Year: 2011

[CIT v. Tulsyan NEC Ltd., (2011) 330 ITR 226 (SC)]

The issue involved a batch of civil appeals filed by the
Department before the Supreme Court, related to the question of whether MAT
credit, admissible in terms of section 115JAA, had to be set off against tax
payable (assessed tax) before calculating interest u/s.234A, u/s.234B and
u/s.234C of the Income-tax Act, 1961 (the Act).

The Supreme Court, at the outset, observed that there was no
dispute with regard to the eligibility of the assessee for set-off of tax paid
u/s.115JA. The dispute was only with regard to the priority of adjustment for
the MAT credit.

The Supreme Court observed that the relevant provisions
u/s.115JAA of the Act, introduced by the Finance Act, 1997, with effect from 1st
April, 1997, i.e., applicable for the A.Y. 1997-1998 and onwards,
governing the carry forward and set-off of credit available in respect of tax
paid u/s.115JA, showed that when tax is paid by the assessee u/s.115JA, then the
assessee becomes entitled to claim credit of such tax in the manner prescribed.
Such a right gets crystallised no sooner tax is paid by the assessee u/s.115JA,
as per the return of income filed by the assessee for a previous year (say, year
one). [See section 115JAA(1)]. The said credit gets limited to the tax
difference between tax payable on book profits and tax payable on income
computed under the normal provisions of the Act [see section 115JAA(2)] in year
one. Such credit is, however, allowable for a period of five succeeding
assessment years, immediately succeeding the assessment year in which the credit
becomes available (say, years two to six) [See section 115JAA(3)]. However, the
MAT credit is available for set-off against tax payable in succeeding years
where the tax payable on income computed under the normal provisions of the Act
the exceeds tax payable on book profits computed for the year [See section
115JAA(4),(5)]. The statute envisages u/s.115JAA ‘credit in respect of the tax
so paid’, because the entire tax is not an automatic credit but has to be
calculated in accordance with sub-section(2) of section 115JAA. Sub-section.(4)
of section 115JAA allows ‘tax credit’ in the year tax becomes payable. Thus, the
amount of set-off is limited to tax payable on the income computed under the
normal provisions of the Act less the tax payable on book profits for that year.
[Refer section 115JAA(4) and section 115JAA(5)]. The Assessing Officer may vary
the amount of tax credit to be allowed, pursuant to completion of summary
assessment u/s.143(1) or regular assessment u/s.143(3) for year one, in terms of
section 115JAA(6). As a consequence of such variation, the tax credit to be
allowed for year one is liable to change. With every change in the amount of tax
payable on book profits and/or tax payable on income computed under the normal
provisions of the Act, the tax credit to be allowed would have to be changed by
the Assessing Officer by passing consequential orders, deriving authority from
section 115JAA(6) of the Act. Thus, the tax credit allowable can be set off by
the assessee while computing advance tax/self-assessment tax payable for years
two to six, limited to the difference between tax payable on income computed
under the normal provisions and tax payable on book profits in each of those
years, as per the assessee’s own computation. Although the right to avail of tax
credit gets crystallised in year one, on payment of tax u/s.115JA and the
set-off thereof, follows statutorily, the amount of credit available and the
amount of set-off to be actually allowed, as in all cases of
deductions/allowances u/s.30/u/s.37, is fluid/inchoate and subject to final
determination are only on adjudication of assessment either u/s.143(1) or
u/s.143(3). The fact that the amount of tax credit to be allowed or to be set
off is not frozen and is ambulatory, does not tax away/destroy the right of the
assessee to the amount of the tax credit.

In the cases before the Supreme Court, it was not in dispute
that the assessees were entitled to set off the MAT credit carried forward from
year one. In fact, the Assessing Officer did set off the MAT credit while
calculating the amount of tax payable for years two to six. However, while
calculating interest payable u/s.234B and u/s.234C, the Assessing Officer
computed the shortfall of tax payable without taking into account the set-off of
MAT credit.

