A.K.SIKRI,J. - (1.) IN this appeal, two questions of law, touching upon the interpretation which is to given to the Explanation below Section 115JB Clause (iii) of the Income Tax Act (hereinafter referred to as 'the Act'), arise for consideration. Before we reproduce the exact questions, which were formulated while admitting the appeal, we deem it proper to dig into the relevant events that occurred leading to the said questions.
(2.) THE assessee company/respondent is engaged in the business of manufacture and sale of injection moulded plastic parts, stamping parts/moulds and job work. The assessee filed its return of income for the Assessment Year 2002-03, relevant to the Financial Year 2001-02, declaring 'NIL' taxable income. This return was filed on 30.10.2002 along with statutory Audit Report and audited balance sheet and profit and loss account. The return was also accompanied by a report in Form No.29 B dated 22.10.2002 from an Accountant, certifying the book profits to be 'NIL' in terms of Minimum Alternate Tax (MAT) provisions of Section 115JB of the Act. This return was selected for scrutiny and notice under Sections 143(2) and 142(1) was served upon the assessee. Revised return of income was filed on 31.03.2004 again declaring a 'NIL' taxable income and 'NIL' book profits for the purposes of Section 115JB of the Act, with certain modifications. While computing book profits for the purpose of Section 115JB, the Assessing Officer (AO), inter alia, noticed that the assessee had claimed a deduction of Rs.11,14,64,874 from the net profits as adjusted. This claim of deduction was made on the strength of the provisions of Clause (iii) provided in Explanation (1) to sub-Section 2 of Section 115JB of the Act. Section 115JB of the Act, which is a MAT provision, creates special provisions for payment of tax for certain companies. In nutshell, it provides for payment of minimum tax by certain companies, if the tax paid by such companies as per book profits is less than the minimum profit prescribed under this provision. Sub- Section (2) thereof provides a specific scheme as per which taxable MAT income is to be calculated. It stipulates that the profit and loss account for the relevant period is to be prepared in accordance with the provisions of the Companies Act. It also provides that while preparing the annual accounts including profits and loss account, provisions of Section 210 of the Companies Act are to be adhered to. Explanation (1) appended below Sub-Section (2), thereafter, stipulates the procedure for arriving at book profits. It provides for certain additions, which are to be made to the book profit as shown in the profit and loss account and also enumerates certain deductions, which are to be made therefrom. Clause (iii) to which we have referred is one of the deductions provided therein. What it means is that book profits shown in the profit and loss account prepared in the manner prescribed under Sub-Section (2) are to be increased by making additions stipulated therein and thereafter are to be reduced by certain amounts as specified therein. Clause (iii) provides that the net profit is to be reduced by the amount of loss brought forward. Relevant portion of this Explanation reads as under: 'Explanation - For the purposes of this section, 'book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by - (a) the amount of income-tax paid or payable, and the provision therefore; or (b) the amounts carried to any reserves, by whatever name called [other than a reserve specified under Section 33AC]; or (c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d) the amount by way of provision for losses of subsidiary companies; or (e) the amount or amounts of dividends paid or proposed; or (f) the amount or amounts of expenditure relatable to any income to which [section 10 (other than the provisions contained in clause (38) thereof) or Section 11 or section 12 apply; or (g) the amount of depreciation, (h) the amount of deferred tax and the provision therefore, (i) the amount or amounts set aside as provision for diminution in the value of any asset,. If any amount referred to in clauses (a) to (i) is debited to the profit and loss account, and as reduced by, - (i) the amount withdrawn from any reserve or provision (excluding a reserve created before the 1st day of April, 1997 otherwise than by way of a debit to the profit and loss account), if any such amount is credited to the profit and loss account: Provided that where this section is applicable to an assessee in any previous year, the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation or Explanation below the second proviso to section 115JA, as the case may be; or (ii) the amount of income to which any of the provisions of [section 10 (other than the provisions contained in clause (38) thereof)] or section 11 or section 12 apply, if any such amount is credited to the profit and loss account; or (iia) the amount of depreciation debited to the profit and loss account (excluding the depreciation on account of revaluation of assets); or (iib) the amount withdrawn from revaluation reserve and credited to the profit and loss account, to the extent it does not exceed the amount of depreciation on account of revaluation of assets referred to in clause (iia); or (iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account.. Explanation.- For the purpose of this clause, - (a) the loss shall not include depreciation; (b) the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation is nil; or"
(3.) REVERTING back to the facts of the case, as on 31.03.2001, the assessee had accumulated book loss to the tune of Rs.34,67,03,948 which was, purportedly, brought forward in the relevant assessment year. It so happened that on 30.08.2001, the Board of Directors of the company passed a resolution to reduce the paid up equity share capital by cancelling equity shares to the tune of Rs.3245 lacs, which was passed for this purpose precisely in the following terms: "That subject to the approval of the shareholders of the company in general meeting and further subject to the confirmation by the High Court of New Delhi, the paid up equity share capital of the company be and is hereby reduced by Rs.5.00 lacs, which is not represented by available assets, by concealing Rs.3,24,50,000 fully paid up equity shares of Rs.10/- each aggregating to Rs.32,45,00,000 and the number of the existing issued and paid up equity shares be proportionately reduced.." ;