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Judgment
P. Govindan Nair, C.J.—The question that has been referred to us by the Income Tax Appellate Tribunal, Madras Bench, for our opinion,
in relation to assessment years 1965-66 to 1967-68, at the instance of the revenue, reads as follows:
Whether it has been rightly held that the cost of assets which had produced any income alone and not the cost of assets which had not produced
any income should be considered as falling under rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?
The question arises in these circumstances :
During the three years mentioned above, in computing the capital assets of the company in accordance with the provisions of the Second
Schedule for determining the ""statutory deduction"", which term is defined in Section 2(8) of the Companies (Profits) Surtax Act, 1964""(hereinafter
referred to as the Act), the Income Tax authorities had taken the value of the assets which is capable of giving rise to income mentioned under
Clause (viii) of Rule 1 of the First Schedule. Before we proceed further, it will be necessary to refer to some of the features of the Act. Section 4
of the Act imposes the surtax only on the ""chargeable profits"" of the previous year or years, as the case may be, as exceed the ""statutory
deduction"", at the rate or rates specified in the Third Schedule. Both the expressions ""chargeable profits"" and ""statutory deduction"" are defined
under the Act, the former u/s 2(5) and the latter u/s 2(8), We shall extract these definitions in full.
Section 2(5):
''Chargeable profits'' means the total income of an assessee computed under the Income Tax Act, 1961 (43 of 1961), for any previous year or
years, as the case may be, and adjusted in accordance with the provisions of the First Schedule."" Section 2(8):
''Statutory deduction'' means an amount equal to ten per cent. of the capital of the company as computed in accordance with the provisions of the
Second Schedule, or an amount of two hundred thousand rupees, whichever is greater.
Rule 1 to the First Schedule provides that income, profits and gains and other sums falling within Clauses (i) to (xii) of the said Rule shall be
excluded. We are concerned in this case only with the income that falls under Clause (viii) thereof. Clause (viii) is in these terms:
income by way of dividends from an Indian company or a company which has made the prescribed arrangements for the declaration and payment
of dividends within India.
The definition of the expression ""chargeable profits"" in Section 2(5) of the Act which we have already extracted indicates that chargeable profits
will have to be determined by taking the total income of an assessee computed under the I.T. Act, 1961, and by adjusting the same in accordance
with the provisions of the First Schedule. This means that out of the income determined for the purpose, of the I.T. Act, 1961, the income falling
under any of the clauses mentioned in Rule 1 of the First Schedule should be excluded. That is the only adjustment contemplated in Rule 1 of the
First Schedule.
The Second Schedule contains the rules for computing the capital of a company for the purpose of surtax, in order '' that the ten per cent. of the
capital may be arrived at, which is called the ""statutory deduction"" u/s 2(5) of the Act. In the Second Schedule, there are specific provisions for
computing the capital of a company which alone could be followed for the purpose of finding out the capital of the company. We may be more
specific and say that all capital of the company is not enumerated in Rule 1 of the Second Schedule. For instance, the capital of the company in the
shape of shares held by it which would fall under Clause (viii) of Rule 1 of the First Schedule is not mentioned in Rule 1 of the Second Schedule.
Even the capital that will contribute to the income which would fall under Clauses. (iii) and (vi) of Rule 1 of the First Schedule are not included in
Rule 1 of the Second Schedule. The legislature has, therefore, indicated as to what is the capital that must be taken into account and on which ten
per cent. will have to be calculated for the purpose of determining the statutory deduction. If the capital is more, obviously the statutory deduction
will be more. After having stated the procedure for reckoning the capital by enumerating the items in Rule 1 of the Second Schedule, Rule 2 of the
Second Schedule states that certain capital will have to be deducted from the statutory deduction. The wording of the rule is different and it
provides that where a company owns any assets the income from which in accordance with Clause (iii) or Clause (vi) or Clause (viii) of Rule 1 of
the First Schedule is required to be excluded from its total income in computing its chargeable profits, the amount of its capital as computed under
Rule 1 of the Second Schedule shall be diminished by the cost to it of the said assets. In other words, what it means is that from the statutory
deduction arrived at in accordance with Rule 1 of the First Schedule, the value of the assets, the income from which are required to be excluded
under Clauses. (iii), (vi) and (viii), will have to be deducted. After having said so, the amount for which the statutory deduction exceed the value of
the assets, the income from which is sought to be excluded under Clauses. (iii), (vi) and (viii) of Rule 1 of the First Schedule, must be augmented
by adding the borrowings under Rule 2(i) as well as the amount of any fund, any surplus and any such reserve as is not to be taken into account in
computing the capital under Rule 1.
