July 2019

Section 115JB of ITA, 1961 – MAT (Banking Companies – Provisions of section 115JB as it stood prior to its amendment by virtue of Finance Act, 2012 would not be applicable to a banking company governed by provisions of Banking Regulation Act, 1949

K.B.Bhujle
Advocate

28  CIT vs. Union Bank of India; [2019] 105 taxmann.com 253 (Bom) Date of order: 16th April, 2019 A.Y.: 2005-06

 

Section 115JB of ITA, 1961 – MAT (Banking Companies – Provisions of section 115JB as it stood prior to its amendment by virtue of Finance Act, 2012 would not be applicable to a banking company governed by provisions of Banking Regulation Act, 1949

 

The assessee bank filed its return for the A.Y. 2005-06 declaring certain taxable income. The AO completed assessment u/s. 143(3) of the Income-tax Act, 1961. He also computed the book profits u/s. 115JB for determining the assessee's tax liability.

 

The Tribunal held that the provisions of section 115JB were not applicable to the assessee bank.

 

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

 

“i)   The question that calls for consideration is whether the machinery provision provided under sub-section (2) of section 115JB is workable when it comes to the banking companies and such other special companies governed by the respective Acts. In this context, the question would also be of the legislative intent to cover such companies within the sweep of section 115JB of the Act. These questions arise because of the language used in sub-section (2) of section 115JB. As per sub-section (2) of section 115JB, every assessee being a company would for the purposes of the said 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 of the Companies Act, 1956. It is undisputed that the assessee a banking company is not required to prepare its accounts in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act, 1956. The accounts of the banking company are prepared as per the provisions contained in the Banking Regulation Act, 1949. The Department may still argue that irrespective of such requirements, for the purposes of the said Act and special requirements of section 115JB, a banking company is obliged to prepare its profit and loss account as per the provisions of the Companies Act, as mandated by sub-section (2) of section 115JB of the Act. The assessee's contention would be that such legislative mandate is not permissible.

 

ii)   This legal dichotomy emerging from the provisions of sub-section (2) of section 115JB particularly having regard to the first proviso contained therein in case of a banking company, would convince the Court that machinery provision provided in sub-section (2) of section 115JB of the Act would be rendered wholly unworkable in such a situation.

 

iii)   For the completeness of the discussion, one may note that section 211 of the Companies Act, 1956 pertains to form of contents of balance sheet and profit and loss account, sub-section (1) of section 211 provided that every balance sheet of a company shall give true and fair view on the state of affairs of the company at the end of the financial year and would be subject to the provisions of the said section and be in the form set out in the Forms 1 and 2 of schedule VI. This sub-section contained a proviso providing that nothing contained in said sub-section would apply to a banking company or any company engaged in generation or supply of electricity or to any other class of company for which a form of balance sheet shall be specified in or under the Act governing such company. Thus, Companies Act, 1956 excluded the insurance or banking companies, companies engaged in generation or supply of electricity or companies for which balance sheet was specified in the governing Act, from the purview of sub-section (1) of section 211 of the Companies Act, 1956 and as a consequence from the purview of section 115JB of the Act.

iv)  There are certain significant legislative changes made by the Finance Act, 2012 which must be noted before concluding this issue. It can be seen that sub-section (2) of section 115JB has now been bifurcated into 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 (which has now replaced the old Companies Act, 1956). Clause (b) refers to a company to which second proviso to sub-section (1) of section 129 of the Companies Act, 2013 is applicable. Such companies, for the purpose of section 115JB, would prepare the statement of profit and loss in accordance with the provisions of the Act governing the company. Section 129 of the Companies Act, 2013 pertains to financial statement. Under sub-section (1) of section 129 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 under section 113 and shall be in the form as may be provided for different classes of companies.

 

v)   Second proviso to sub-section (1) of section 129 refers to 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 sub-section (1) of section 129 of the Act, 2013 and clause (b) of sub-section (2) of section 115JB of the 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. Clause (b) of sub-section (2) provides that in case of such companies for the purpose of section 115JB the preparation of statement of profit and loss account would be in accordance with the provisions of the Act governing such companies. This legislative change thus aliens class of companies who under the governing Acts were required to prepare profit and loss accounts not in accordance with the Companies Act, but in accordance with the provisions contained in such governing Act. The earlier dichotomy of such companies also, if one accepts the Revenue's contention, having the obligation of preparing accounts as per the provisions of the Companies Act has been removed.

vi)  These 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 of the Act 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 under section 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 under section 115 JB of the Act.

 

vii)  Further, Explanation (3) below section 115JB(2) starts with the expression ‘For the removal of doubts’. It declares that for the purpose of the said section in case of an assessee-company to which second proviso to section 129 (1) of the Companies Act, 2013 is applicable, would have an option for the assessment year commencing on or before 1st April, 2012 to prepare its statement of profit and loss either in accordance with the provisions of schedule III to the Companies Act, 2013 or in accordance with the provisions of the Act governing such company. This is a somewhat curious provision. In the original form, sub-section (2) of section 115JB of the Act did not offer any such option to a banking company, insurance company or electricity 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 of the Act. Secondly, by virtue of this explanation if an anomaly which has been noticed is sought to be removed, it cannot be said that the Legislature has achieved such purpose. In plain terms, this is not a case of retrospective legislative amendment. It is stated to be a clarificatory amendment for removal of doubts. When the plain language of sub-section (2) of section 115JB did not permit any ambiguity, one cannot say that the Legislature by introducing a clarificatory or declaratory amendment cured a defect without resorting to retrospective amendment, which in the present case has admittedly not been done.

 

viii) In the result, it is held that section 115JB as it stood prior to its amendment by virtue of Finance Act, 2012 would not be applicable to a banking company. In the result, Revenue's appeal is dismissed.”

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