Commissioner of Income Tax vs Stanes Tyre and Rubber Products Ltd.

K.A. Thanikkachalam, J.—At the instance of the Department, the Tribunal referred the following common question of law for the assessment years 1975-76 to 1979-80, for the opinion of this court u/s 256(1) of the income tax Act, 1961, read with section 18 of the Companies (Profits) Surtax Act, 1964:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that while computing the chargeable profits for purposes of surtax assessment, the deductions contemplated in clauses ( viii ) and ( ix ) of rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, should be allowed at their gross amounts?"

The assessee is a company in which the public are substantially interested and the assessment years involved are 1975-76 to 1979-80 for which the respective financial years are the accounting years. The point for consideration relates to adjustment of dividends and royalty for the purpose of computing the chargeable profits in terms of rule 1( viii ) and ( ix ) of the First Schedule to the Companies (Profits) Surtax Act, 1964. The rule provides for adjustment of income by way of dividends and income by way of royalties. A plain reading of the rule gives the impression that the income contemplated in the aforesaid rule refers to gross and not net income. This is the view of the Kerala, Punjab and Haryana and Himachal Pradesh High Courts. However, the Tribunal found that the Supreme Court has granted special leave to the Department to appeal against the judgment, dated June 21, 1979, of the Karnataka High Court in I.T.R.C. No. 2 of 1976, whereby the High Court following the decision of the Supreme Court in the case of Cloth Traders (P) Ltd. Vs. Additional Commissioner of Income Tax , Gujarat-I, answered in favour of the assessee-company the question whether for the purpose of assessment under the Companies (Profits) Surtax Act, 1964, the assessee was entitled to deduction under rule 1( viii ) of the First Schedule of the full amount of dividend or only the lesser amount (vide CIT v. Consolidated Coffee Co. Ltd. (See [1983] 142 ITR (St.) 5) SLP Civil No. 10350 of 1980, decided on April 15, 1983).

While finalising the assessment, the income tax Officer has adjusted only the net income assessed under sections 80M and 80MM of the income tax Act, 1961, as against the gross amounts claimed by the assessee.

On appeal, the Commissioner of income tax (Appeals) accepted the plea of the assessee that only the gross income by way of dividends and royalties should be adjusted and not the net income as taken by the income tax Officer. On further appeal by the Revenue, the Tribunal upheld the decision of the Commissioner of income tax (Appeals).

In so far as the first part of the question relating to deduction claimed under rule 1( viii ) of the First Schedule to the Companies (Profits) Surtax Act, 1964, is concerned, the assessee claimed that the gross dividend income received should be allowed as deduction and not the net income after deducting the expenditure. A similar question came up for consideration before the Calcutta High Court in Commissioner of Income Tax Vs. Hindustan Gum and Chemicals Ltd., , wherein the Calcutta High Court, by following the decision of the Supreme Court in the case of Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and Others, held that the assessee deriving dividend income from another Indian company is not entitled to exclusion of the gross dividend income, but only the net dividend after the deduction of the amount allowed u/s 80M of the Act.

A similar view was taken by the Kerala High Court in the case of Commissioner of Income Tax Vs. Kil Kotagiri Tea and Coffee Estates Ltd., ; by the Karnataka High Court in Commissioner of Income Tax Vs. T.T. Pvt. Ltd., by the Delhi High Court in Trade Links P. Ltd. Vs. Commissioner of Income Tax, ; by the Andhra Pradesh High Court in Commissioner of Income Tax Vs. Vazir Sultan Tobacco Co. Ltd., ; by the Allahabad High Court in Commissioner of Income Tax Vs. R.B. Multanimal Modi and Sons, by the Gujarat High Court in Commissioner of Surtax Vs. Atul Products Ltd., and by the Madras High Court in Commissioner of Income Tax Vs. T. Stanes and Co. Ltd., , wherein the Madras High Court followed the earlier decision of its own in T.C. Nos. 136 and 137 of 1979, judgment dated June 19, 1986 (Virudhunagar Textile Mills Ltd. ). A similar view was also taken by this court in T.C. No. 1518 of 1984, judgment dated April 22, 1996. In all these decisions rendered by various High Courts, they have followed the judgment of the Supreme Court in Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and Others, . In view of the abovesaid uniform view taken by the various High Courts and the Supreme Court, we hold that the Tribunal was not correct in coming to the conclusion that for the purpose of surtax assessment the deduction contemplated in clause ( viii ) of rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, should be given with regard to the gross dividend. Accordingly, we answer the first part of the question referred to us in the negative and in favour of the Department.

In so far as the second part of the question referred to us is concerned, it relates to deduction contemplated in clause ( ix ) of rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964. According to the assessee, the royalty amount received from the Government should be allowed as deduction while computing the chargeable profits for the purpose of surtax assessment. But, according to the Department, in view of the various decisions rendered by various High Courts and the Supreme Court, the deduction should be given only with regard to the net royalty income, so far as the deduction contemplated under clause ( ix ) of rule 1 of the First Schedule to the Companies (Profits) Surtax Act, is concerned.

