KARNATAKA SMALL SCALE INDUSTRIES DEVELOPMENT CORPORATION LTD. versus COMMISSIONER OF INCOME TAX, BANGALORE

Citation: [2002] SUPP. 4 S.C.R. 453 · Decided: 03-12-2002 · Supreme Court of India · Bench: RUMA PAL · Disposal: Dismissed

Judgment (excerpt)

KARNATAKA SMALL SCALE INDUSTRIES DEVELOPMENT 
A 
CORPORATION LTD. 
v 
COMMISSIONER OF INCOME TAX, BANGALORE 
DECEMBER 3, 2002 
B 
[RUMA PAL AND B.N. SRIKRISHNA, JJ.] 
Income Tax Act, 1961: 
Section 115-J-Special provisions for assessment of Tax on book profit C 
for certain period/previous years in respect of certain companies-Deductions 
under other provisions of the Act-Held, such deductions are necessary 
ingredient of the formula under the said provision of law which is taken into 
account while assessing notional income for computing tax on book profit. 
Words and Phrases: 
D 
'wfitten down value '-Meaning of 
The question which arose in these appeals was whether the deductions 
permissible under the provisions of the Income Tax Act can be considered to E 
have been actually allowed when the assessee has been made liable to pay 30 
per cent of the book profits in term of Section 115-J of the Act 
It was contended for the assessees that since benefit of deduction was 
not allowed while assessing income of the assessee for calculating tax on book 
profit they should be permitted to carry forward the same for the relevant F 
previous year under the provisions of the Act including Section 115-J; and 
that assessable income under Section 115-J could not be extended to include 
the fictional deductions. 
On behalf of Revenue, it was submitted that under Section 115-J(2) 
assessee could not be permitted to carry forward those deductions which had G 
already been allowed while assessing zero tax figure for the previous years. 
Dismissing the appeals, the Court 
HELD: l. The very object of the provision of Section 115-J is to tax such 
companies which are making huge profits and also declaring substantial H 
453 
454 
SUPREME COURT REPORTS [2002] SUPP. 4 S.C.R. 
A dividends, but are managing their affairs in such a way as to avoid payment of 
income tax, as a result of various tax concessions and incentives and for that 
purpose the taxable income is determined under sub-section (1) of Section 
115J, if any loss equal to the income thus determined is allowed to be adjusted, 
then that would frustrate and nullify the very object of enacting the provision. 
B 
c 
1461-E, Fl 
SwJ1alatha Spg. Mills Ltd. v. Union of India, (223 ITR 713), approved. 
lallcherra Tea Co. (0) ltd. v. Commissioner of Income tax, 239 ITR 
61! and Madeva Upendra Sinai v. Union of India and Ors. 98 ITR 209, 
distinguished. 
2.1. Section 115-J(l) provides for two stages. The first stage envisages 
computation of income after taking into consideration all deductions allowable 
under the Income Tax Act. It is only after the deductions are given effect to, 
and if the resultant income is less than 30 per cent of the book profit, that 
D the assessee's total income would be deemed to have a notional income fixed 
at 30 per cent of its book profit. It may be that the assessees are not required 
to pay tax on the figure of the assessable income arrived at after deducting 
the amounts permissible under the Act. However, it cannot be said that the 
deductions are not taken into account. If the deductions had not in fact been 
allowed then the assessee would not have had an assessable income less than 
E 30 per cent of the book profit, the deductions.claimed are not ignored but are 
a necessary ingredient of the formula for applying the fictional total income. 
1459-C, E-HJ 
2.2. All that Section 115-J(2) does is to preserve the right to carry 
forward the balance of the unabsorbed deductions in the relevant previous year 
F to the next assessment year. Section 115-J does not create any right nor does 
it serve to allow all the deductions taken into consideration for determining 
whether the total income should be quantified under Section 115-J(l), to be 
carried forward under sub-section (2) of Section 115-J. It allows only the 
unabsorbed losses, depreciation, investment allowance etc. which otherwise 
G could have been carried forward, to be carried forward. This construction of 
sub-sections (1) and (2) Section 115-J is in keeping with the avowed. purpose 
for which Chapter XII-B was introduced in the Act by the Finance Act, 1987. 
In addition, a contemporaneous exposition of the purport of Section ll 5~J is 
contained in Circular No. 495 dated 22nd September 1987 issued by the 
Central Board of Direct Taxes. Had Section 115-J not been introduced, the 
H assessee would have been entitled under the provisions of Sections 32(2), 
KARNATAKA S.S.l.D.C.L. v. C.l

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