Legislation by incorporation — Schedule VI vis-à-vis MAT

Section 115JB of the Income-tax Act, 1961 (‘the Act’) requires every assessee-company to prepare its profit and loss account in accordance with Part II and Part III of the Schedule VI for the purpose of determining net profit, for the computation of ‘book profit’. In other words, Part II and Part III of the Schedule VI are legislatively incorporated under the provisions of section 115JB of the Act.

Legislation by incorporation is a legislative device by which certain provisions of a particular Act are incorporated by reference into another Act, such that the provisions so incorporated become part and parcel of the later Act, as if they had been ‘bodily transposed into it’. In other words, the legal effect of such incorporated provisions are often held to be actually written in the later Act with the pen, or printed in it. The said observations were made by Lord Esher, M. R. while explaining the aforesaid principle in one of the earliest decisions on the subject1.

However, the aforesaid incorporated provisions in MAT, only prescribe the contents of the profit and loss account of the company and the principles for recognition, measurement, presentation, etc. of financial items are prescribed under the Accounting Standards as applied by the company in adopting the accounts at its annual general meeting.

A question which requires attention is whether the Revised Schedule VI as amended by the Central Government can be said to be legislatively incorporated under the provisions of section 115JB of the Act and accordingly net profit for the purpose of computation of book profit will be determined based on the format of profit and loss account as prescribed under the Revised Schedule VI.

The answer to this question depends upon the manner of construction and interpretation of whether Part II and Part III of the Old Schedule VI are introduced in MAT provision of the Act merely as reference/citation or have been incorporated under section 115JB. Legislation by incorporation may be undertaken by either merely citing a provision of one statute in another statute or by incorporating the said provision in another statute.

Therefore, before embarking upon answering the question under consideration, it is necessary to understand the principles of identifying the differences between the two and implications on the construction of a provision of a particular statute, which is merely referred to in another statute vis-à-vis being incorporated. In the former case, a modification, repeal or re-enactment of the statute that is referred will also have the effect in the statute in which it is referred, but in the latter case any change in the incorporated statute by way of amendment or repeal shall have no repercussion on the incorporating statute. The legal decisions have time and again tried to differentiate between the two, but the distinction is one of difference in degree and is often blurred2. There are no clear-cut guidelines which have been spelt out.

However, there are four exceptions which have been observed by the Courts3 to the implications on the construction of a provision as discussed above, wherein a repeal or amendment of an Act which incorporated in a later Act shall have effect on the later Act, irrespective of whether the said provision was merely referred or incorporated in the other statute. These exceptions are as under:

•  where the later Act and the earlier Act are supplemental to each other;

•  where the two Acts are in pari materia;

•  where the amendment of the earlier Act if not imported in the later Act would render the later Act wholly unworkable; and

•  where the amendment of the earlier Act either expressly or by necessary intendment also applies to the later Act.

On the touchstone of the aforesaid exceptions applied to the case under consideration, one may observe as under:

•  the Income-tax Act, 1961 and the Companies Act, 1956 are not supplemental to each other i.e., existence of either of the said Acts is not dependant of each other;

? the two Acts are not in pari materia i.e., both the Acts legislate in two different fields of law;

? the non-incorporation of the Revised Schedule VI under MAT provisions would not make the said provisions unworkable, since one would be able to compute net profit based on the Old Schedule VI; and

•  there is no mention by the Central Government of simultaneous amendment of MAT provisions, when Schedule VI was replaced under the Companies Act.

Considering this, one may observe that none of the four exceptions are applicable to the impugned issue.

Though it makes a case stronger to tilt the balance of construction that Part II and Part III of the Old Schedule VI are incorporated and not referred under MAT provisions, yet one may not conclude such construction without further discussion. It is necessary to understand the factors which may help in answering the aforesaid question. A matter of probe into the semantics of the provision along with the legislative intention and/ or taking an insight into the working of the enactment may help in determining which of the view is to be adopted. Part II and Part III of the Old Schedule VI are incorporated in all its phases from section 115J to section 115JB of the Act.

Reference is invited to the relevant provisions of section 115JB of the Act, which are reproduced below for ready reference:

“ ……………….. (2) 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):

Provided that while preparing the annual accounts including profit and loss account, —

(i) the accounting policies;

(ii) the accounting standards followed for preparing such accounts including profit and loss account;

(iii) the method and rates adopted for calculating the depreciation,

shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956):” (Emphasis supplied)

From the perusal of the aforesaid provisions of section 115JB(2), one would notice that the Legislature by applying the principle of legislation by incorporation introduced two provisions of the Companies Act, 1956. The differences in the language used for incorporating the said provisions highlight the mechanism of merely citing a provision vis-à-vis incorporating the provision.

