Commissioner of Income Tax vs May and Baker (India) (P.) Ltd.

S.P. Bharucha, J.—The reference, at the instance of the revenue, raises a single question, which reads thus: Whether, on the facts and in the circumstances of the case, the Tribunal was right in upholding the AAC''s decision that the capital for the purpose of surtax assessment cannot be proportionately taken in accordance with the period of the previous year even though the previous year may be consisting of less than 12 months and in, consequently, directing the ITO to recalculate the surtax payable by taking the capital base at the rate of Rs. 8 lakhs instead of Rs. 6 lakhs taken by ITO?

The question is posed with reference to the assessment of the assessee under the Companies (Profits) Surtax Act, 1964 (''the Act'') for the assessment year 1973-74.

Under the Act, surtax is leviable on so much of the assessee''s chargeable profits as exceed the statutory deduction provided for by the Act at the rate specified in its Third Schedule. Chargeable profits for the purpose of the Act mean the total income of the assessee as computed for the purpose of income tax with certain stated adjustments. ''Statutory deduction'' is defined by section 2(8) of the Act thus:

Definitions.-- In this Act, unless the context otherwise requires, --

(1) to (7) ******

(8) ''Statutory deduction'' means an amount equal to ten percent 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:

Provided that where the previous year is longer or shorter than a period of 12 months, the aforesaid amount of ten percent or, as the case may be, of two hundred thousand rupees shall be increased or decreased proportionately.

Under the Third Schedule, the surtax is charged at the rate of 25 per cent on so much of the chargeable amount as does not exceed 5 per cent of the amount of capital as computed in accordance with the Second Schedule and at the rate of 30 per cent on the balance.

The ITO noticed that the relevant previous year of the assessee was of 9 months. He, therefore, computed the surtax payable by the assessee in this manner

Computation of statutory deduction:

Rs.

Rs.

Share capital

5,00,000

General reserve

3,00,000

8,00,000

Proportionate capital base for

9 months

6,00,000

10 per cent thereof

60,000

Minimum statutory deduction

''

being more than 10 per cent

of the proportionate capital base

2,00,000

Proportionate for 9 months

1,50,000

1,50,000

Net chargeable profits

1,53,575

Surtax payable:

5 per cent of capital base, i.e., Rs. 6,00,000

(Rs. 30,000 @ 25 per cent)

7,500

Balance of Rs. 1,23,575@ 30

percent

37,073

44,573

The assessee went up in appeal to the AAC and submitted that its capital base for the purposes of computation of its surtax liability was not Rs. 6 lakhs as taken by the ITO but Rs. 8 lakhs. The AAC accepted the assessee''s submission. The revenue went in further appeal to the Tribunal. In a carefully considered judgment, the Tribunal upheld the AAC''s order.

It is, on a plain construction of the proviso to section 2(8), not possible to accept the revenue''s submission that the capital base has to be increased or decreased depending upon whether the assessee''s previous year is of more or less than 12 months. It is crystal clear that the proviso applies only to the statutory deduction of 10 per cent which has to be increased or decreased depending upon whether the assessee''s previous year is of more or less than 12 months. The capital base has to be computed without any reference to the proviso.

Mr. Jetley, the learned counsel for the revenue, relied upon the judgment of the Madras High Court in Commissioner of Income Tax Vs. Madras Auto Service (P.) Ltd., . The previous year of the assessee in this case was of a period of 8 months and 24 days. The ITO, accordingly, reduced the standard deduction to 7.33 per cent. The Tribunal held that it should be allowed at 7.5 percent. In reference, the Madras High Court found that the Tribunal''s notion that any fraction of a month must be rounded off as a month was incorrect. There is nothing in this judgment which has a bearing on the issue before us.

We are satisfied that the Tribunal was right in the view that it took and answer the question in the affirmative and in favour of the assessee. No order as to costs.