A mere reading of Rule 2 indicates, particularly when the words of the rule are taken into account, that the statutory deduction is likely to get
reduced by the value of the assets, the income from which is.....to be excluded under Rule 1 of the First Schedule. The result would be that even in
cases where there has been no income of the type mentioned in Clauses (iii), (vi) and (viii), the capital assets which could have given rise to that
type of income mentioned in Clauses. (iii), (vi) and (viii) will have to be added up and excluded from the statutory deduction for the purpose of
Rule 2 of the Second Schedule. To take a concrete example from the facts of this case, the value of the shares held by the assessee which is
capable of giving rise to income as mentioned in Clause (viii) of Rule 1 to the First Schedule will have to be excluded from the statutory deduction
even in a case where, in a particular year or years, there was no income at all from those shares.
We may at this stage advert to the fact again that shares held by a company are not treated as capital for the purpose of Rule 1 to the Second
Schedule. From the provisions of the Act and the provisions in the two Schedules which we have referred to, it is clear that the intention of the
legislature was that where the income from certain types of assets is excluded from the purview of the charging Section 4 of the Act, the value of
those assets must go in diminution of the statutory deduction. The reason for this is plain. An assessee who has that type of income gets the whole
of that income excluded by virtue of the definition of the term ""chargeable profits"" and by reason of the charging Section 4. This is effectuated by
the specific provision in Rule 1 of the First Schedule. The assessee therefrom gets a substantial benefit of the entire income of the type mentioned in
Rule 1 of the First Schedule being excluded completely from the purview of the Act. The legislature, therefore, appears to have thought, as is clear
from the provisions, that these assessees who got such benefits should not get the full benefit of the statutory deduction by computing statutory
deduction merely in accordance with Rule 1 of the Second Schedule. Hence, provision has been made that the statutory deduction must get
reduced to the extent of the value of the assets which are capable of giving rise to the income which are enumerated in Rule 1 of the First Schedule.
Even after making a provision for reducing the statutory deduction, as we said earlier, provision is made by Rule 2(i) and (ii) (of the Second
Schedule) to augment adding the borrowings under Rule 2(i) as well as the amount of any fund, any surplus and any such reserve as is not to be
taken into account in computing the capital under Rule 1.
From the above provisions, a very reasonable attitude on the part of the legislature could be discerned. The deductions are to have the full
value of the ""statutory deductions"" and, in certain cases, the ""statutory deduction"" should get reduced and, when they are so reduced, they have to
be augmented by the value of the borrowings, the surplus profits and the reserves, other than those mentioned in Rule 1 of the First Schedule.
Counsel for the revenue contended that we should not try to find out the object, intent and purpose of the statute by not attributing to it the
natural, literal and grammatical meaning. So read, it was further urged that it is clear that the value of the assets which are capable of giving rise to
the income as mentioned in Clauses. (iii), (vi) and (viii) of Rule 1 of the First Schedule will, in all cases, have to be reduced from the statutory
deduction whether those assets give rise to income or not. This aspect was emphasised particularly with reference to the words ""is required to be
excluded "" in Rule 2 of the Second Schedule. It was submitted that if the intention of the legislature was that the value of the assets mentioned in
Rule 2 is to be taken into account for reducing the statutory deduction only when such assets gave rise to income, the legislature would have
mentioned the same in Rule 2 by using appropriate language. The rule could have been worded, it was suggested, that in cases where income from
assets which are liable to be excluded under Clauses (iii), (vi) and (viii) of Rule 1 of the First Schedule, has accrued, the value of those assets
should be reduced, from the statutory deduction. If the legislature had said so, there would have been no difficulty whatsoever. But the argument of
the counsel for the revenue was that even if they had not said so, what they have said is clear, in that in all cases in which a company owns assets
which are capable of giving rise to income of the type mentioned in Clauses (iii), (vi) and (viii), the amount of such capital shall be deducted from
the statutory deduction. The matter is certainly not free from doubt.
