Tax under Section 115J can be determined only after the end of the relevant year.
Indian corporate houses were aghast when book profits tax a levy on zero-tax companies was introduced. When the total income of a company, as computed under the Income-Tax Act, is less than 30 per cent of its book profit, the total income chargeable to tax shall be deemed to be an amount equal to 30 per cent of such book profits.
Section 115JB of the Income-Tax Act defines book profits. The law requires zero tax companies to pay advance tax on the book profits. If such advance tax is not paid, Section 234B seeks to levy interest up to 90 per cent of the tax liability on assessed income before the end of the previous year. Such levy was challenged in several High Courts on the ground that MAT liability gets crystallised only when the accounts are audited and that can be only after the end of the accounting year.
The Bombay High Court agreed with the views of the Madhya Pradesh and Gauhati High Courts and ruled that Sections 234B and 234C are automatically attracted when there is non-payment or short payment of advance tax. It was pointed out that interest is only compensatory in nature and there was no element of penalty involved.
The Madras High Court took the same view in CIT vs Holiday Travels (P) Ltd (263 ITR 307). The Punjab and Haryana High Court also upheld the charging of interest in CIT vs Upper India Steel Manufacturing and Engineering Company Ltd (279 ITR 123).
However, there is one ruling of the Karnataka High Court, in Kwality Biscuits Ltd vs CIT (243 ITR 519), is in favour of the tax-paying company. The court pointed out that determination of tax under Section 115J is only after the end of the relevant year and Sections 207, 208, 209 and 210 cannot be made applicable unless and until the accounts are audited and the balance-sheet is prepared, because till then even the company may not known whether Section 115J would be applicable or not.
The words "for the purposes of this section" in the Explanation to Section 115J (1A) are relevant and cannot be construed to extend beyond the computation of tax liability. Hence, interest cannot be charged under Sections 234B and 234C.
And now comes the bonanza from the Supreme Court. The Revenue took up the matter in appeal in CIT vs Kwality Biscuits Ltd (284 ITR 434), which the Supreme Court recently dismissed. This means that the solitary Karnataka view prevails ultimately and the decisions of all the other High Court stand overruled.
The present Section 115JB does not merely refer to the income base as was the case with Sections 115J and 115JA. It levies a tax on book profits.
It must however be pointed out that even under this section, book profits form only an alternate base not recognised in Sections 207 to 210, which require computation of advance tax. Tax on current income for advance tax purposes has still to be on the total income. Interest cannot be charged under Sections 234B and 234C even under the present law.
T. C. A. Ramanujam (The author is a former Chief Commissioner of Income-Tax.)