The Supreme Court observed that u/s.234B, ‘assessed tax’
means tax on the total income determined u/s.143(1) or on regular assessment
u/s.143(3), as reduced by the amount of tax deducted or collected at source, in
accordance with the provisions of Chapter XVII, on any income which is subject
to such deduction or collection and which is taken into account in computing
such total income. The definition, thus, at the relevant time, excluded MAT
credit for arriving at assessed tax. This led to immense hardship. The position
which emerged was that due to the omission, on one hand, the MAT credit was
available for set-off for five years u/s.115JAA; but the same was not available
for set-off while calculating advance tax. This dichotomy was more spelt out
because section 115JAA did not provide for payment of interest on the MAT
credit. To avoid this situation, the Parliament amended Explanation 1 to section
234B by the Finance Act, 2006, with effect from 1st April, 2007, to provide
along with tax deducted or collected at source, the MAT credit u/s.115JAA also
to be deducted while calculating assessed tax.

The Supreme Court held that any tax paid in
advance/pre-assessed tax paid, can be taken into account in computing tax
payable subject to one caveat, viz., that where the assessee on the basis
of self-computation unilaterally claims set-off or the MAT credit, the assessee
does so at its risk, as in case it is ultimately found that the amount of tax
credit availed of was not lawfully available, the assessee would be exposed to
levy of interest u/s.234B on the shortfall in the payment of advance tax. The
Supreme Court reiterated that it was unable to accept the case of the
Department because it would mean that even if the assessee does not have to pay
advance tax; in the current year, because of his brought forward MAT credit
balance, he would nevertheless be required to pay advance tax, and if he fails,
interest u/s.234B would be chargeable. The consequence of adopting the case of
the Department would mean that the MAT credit would lapse after five succeeding
assessment years u/s.115JAA(3); that no interest would be payable on such credit
by the Government under the proviso to section 115JAA(2); and that the assessee
would be liable to pay interest u/s.234B and u/s.234C on the shortfall in the
payment of advance tax, despite existence of the MAT credit standing to the
account of the assessee.

[CIT v. Bharti Cellular Ltd., (2011) 330 ITR 239 (SC)]

Respondent No. 1, a cellular service provider, had an
interconnected agreement with BSNL/MTNL. Under such agreement, Respondent No. 1
paid interconnect/access/port charges to BSNL/MTNL. Bharti Cellular, BSNL, MTNL,
Hutchison are all service providers. All are governed by National Standards of
CCS No. 7, issued by Telecom Engineering Centre. Under National Standards, M/s. Bharti Cellular Limited is required to connect its network with the network
of BSNL (the service provider) and similar concomitant agreement is provided
for, under which BSNL is required to interconnect its network with M/s. Bharti
Cellular Ltd.

The question basically involved in the lead case before the
Supreme Court was : whether tax was deductible by M/s. Bharti Cellular Ltd when
it paid interconnect charges/access/port charges to BSNL ?

The Supreme Court observed that the problem which arose in
such cases was that there was no expert evidence from the side of the Department
to show how human intervention takes place, particularly during the process when
calls take place, let us say, from Delhi to Nainital and vice versa. If,
for example, M/s. Bharti Cellular Ltd (in this example, in the judgment , it
appears that BSNL is inadvertently mentioned) had no network in Nainital,
whereas it had a network in Delhi, the interconnect agreement enabled M/s.
Bharti Cellular Ltd to access the network of BSNL in Nainital; and the same
situation could arise vice versa in a given case. During the traffic of
such calls, whether there is any manual intervention, was one of the points
which required expert evidence. Similarly, on what basis was the ‘capacity’ of
each service provider fixed when interconnection agreements were arrived at ?
For example, as informed, each service provider is allotted a certain
‘capacity’. On what basis such ‘capacity’ is allotted and what happens if a
situation arises where a service provider’s ‘allotted capacity’ gets exhausted
and it wants, on an urgent basis, ‘additional capacity’ ? Whether at that stage,
any human intervention was involved was required to be examined, which again
required technical data. According to the Supreme Court, these type of matters
could not be decided without any technical assistance available on record.