Counsel for the assessee brought to our notice column 8(2)(a) in Form No. 1, Part III, computation of statutory deduction, in the Appendix to
the Companies (Profits) Surtax Rules, 1964, which reads as follows:
8(2)(a):
Amount (as on the first day of the previous year) of the cost of assets, if any, the income from which is not included in the chargeable'' profits in
accordance with clause (iii) or clause (vi) or clause (viii) of rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964.
It was urged that in computation of the statutory deduction the value of the assets which give rise to the income mentioned in Clauses. (iii), {vi)
and (viii) of Rule 1 of the First Schedule will have to be deducted only when the income from which is not included in the chargeable profits. The
wording of column 8(2)(a) means clearly that from the statutory deduction, the value of the assets capable of giving rise to the income mentioned
under Clauses. {iii), (vi) and (viii) of Rule 1 in the First Schedule must be reduced only where the income from such assets is included in the
chargeable profits. If prominence is given to Form No. 1 or if it is applied for the purpose of Rule 2 of the Second Schedule, the value of the assets
which have not given rise to any income under Clauses. (iii), (vi) and (viii) of Rule 1 of the First Schedule need not be reduced from the statutory
deduction. Counsel for the assessee, therefore, contended that rule 2 will have to be read along with the provision in the form, and if so read, it will
be clear that Rule 2 of the Second Schedule will not apply to cases where there has been no income of the type mentioned in Clauses. (iii), (vi) and
(viii) of Rule 1 of the First Schedule.
Our attention was drawn by the counsel for the revenue to note 6 with reference to column 8(2)(a) wherein the word ""includible"" is used. It
was argued by the counsel that the note is more in consonance with Rule 2 of the Second Schedule and, therefore, column 8(2)(a) will have to be
read in accordance with the section. A rule or a provision in a rule which clashes with a section cannot override the provisions in the section. We
expect the same rule must apply even when the clash is between a rule and a schedule to an Act and a rule will have no application or effect in
understanding the scope and object of a provision in an Act. Normally, rules and the provisions in the statute must harmonise and the attempt must
always be to so harmonise, if there is any apparent conflict. Apart from this, rules must be looked into to find out whether a meaning that is
attributable to a section fits in with the provisions in the rule.
The decision of the English Court in Hales v. Bolton Leathers Ltd. [1951] AC 531, 544; [1951] 1 All ER 643 supports this proposition. Lord
Norm and observed as follows:
The National Insurance (Industrial Injuries) (Prescribed Diseases) Regulations, 1948, were made under.....Section 55(4) and though, in my
opinion, they cannot control the construction of the Act, it is yet of some importance to consider whether they fit into the construction which I think
the Act properly bears.
The first question to consider is whether the words of Rule 2 are clear and unambiguous that the court has no alternative but to apply its
grammatical meaning. The Supreme Court has ruled in a number of cases that in understanding the provisions in a particular section or sections in a
statute, the general intent, purpose and scope of the Act as seen from the provisions thereof must be seen. In other words, when the object and
purpose of the Act is clear, a court will not be guided solely by the words of a particular section or a rule. The attempt would be to construe that
rule in consonance with the general intent, purpose and object of the Act. It is inconceivable that having clearly indicated the intention and object of
the Act by the various provisions in the Act, the legislature would have intended deliberately to strike a discordant note nullifying that object. That
will normally lead to inconsistent and irrational provisions being provided in the statute which does not seem to be the object of the legislature. We
must normally understand the legislature to speak in clear terms and with consistency which is understandable from the provisions in the Act read
as a whole and if there is any provision which does not fit into the general scheme and object and purpose of the Act, a toning down of the
provision which militates against this intention and object is not only permissible, but, we think, is required to be adopted in such cases. The
decisions of the Supreme Court in Workmen of Dimakuchi Tea Estate Vs. The Management of Dimakuchi Tea Estate, , New India Sugar Mills
Ltd. Vs. Commissioner of Sales Tax, Bihar, and Sheikh Gulfan and Others Vs. Sanat Kumar Ganguli, , are some on this aspect. Our attention has
been drawn by the counsel for the revenue to a number of decisions which have laid down that when the meaning of a section is unambiguous and
clear, the court should not be guided by considerations of what is just or fair and try to modify the clear expressions of the legislature. One of the
decisions is reported in Rananjaya Singh Vs. Baijnath Singh and Others, .
