adjusted against the said taxable income, that is so much of the loss as can be adjusted against Rs. 1.80 lakhs should be allowed to be carried forward to the next year. We find it difficult to accede to the contention of the learned Counsel for the petitioners for the reasons more than one. Firstly for purpose of arriving at the total taxable income under the provisions of the Income-tax Act, out of the carried forward loss, a sum of Rs. 2 lakhs was already adjusted and that resulted in the Nil income and business loss, unabsorbed, of Rs. 8,00,000 which is allowed to be carried forward as such the claim to carry forward Rs. 1,80,000, equal to taxable income under sub-section (1), is misconceived. Secondly because sub-sec. (2) of Section 115-J of the Act is a saving provision and does not confer any further right, the amount of income arrived at for purpose of exigibility of income-tax under sub-section (1) of Section 115-J, cannot be taken note of, while considering the question of carrying forward of unadjusted loss. Thirdly, the very object of the provision of Section 115-J is to tax such companies which are making huge profits and also declaring substantial dividends, but are managing their affairs in such a way as to avoid payment of income-tax, as a result of various tax concessions and incentives and for that purpose the taxable income is determined under sub-section (1) of Section 115-J, if any loss equal to the income thus determined is allowed to be adjusted then that would frustrate and nullify the very object of enacting the provision. In our view, from a plain reading of sub-section (2) of Section 115-J, it is very clear that the quantum of unabsorbed losses, unadjusted depreciation etc., for the purpose of carrying forward has to be under the provisions of the Act irrespective of quantum of income determined under the provisions of sub-section (1) of Section 115-J. We, therefore, find no illegality in the example of calculations given in the Board Circular No. 495 dated 22-9-1987.

16. This takes us to the second contention which was some what faintly contended and that is, if operation of sub-section (2) of Section 115-J, as given in the Board's circular is accepted, the provision of sub-section (1) of Section 115-J would be rendered unconstitutional, as it will be discriminative and violative of Articles 14 and 19(1)(g) of the Constitution of India. The discrimination alleged is that the provision is applicable only to companies but not to other units of taxation. This contention in our view is without any substance. In Jai Brothers v. Union of India . 1970 77 ITR 107. the Supreme Court observed that it was well settled that in fiscal enactments the legislature had a larger discretion in the matter of classification so long as there is no departure from the rule that persons included in a class were not singled out for special treatment. In that case the classification of firm as the registered firm and the unregistered firm and taxing them differently, was questioned as arbitrary and violative of Article 14. It was held that it was open to the legislature to say that once a registered firm committed a default attracting penalty it should be deemed or considered to be an unregistered firm for the purpose of imposition of penalty ???no question of discrimination under Article 14 could arise in such a.??? ation. It was also observed that there was nothing to prevent the legislature from giving the benefit of a reduced rate to a registered firm for the purpose of tax but withholding the same when it committed a default and became liable to imposition of penalty.

17. On the question of applicability of Article 14 to fiscal legislation, in I.T.O, Shillong v. Takin Roy Rymbai . 1976 103 ITR 92. the Supreme Court has laid down as under:

“In taxation laws the State has, in view of intrinsic complexity of fiscal adjustments of diverse elements, a considerably wide discretion in the matter of classification for taxation purposes. Legislature has ample freedom to select and classify persons, districts, goods, properties, incomes and objects which it would tax and which it would not tax. So long as the classification made within this wide flexible range does not transgress the doctrine of equity it is not vulnerable to attack on the ground of discrimination merely because it taxes or exempts from taxation, some incomes or objects and not others. Nor is the mere fact that tax falls more heavily on some in the same category, by itself a ground to render the law invalid.”

18. The same principle is reiterated in R.K Garg v. Union of India . 1982 133 ITR 239. and Kerala Hotel and Restaurant Assn. v. State of Kerala . 1990 2 SCC 502..

19. Before concluding the discussion on this aspect, we may usefully refer to the judgment of the Division Bench of the Delhi High Court in National Thermal Power Corpn. Ltd. v. Union of India . 1991 192 ITR 187. wherein the Division Bench has held that the provision of Section 115-J is not violative of Article 14 or 19(1) of the Constitution. We are in respectful agreement with the view expressed by the learned Judges. The next contention is that sub-section (1) of Section 115-J results in double taxation. We are unable to appreciate this contention. Firstly because what is being taxed is income determined on the basis prescribed under the said impugned provision and there is no provision to re-tax the same income, as such as of fact there is no double taxation. And secondly because double taxation per se would not render an otherwise valid provision, invalid. (See Jain Brothers v. Union of India (1 Supra)).

20. However, the learned Counsel submits that if the losses etc., which are not set off or adjusted against the income determined as taxable under Section 115-J (1) and are not allowed to be carried forward, it would result in double taxation. We do not think so. The right to carry forward losses, unadjusted allowances etc., is kept in tact by sub-section (2) of Section 115-J; merely because the amount equal to the income determined as taxable under sub-section (1) is not treated as unabsorbed loss etc., which under no provision of the Act can be so treated, it cannot be said that there is double taxation.

21. For the afore-mentioned reasons, the writ petitions are without any substance and accordingly we dismiss them; having regard to the circumstances of the cases, we make no order as to costs.

Suryalatha Spinning ... v. The Union Of India, ...