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

S.P. Bharucha, J.—This 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 Appellate Assistant Commissioner''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 consist of less than 12 months and in consequently, directing the Income Tax Officer to recalculate the surtax payable by taking the capital base at Rs. 8 lakhs instead of Rs. 6 lakhs taken by the Income Tax Officer ?"

The question is posed with reference to the assessment of the assessee under the Companies (Profits) Surtax Act, 1964, 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 an assessee as computed for the purpose of Income Tax with certain stated adjustments. "Statutory deduction" is defined by section 2(8) thus :

"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 :

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

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

The Income Tax Officer 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% thereof 60,000 -------- Minimum statutory deduction being more than 10% of the proportionate capital base 2,00,000 Proportionate for 9 months net chargeable profits 1,50,000 -------- 1,50,000 1,53,575 -------- Surtax payable : 5% of the capital base, i.e., Rs. 6,00,000 at Rs. 30,000 at 25% 7,500 Balance of Rs. 1,23,575 at 30% 37,073 ------- 44,573" --------

The assessee went up in appeal to the Appellate Assistant Commissioner and submitted that its capital base for the purpose of computation of its surtax liability was not Rs. 6 lakhs as taken by the Income Tax Officer but Rs. 8 lakhs. The Appellate Assistant Commissioner accepted the assessee''s submission. The Revenue went up in further appeal to the Income Tax Appellate Tribunal. In a carefully considered judgment, the Tribunal upheld the Appellate Assistant Commissioner''s order.

On a plain construction of the proviso to section 2(8), it is 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 than 12 months 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 than 12 months or less than 12 months. The capital base has to be computed without any reference to the proviso.

Mr. Jetley, 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 Income Tax Officer, accordingly, reduced the standard deduction to 7.33%. The Tribunal held that it should be all owed at 7.5%. 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 be aring 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.