The Supreme Court directed the Assessing Officer (TDS) in
each case to examine a technical expert from the side of the Department and to
decide the matter. Liberty was also given to the respondents to examine its
expert and to adduce any other evidence.

The next question which arose was whether the Department was
entitled to levy interest u/s. 201(1A) of the Act or impose penalty for non-deduction of tax. The Supreme
Court was of the view, that in the facts and circumstances of the case, it would
not be justified for the following reasons : Firstly, there was no loss of
revenue. Though the tax had not been deducted by the payee, tax had been paid by
the recipient. Secondly, the question involved in the present cases before it
was the moot question of law, which was yet to be decided. The Supreme Court
would have closed the file because these cases were only with regard to levy of
interest but the matter was remitted to the Assessing Officer (TDS) only because
this issue was a live issue and it needed to be settled at the earliest. Once
the issue gets settled, the Department would be entitled to levy both a penalty
and an interest, but as far as the facts and circumstances of the cases before
it were concerned, the Supreme Court was of the view that the interest was not
justified at this stage. Consequently, it held that there would be no levy of
penal interest prior to the date of fresh adjudication order.

[Joint CIT v. Rolta Indian Ltd., (2011) 330 ITR 470
(SC)]

The question which arose for determination before the Supreme
Court was whether interest u/s.234B can be charged on the tax calculated on book
profits u/s.115JA ? In other words, whether advance tax was at all payable on
book profits u/s.115JA ?

The assessee furnished a return of income on 28th November,
1997, declaring total income of Rs. Nil. On 28th March, 2000, an order
u/s.143(3) was passed determining the total income at nil after set-off of
unabsorbed business loss and depreciation. The tax was levied on the book profit
worked out at Rs.1,52,61,834, determined as per the provisions of section 115JA.
The interest u/s.234B of Rs.39,73,167 was charged on the tax on book profit, as
worked out in the order of assessment. Aggrieved by the said order, the assessee
went in appeal before the Commissioner of Income-tax (Appeals). The appeal on
the question in hand was dismissed. On charging of interest u/s.234B, the appeal
was dismissed by the Tribunal on the ground that the case fell u/s.115JA and not
u/s.115J, hence, the judgment of the Karnataka High Court in the case of Kwality
Biscuits Ltd. was not applicable. At one stage, the Bombay High Court decided
the matter in favour of the Department, but later on, by way of review, it took
the view, following the judgment of the Karnataka High Court in the case of
Kwality Biscuits Ltd., that interest u/s.234B cannot be charged on tax
calculated on book profits. Hence, the Commissioner of Income-tax went to the
Supreme Court by way of civil appeal.

The Supreme Court held that section 207 envisages that tax
shall be payable in advance during the financial year on current income, in
accordance with the scheme provided in section 208 to
section 219, in respect of the total income of the assessee that would be
chargeable to tax for the assessment year immediately following that financial
year. Section 215(5) of the Act defines what is ‘assessed tax’. Tax determined
on the basis of regular assessment, so far as such tax relates to advance tax.
The evaluation of the current income and the determination has to be made
comprising section 115J/115JA of the Act. Hence, levying of interest was
inescapable. The Supreme Court further held that it was clear from reading
section 115JA and section 115JB that a specific provision is made on that
section, which says all the provisions of the Act shall apply to the MAT
company. Further, amendments have been made in relevant Finance Acts, providing
for payment of advance tax u/s.115JA and u/s.115JB. As far as interest leviable
u/s.234B was concerned, the Supreme Court held that the section was clear in
that it applied to all companies.

