Commissioner of Income Tax vs Madras Auto Service (P.) Ltd.

Balasubrahmanyan, J.—Two questions are referred to us by the Income Tax Appellate Tribunal for our consideration. The first question is is

as under :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the amounts deducted under

the provisions of section 80G, 80L and 80M formed part of the total income for Income Tax assessment and that, therefore, the capital should not

be reduced by the amounts referable to such deduction under rule 4 of the Second Schedule to the Companies Profits) Surtax Act, 1964 ?

The answer to this question is covered by a decision of this court in Additional Commissioner of Income Tax Vs. Bimetal Bearings Ltd., .

Following that decision, we answer the question in the affirmative and against Revenue.

The second question for our opinions is in the following terms :

Whether, on the facts and in the circumstances of the case and having regard to the proviso to section 2(8) of the Companies (Profits) Surtax

Act, 1964, the Appellate Tribunal was right in holding that the standard deduction should be allowed at 7.5% of the capital employed and not at

7.33% computed by the Income Tax Officer ?

For a decision on this question, a few facts may be mentioned. The assessee, Madras Auto Service Private Limited, was a private company,

whose normal accounting period was the financial year. However, during the financial year 1970-71, the assessee company was amalgamated with

T. V. Sundaram Iyengar & Sons Private Limited. This meant that for the relevant accounting year 1971-72, the assessee did not have a full

financial year as the previous year, but only a broken period of 8 months and 24 days.

The present reference is concerned with an assessment of the company to surtax under the companies (Profits) Surtax Act 1964. The basis of

the charge under this Act is the excess of the chargeable profits over the statutory deduction for any given previous year. While ""chargeable profits

are defined as the total income of an assessee company for the given previous year, the ""statutory deduction"" is defined in section 2(8) of the Act.

Shortly stated, ""statutory deduction"" is a certain percentage on the capital of company. During the assessment year 1971-72, the statutory

deduction was fixed at ten per cent. of the capital of the company. There is an important proviso to the definition of ""statutory deduction"". That

proviso reads as under :

Provided that where the previous year is longer or shorter than a period of twelve months, the aforesaid amount of ten per cent... shall be

increased or decreased proportionately.

In the present case, as already mentioned, for the assessment year 1971-72, the company did not have a full one year as its previous year by

reason of the supervening amalgamation on December 24, 1970. As already mentioned, the accounting period relevant to the assessment year

1971-72 extended only for a period of 8 months and 24 days. Under the proviso to section 2(8), therefore, the statutory deduction must be

correspondingly reduced on a time basis in the same proportion as the actual accounting period bears to the whole period of twelve months of a

year. The Income Tax Officer accordingly reduced the statutory percentage so as to accord with the accounting period being 8 months and 24

days. The Tribunal did not agree with this computation. According to the Tribunal, the proviso to section 2(8) required that the standard deduction

should be proportionate to the number of months by which the previous year is shorter than twelve months. The Tribunal''s idea seems to be that

any fraction of a month must be rounded off as a month. In that view, the Tribunal held that the proportion to be applied under the proviso to

section 2(8) is not on 8 months and 24 days, but on 9 months.

It is the correctness of this view of the Tribunal that is questioned in the second question which we have quoted earlier. In our judgment, the

Tribunal''s decision is based on a wrong construction of the proviso to section 2(8) of the Act. There is nothing, either express or implicit, in the

proviso which enables the rounding off of fraction of a month as a full month. All that the proviso says is that the ten per cent. statutory deductions

must be increased or decreased proportionately according as the actual period is longer or shorter than a period of twelve months. What the

Income Tax Officer did in this case was to apply the precise length of the actual accounting period, namely, 8 months and 24 days, so as to derive

the correct statutory deduction in terms of the proviso to section 2(8) of the Act. We uphold his interpretation of the provisions rather than that of

the Tribunal. In the circumstances, we answer the second question in favour of the Department and against the assessee. There will be no order as

to cost.

Learned standing counsel for the Department orally applied for leave to appeal to the supreme Court against our decision in regard to the first

question. Considering that the earlier decision of this court in Additional Commissioner of Income Tax Vs. Bimetal Bearings Ltd., had been the

subject of grant of leave by this court to appeal to the supreme Court. We are disposed to grant the learned counsel''s request. There will be a

certificate of fitness for appeal to the Supreme Court as respects our decision on the first question alone. As for the second question, we do not

think that it is of it is of such substantial importance as to require a decisions by the supreme court.