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/-

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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/-

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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/-

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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/-

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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

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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/-

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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

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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.