Commissioner of Income Tax vs Sanmar Consolidations Ltd.

K. Raviraja Pandian, J.—The assessment year involved is 1980-81. The following question of law has been referred to this Court for our opinion by the Income Tax Appellate Tribunal at the instance of the Revenue:

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in cancelling the order of the Commissioner of Income Tax passed u/s 16 of the Companies (Profits) Surtax Act holding that Rule 2 of the Second Schedule to the Act cannot be applied on the facts of this case?

The facts of the case are : The assessee is a public limited company. Its surtax assessment for the assessment year 1980-81 for the previous year ended June 30, 1979, was completed u/s 6(2) on September 29, 1984, on a chargeable profits of Rs. 4,81,169. The Commissioner of Income Tax called for the records of the case and found that while computing the capital, the provisions of Rule 2 of the Second Schedule had not been applied by the Assessing Officer, even though the investments as on the opening day of the accounting year exceeded the borrowed money. He was of the view that as the assessee owned shares in other companies, the income by way of dividends from which were excludible while computing the chargeable profits as per Rule 1(viii) of the First Schedule, the excess of the cost of these shares to the assessee on the first day of the previous year minus any sums borrowed and remaining outstanding should be excluded from the capital base for computing the standard deduction. He found that as this exercise had not been conducted by the Assessing Officer, the assessment order was erroneous so as to be prejudicial to the interests of the Revenue. The assessee contended before the Commissioner of Income Tax that during the previous year relevant to the assessment year 1980-81 it has had no income in the return of dividends and, consequently, the provisions of Rule 1(viii) of the First Schedule to the Surtax Act would not apply. It followed, therefore, that Rule 2 of the Second Schedule pertaining to the reduction in the capital base would also not apply. Reliance was placed by the assessee on the Madras High Court decision in the case of Additional Commissioner of Income Tax Vs. Madras Motor and General Insurance Co. Ltd., . The Commissioner, however, noted that the Supreme Court had granted special leave to the Department to appeal against this decision and hence the decision has not become final. He, therefore, directed the Assessing Officer to redo calculations by reducing from the capital the net cost of the shares owned by the assessee and thereby reduce the standard deduction, and in accordance with law.

The Tribunal considered the arguments advanced by the assessee that the Madras High Court in Additional Commissioner of Income Tax Vs. Madras Motor and General Insurance Co. Ltd., had clearly held that: "Where an assessee had no income whatsoever falling under Clause (viii) of Rule 1 of the First Schedule, the value of assets which would have given rise to such income should not be deducted from the capital base for computing the statutory deductions". The Tribunal noted that during the previous year relevant to the assessment year 1980-81 the assessee had no income in the nature of dividend. Hence, the Tribunal came to the conclusion that as Rule 1(vi) of the First Schedule would not apply, there was no question of reducing the capital as required under Rule 2 of the Second Schedule. The Tribunal, therefore, found that there was no error which was required to be revised by the Commissioner of Income Tax u/s 16 of the Surtax Act. The Tribunal also concluded that such revision would be infructuous, inasmuch as the Assessing Officer could not make an order other than what he had made earlier, since he is bound by the decision of the jurisdictional High Court. The Tribunal, therefore, cancelled the order of revision, passed u/s 16 of the Companies (Profits) Surtax Act. The Tribunal rejected the reference application preferred by the Department on the ground that its decision was based upon the pronouncement of the jurisdictional High Court.

Learned Counsel for the Revenue submitted that the issue is squarely covered by the decisions of this Court in the cases of Commissioner of Income Tax Vs. United India Fire and General Insurance Co., and Commissioner of Income Tax Vs. Sri Rama Vilas Service Ltd., , approving the stand taken by the Tribunal. In the said decision, it was held as follows (headnote):

A perusal of the provisions of the Companies (Profits) Surtax Act, 1964, shows that it is only the chargeable profits that are brought under the statute as is evident from Section 4 of the Act. Chargeable profits are the profits adjusted in accordance with Rule 1 of the First schedule to the Act. 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 are brought to tax.

The proper interpretation to be placed on the First and the Second Schedules to the Surtax Act including Rule 2 of the Second Schedule, is to understand Rule 2 of the Second Schedule as attracting 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 in a particular assessment year, Rule 2 of the Second Schedule will not be attracted at all.

By virtue of Rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, income by way of dividends from shares of certain Indian companies is to be excluded while computing chargeable profits. Hence, under Rule 2 of the Second Schedule, such investment is to be excluded from the capital base of the company. However, as per Rule 2, such exclusion or diminution is confined to the extent to which the cost of such assets as on the first day of the previous year exceeds the aggregate of borrowed moneys as set out therein and any fund, any surplus and any such reserve as is not to be taken into account in computing the capital under Rule 1.

In the light of the decisions cited supra, the question referred to us has to be and is answered in the affirmative against the Revenue.