The Supreme Court further held that the pre-requisite condition for applicability of section 234B is that the assessee
is liable to pay tax u/s.208 and the expression ‘assessed tax’ is defined to
mean tax on the total income determined u/s.143(1) or u/s.143(3), as reduced by
the amount of tax deducted or collected at source. Thus, there is no exclusion
of section 115JA in the levy of interest u/s.234B. The expression ‘assessed tax’
is defined to mean tax assessed on regular assessment which means tax determined
on the application of section 115J/115JA in the regular assessment.

The Supreme Court observed that the question which remained to be considered was whether the assessee, which is a MAT company, was not in a position to estimate its profits of the current year prior to the end of the financial year on 31st March. In this connection, the as-sessee had placed reliance on the judgment of the Karnataka High Court in the case of Kwality Biscuits Ltd. v. CIT, reported in (2000) 243 ITR 519; and, according to the Karnataka High Court, the profit as computed under the Income-tax Act, 1961 had to be prepared and thereafter the book profit, as contemplated u/s.115J of the Act, had to be determined; and then, the liability of the assessee to pay tax u/s.115J of the Act arose only if the total income, as computed under the provisions of the Act, was less than 30% of the book profit. According to the Karnataka High Court, this entire exercise of computing income or the book profits of the company, could be done only at the end of the financial year; and, hence, the provisions of section 207, section 208, section 209 and section 210 (predecessors of section 234B and section 234C) were not applicable until and unless the accounts stood audited and the balance-sheet stood prepared; because till then even the assessee may not know whether the provisions of section 115J would be applied or not. The Court, therefore, held that the liability would arise only after the profit is determined in accordance with the provisions of the Companies Act, 1956 and, therefore, interest u/s.234B and u/s.234C is not leviable in cases where section 115J is applied. This view of the Karnataka High Court in Kwality Biscuits Ltd. was not shared by the Gauhati High Court in Assam Bengal Carriers Ltd. v. CIT, reported in (1999) 239 ITR 862; and the Madhya Pradesh High Court in Itarsi Oil and Flours (P) Ltd. v. CIT, reported in (2001) 250 ITR 686; as also by the Bombay High Court in the case of CIT v. Kotak Mahindra Finance Ltd., reported in (2003) 130 Taxman 730 which decided the issue in favour of the Department and against the assessee. It appeared that none of the assessees challenged the decisions of the Gauhati High Court, Madhya Pradesh High Court as well as the Bombay High Court in the Supreme Court. The Supreme Court observed that the judgment of the Karnataka High Court in Kwality Biscuits Ltd. was confined to section 115J of the Act. The order of the Supreme Court dismissing the special leave petition in limine filed by the Department against Kwality Biscuits Ltd. was reported in (2006) 284 ITR 434. Thus, the judgment of the Karnataka High Court in Kwality Biscuits Ltd. stood affirmed. However, the Karnataka High Court had thereafter, in the case of Jindal Thermal Power Co. Ltd. v. Deputy CIT, reported in (2006) 154 Taxman 547, distinguished its own decision in the case of Kwality Biscuits Ltd. (supra) and held that section 115JB, with which the Supreme Court was concerned, was a self-contained code pertaining to MAT, which imposed liability for payment of advance tax on MAT companies; and, therefore, where such companies defaulted in payment of ad-vance tax in respect of tax payable u/s.115JB, it was liable to pay interest u/s.234B and u/s.234C of the Act. The Supreme Court, therefore, concluded that interest u/s.234B and u/s.234C would be payable on failure to pay advance tax in respect of tax payable u/s.115JA/115JB. The Supreme Court further held that for the aforestated reasons, Circular No. 13 of 2001, dated November 9, 2001 issued by the Central Board of Direct Taxes, reported in (2001) 252 ITR (St.) 50, had no application. Moreover, in any event, para 2 of that Circular itself indicated that a large number of companies liable to be taxed under the MAT provisions of section 115JB were not making advance tax payments. In the said Circular, it had been clarified that section 115JB was a self-contained code and thus, all companies were liable for payment of advance tax u/s.115JB, and consequently the provisions of section 234B and section 234C, imposing interest on default in payment of advance tax, were also applicable.