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

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 1^st 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.”