By TIOL News Service

MUMBAI, APRIL 30, 2019: THE ISSUE BEFORE THE DIVISION BENCH IS - Whether the requirement of preparing statement of accounts in terms of Companies Act, is not applicable to banking companies for whom financial statement has been specified under the governing Act. YES is the Verdict.

Facts of the case:

The assessee in the present case i.e., Union Bank of India, had filed its return for the relevant A.Y and the assessment order came to be passed u/s 143(3) determining the assessee's taxable income at Rs.412.41 crores under the normal provisions and Rs.431.15 crores as book profit u/s 115JB. The AO thereafter passed an order of rectification to give effect to a retrospective amendment in Section 115JB and computed the assessee's revised book profit at Rs.374.21 crores.

The matter ultimately reached the Tribunal, wherein the assessee challenged the order passed by AO exercising rectification powers. Further, the assessee raised an additional ground that being a banking company, the provisions of Section 115JB would not be applicable to it. The submissions raised by assessee came to be accepted and the Tribunal opined that the the entire exercises of modifying the orders was redundant as even after such adjustment, the tax determined under the normal provisions was more than the tax that were being determined by this order u/s 154. Be that as it may, just because a retrospective amendment had been carried out on the statue, the assessment could not be modified without examining whether the provisions so made were to be disallowed or not.

High Court held:

++ the provision of Section 115JB, pertains to special provisions for payment of tax by certain companies and provides a formula for payment of minimum tax in case of companies, whose tax payable on the total income works out to be below a certain minimum threshhold percentage of its book profit. This provision is a successor to Section 115JA, which was also introduced for the same purpose. In fact, the first legislative introduction of the provisions pertaining to what is popularly referred to as MAT companies was Section 115J. The CBDT Circular No.762 dated Feb 18, 1998 explains the object for introduction of such MAT provisions and clarifies that new Section 115JA has been inserted by the Finance Act, so as to levy a minimum tax on companies, who are having book profits and paying dividends, but not paying any taxes. In terms of Section 115JB(1) thus notwithstanding anything contained in any of the provisions of the Act in case of an assessee being a company where the income tax payable on the total income as computed under the Act, is less than prescribed percentage of its book profit, such book profit shall be deemed to be the total income of assessee. Section 115JB(1) takes within its swip all companies with no further bifurcation or distinction between companies. However, the question that calls for consideration in the present case, is whether the machinery provision provided u/s 115JB(2) is workable when it comes to the banking companies;

++ the first proviso to Section 115JB(2) provides that while preparing annual accounts including P&L A/c, the accounting policies and accounting standards adopted for preparing the account and the method and rules adopted in calculating the depreciation shall be the same as have been adopted for the purpose of preparing such accounts and laid before the company at its Annual General Meeting in accordance with provisions of Section 210 of the Companies Act, 1956. There is no dispute that the assessee bank in terms of Section 210 of the Companies Act, 1956 is also required to lay its accounts before the Annual General Meeting. However, such accounts would necessarily be prepared in accordance with the provisions of Banking Regulation Act, 1949 and never be those which even had it been possible to be prepared, in accordance with Parts II and III of Schedule VI of the Companies Act. The applicability of this proviso therefore, in case of a banking company would immediately create complications. A Banking company in terms of Section 115JB(2) can prepare additional accounts as per provisions of Parts II and III of Schedule VI of the Companies Act or fulfill the requirements of the proviso to sub­section (2) but cannot fulfill both the conditions. This legal dichotomy emerging from the provisions of Section 115JB(2) particularly having regard to the first proviso contained therein in case of a banking company, would convince that machinery provision provided u/s 115JB(2) would be rendered wholly unworkable in such a situation;

++ however, there are certain significant legislative changes made by Finance Act, 2012, which must be noted. In the present form, post amendment by Finance Act, 2012, it can be seen that Section 115JB(2) has now been bifurcated in two parts covered in the clauses(a) and (b). Clause (a) would cover all companies other than those referred to in clause (b). Such companies would prepare the statement of profit and loss in accordance to the provisions of schedule III of the Companies Act, 2013. Clause (b) refers to a company to which second proviso to Section 129(1) of the Companies Act, 2013 is applicable. Such companies for the purpose of Section 115JB, would prepare the statement of P&L in accordance with the provisions of the Act governing the company. Section 129 of the Companies Act, 2013 pertains to financial statement. U/s 129(1) it is provided that the financial statement shall give a true and fair view of the state of affairs of the company, comply with the Accounting Standard notified u/s 113 and shall be in the form as may be provided for different classes of companies. Second proviso to Section 129(1) refers any insurance or banking companies or companies engaged in the generation or supply of electricity or to any other class of company in which form of financial statement has been specified in or under the Act governing such class of company. Combined reading of this proviso to Section 129 of the Companies Act, 2013 and Section 115JB(2)(b) of the I-T Act would show that in case of insurance or banking companies or companies engaged in generation or supply of electricity or class of companies for whom financial statement has been specified under the Act governing such company, the requirement of preparing the statement of accounts in terms of provisions of the Companies Act, is not made;

++ the amendments in section 115JB are neither declaratory nor classificatory but make substantive and significant legislative changes which are admittedly applied prospectively. The memorandum explaining the provision of the Finance Bill, 2012 while explaining the amendments under Section 115JB notes that in case of certain companies such as insurance, banking and electricity companies, they are allowed to prepare the profit and loss account in accordance with the sections specified in their regulatory Acts. To align the Income Tax Act with the Companies Act, 1956 it was decided to amend Section 115JB to provide that the companies which are not required u/s 211 of the Companies Act, to prepare profit and loss account in accordance with Schedule VI of the Companies Act, profit and loss account prepared in accordance with the provisions of their regulatory Act shall be taken as basis for computing book profit u/s 115JB of the Income tax Act. Further, in the original form, Section 115JB(2) did not offer any option to a banking company to prepare its profit and loss account at its choice either in terms of its governing Act or as per terms of Section 115JB. In plain terms, this is not a case of retrospective legislative amendment. When the plain language of Section 115JB(2) did not permit any ambiguity, the legislature by introducing a clarificatory or declaratory amendment should not cure a defect without resorting to retrospective amendment, which in the present case has admittedly not been done. Thus, sub-section 115JB as it stood prior to its amendment by virtue of Finance Act, 2012, would not be applicable to a banking company.

(See 2019-TIOL-949-HC-MUM-IT)