Bearing in mind the decisions we have adverted to earlier, we have to decide now as to what is the correct principle to be applied in a given
case. Anomalies can result if one section or a rule strikes a different note from the general intent and purpose discerned from the provisions of the
Act. If there are anomalies resulting from such different purposes and intentions being indicated, the section which militates against the general
purpose of the Act will have to be understood in a manner different from the apparent meaning given to the section. There is yet another way of
reconciling this inconsistency and that is by understanding in what circumstances a particular section would apply.
Our attention was invited by the counsel for the assessee to the decision in R.B. Jodha Mal Kuthiala Vs. The Commissioner of Income Tax,
Punjab, Jammu and Kashmir, Himachal Pradesh and Patiala, and (1949) 17 ITR 561 where the apparent meaning of the provisions in the Act
have been understood in a limited manner. We think it is the principle of these decisions that should apply to this case.
When we look at the provisions in the Act, we find that the legislature has been guided by a sense of reasonableness and that there has been
no attempt made to clutch at all the profits made by a company and subject the same to a surtax under the Act, It is only the chargeable profits that
are brought under the statute as is evident from Section 4 of the Act. Chargeable profits are only the profits adjusted in accordance with Rule 1 of
the First Schedule. From the chargeable profits, the statutory deductions have to be made and it is only the excess of the chargeable profits over
the statutory deductions that is brought to tax. Even when Rule 2 of the Second Schedule comes into operation, the reduction of the statutory
deduction is augmented by the borrowings and by the funds and surplus profits and reserves other than those under Rule 1 of the Second
Schedule. It is thus clear that reasonableness, fairness and justice are writ large in the provisions of the statute. In such circumstances, if we try to
understand the meaning of the provisions in Rule 2 of the Second Schedule in a grammatical and literal way, the result would be an unjust provision
for which there is no rhyme or reason. We call it unjust provision because the object of Rule 2 in the Second Schedule appears to be evident that
an assessee should not get a double benefit of the income from certain assets being altogether excluded and the other balance of income getting
further reduced by a full allowance for statutory deduction excluded from the purview of tax. This is understandable. That is why the provision has
been made in Rule 2 of the Second Schedule that the value of the assets, the income from which had been excluded from the purview of the Act,
should go in reduction of the statutory deduction which would otherwise be available to the assessee.
In the light of the above, we consider that the proper interpretation to be placed on the First and the Second Schedules including Rule 2 of the
Second Schedule, is to understand Rule 2 of the Second Schedule as attracting only cases where Rule 1 of the First Schedule is attracted. In other
words, if there is no income of the kind mentioned in Clauses (iii), (vi) and (viii) of Rule 1 of the First Schedule at all in a particular assessment
year, Rule 2 of the Second Schedule will not be attracted at all. This view is in consonance with column 8(2)(a) in Form No. 1 which has already
been referred to. This would be the reasonable view that we can give to the Schedules which would be in consonance with the general object and
purpose of the Act. We, therefore, hold that the assessee having had no income whatsoever which would fall under Clause (viii) of Rule 1 of the
First Schedule, the value of .. the assets which would have given rise to such income cannot be deducted from the statutory deduction. The
Tribunal was right in coming to that conclusion. We, accordingly, answer the question referred to us in the affirmative, that is, in favour of the
assessee and against the revenue.
The matter has been a complicated one and has given rise to elaborate arguments, and as far as the research of the counsel goes, the question
raised is one of first impression. We, therefore, direct the parties to bear their respective costs in this case.