One finds that similar usage of words, being ‘shall be the same’ is missing under the incorporation of Part II and Part III of Schedule VI to the Companies Act. Therefore, such similar construction and mechanism may not hold good for the purpose of interpretation of Part II and Part III of the Schedule VI to the Companies Act, which have been incorporated and not merely referred under the provisions of section 115JB(2) of the Act.

In a recent decision of the Supreme Court in the case of M/s. Dynamic Orthopedics Pvt. Ltd. v. CIT, (321 ITR 300), the Apex Court while referring the matter relating to the computation of book profit under MAT provisions to the Larger Bench, made following observations with respect to the semantics of MAT provisions under the Act. These observations on legislation by incorporation which may hold good for all the three avatars of MAT provisions viz. section 115J, section 115JA, and section 115JB are reproduced below:

“….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….

…. 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 ….. Hence, what is incorporated in section 115J is only Schedule VI and not section 205 or section 350 or section 355 ….. ” [Emphasis supplied]

The aforesaid decision reiterates the understanding that Part II and Part III of Schedule VI only are legislatively incorporated under the provisions of MAT. Therefore, any repeal, amendment or revision of Part II and Part III of Schedule VI to the Companies Act may not have effect on the operation of computation of book profit, until the Revised Schedule is incorporated under the MAT provisions of the Act.

Based on the aforesaid discussions, one may conclude that the Revised Schedule VI to the Companies Act cannot be taken into consideration, until necessary amendments are made requiring the assessee companies to determine the net profit for the purpose of computation of book profit under MAT provisions as per the Revised Schedule VI to the Companies Act.

This conclusion and article may be incomplete if the significant in-principle differences between the Old Schedule VI and the Revised Schedule VI are not highlighted. These differences are touched upon only in brief:

•     The Revised Schedule only contains Part I and Part II. It does not have Part III of the Old Schedule VI which provided for interpretation of the various expressions such as ‘provision’, ‘reserve’, ‘liability’, etc. and Part IV of the Old Schedule VI which dealt with balance sheet abstract and company’s general business profile.

•     The Revised Schedule VI prescribes the format of profit and loss account for the company, as against the Old Schedule VI, which did not provide for such format; and

•     The Old Schedule VI prescribed the principles on which the profit and loss account of the company was required to be prepared for the purpose of disclosure, which one fails to find under the Revised Schedule VI;

This issue is of importance from the perspective of the Direct Tax Code Bill, 2010 (draft) (‘DTC’) which in Clause 104 has provision analogous to section 115JB of the Act. Clause 104 of DTC provides reference to Clause 105 of DTC for the purpose of determination of net profit as shown in the profit and loss account prepared in accordance with Part II and Part III of Schedule VI to the Companies Act. Assuming Clause 104 and Clause 105 of draft DTC come into effect in their present form, one may interpret that Part II and Part III of the Revised Schedule VI are incorporated in the said clauses, considering the fact that the Revised Schedule VI to the Companies Act will be existing on the statute when draft DTC becomes an Act. However, it may be intriguing to notice that the Revised Schedule VI does not have Part III and therefore, the Legislature may have to make necessary amendments; otherwise the formula may become unworkable. Similar consequences may also be envisaged for companies subjected to MAT provisions for financial years ending on or after 1st April 2011, if we propose that Part II and Part III of the Old Schedule VI are merely referred to in section 115JB of the Act.  This subject may require further attention with the intention of the Government to introduce different set of Accounting Standards (i.e., Ind-AS and otherwise) applicable to different categories of companies and thereby leading to different tax bases of net profit as shown in the profit and loss account prepared in accordance with Part II and Part III of the Schedule VI to the Companies Act.

If the above discussion and conclusions are drawn to their logical end, then one envisages that companies subjected to MAT provisions of the Act may have to prepare two sets of their profit and loss account, wherein net profit as shown in the profit and loss account will have to be prepared in accordance with:

•     Part II and Part III of the Revised Schedule VI for the compliance of provision of Companies Act, 1956; and

•     Part II and Part III of the Old Schedule VI for the computation of book profit under the Act.