The Tribunal, while deciding this issue, held that the gross royalty income received by the assessee from the Government should be allowed as deduction, while computing the chargeable profits for the purpose of surtax assessment. Learned standing counsel appearing for the Department submitted that in view of the Explanation to rule 1 of the First Schedule to the Companies (Profits) Surtax Act, which came into effect from April 1, 1981, which is clarificatory in nature, according to the judgment of the Supreme Court in Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and Others, , the Explanation is applicable to the earlier assessment years, including the assessment years under consideration and, accordingly, the assessee is entitled to deduction of the net royalty income received from the Government while computing the chargeable profits for the purpose of surtax assessment. This Explanation was introduced under the Companies (Profits) Surtax Act, 1964, in order to make the Companies (Profits) Surtax Act, 1964, in line with the law as obtaining under the income tax Act, 1961. Under the income tax Act, section 80AA was added to the income tax Act with retrospective effect from April 1, 1968. This provision made it clear that only the net dividend could be deducted under Chapter VIA of the income tax Act, 1961. Therefore, the assessee is not entitled to ask for deduction of the gross royalty income received from the Government while computing the chargeable profits for the purpose of the surtax assessment.

However, learned counsel appearing for the assessee submitted that in the decision rendered by the Supreme Court in Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and Others, the Board''s circular to the effect that the Explanation brought into the Companies (Profits) Surtax Act, rule 1, would be applicable only from the assessment year 1981-82, was not brought to the notice of the Supreme Court. Therefore, according to learned counsel, the above said Explanation would be applicable only from the assessment year 1981-82 onwards. So also, learned counsel submitted that the Bombay High Court, while rendering its decision in Commissioner of Income Tax Vs. Banque Nationale De Paris, which had the occasion to consider clause ( x ) of rule 1 of the Companies (Profits) Surtax Act, 1964, held that only the net income received by way of interest or fees received for any technical service alone should be taken into consideration. According to learned counsel, clause ( x ) is pari materia with clause ( ix ) of rule 1 of the First Schedule to the Companies (Profits) Surtax Act. In the above said decision also learned counsel submitted that the circular issued by the Central Board of Direct Taxes, as stated above, was not considered. Therefore, according to learned counsel for the assessee, on a plain reading of clause ( ix ) of rule 1 of the Companies (Profits) Surtax Act, while computing the chargeable profits, only the gross royalty received by the assessee from the Government should be taken into consideration and not the net royalty amount. In order to support this line of argument, learned counsel appearing for the assessee, relied upon the decision of the Madhya Pradesh High Court in Commissioner of Income Tax Vs. Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd., wherein the Madhya Pradesh High Court held that the Explanation to rule 1( viii ) of Schedule I to the Companies (Profits) Surtax Act, 1964, has not been given any retrospective effect, and so, it will have application only for the assessment year 1981-82 and subsequent years. After the coming into force of the Explanation, the deduction under clause ( viii ) of rule 1, for computing chargeable profits would be of the net income received from dividends. As the Explanation has no application to the assessment year 1968-69, the gross income from dividends has to be deducted in computing the chargeable profits for that year. While rendering this decision, the Madhya Pradesh High Court followed the decision of the Supreme Court in Cloth Traders (P) Ltd. Vs. Additional Commissioner of Income Tax , Gujarat-I, . This decision was reversed by the Supreme Court in Distributors Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and Others, . Further, this decision is concerned with clause ( viii ) of rule 1 and not with regard to clause ( ix ) of rule 1. While considering the Explanation to rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, the Andhra Pradesh High Court in Commissioner of Income Tax Vs. Andhra Bank Ltd., , held that the Explanation is only clarificatory or declaratory in nature, declaring the law, which was already in existence, and, therefore, the Explanation would be applicable to the earlier assessment years also, even though it came into effect from April 1, 1981. This amendment was brought to the Companies (Profits) Surtax Act, 1964, rule 1, in line with section 80AA, which was brought by an Amending Act to the income tax Act, 1961. A similar view was taken by the Calcutta High Court in the case of Commissioner of Income Tax Vs. Hindustan Gum and Chemicals Ltd., ; by the Karnataka High Court in Commissioner of Income Tax Vs. T.T. Pvt. Ltd., , by the Delhi High Court in Trade Links P. Ltd. Vs. Commissioner of Income Tax, and Commissioner of Surtax Vs. Modi Industries Ltd., Again by the Andhra Pradesh High Court in Commissioner of Income Tax Vs. Vazir Sultan Tobacco Co. Ltd., . So also, the Bombay High Court in Commissioner of Income Tax Vs. Banque Nationale De Paris, while considering clause ( x ) of rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, held, that while granting deduction from the income derived by a company from securities of the Central Government constitutes income by way of interest from the Government as contemplated under rule 1( x ) of the First Schedule to the Companies (Profits) Surtax Act, 1964, and while granting deduction, the net interest income derived alone should be deducted while computing the chargeable profit under the Companies (Profits) Surtax Act, 1964. In the above said decision, while considering the Explanation brought to rule 1 of the First Schedule to the Companies (Profits) Surtax Act, the Bombay High Court observed that an Explanation may be appended to a section to explain the meaning of the words used in the section. There is no presumption that an Explanation which is inserted subsequently introduces something new, which was not present in the section before. Ordinarily, an Explanation is inserted to clear up any ambiguity in the section and it should be so read as to harmonise it with the section and to clear up any ambiguity in the main section. Here also the Bombay High Court followed the judgment of the Supreme Court in Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and Others, . In view of the various decisions cited supra rendered by various High Courts wherein it was held that the Explanation brought to rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, is clarificatory in nature, and therefore it is applicable for the earlier assessment years also, we cannot accept the argument advanced by learned counsel appearing for the assessee that while computing the chargeable profits, only the gross royalty income should be taken into consideration in view of the decision of the Madhya Pradesh High Court in Commissioner of Income Tax Vs. Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd., , wherein the Madhya Pradesh High Court followed the decision of the Supreme Court in the case of Cloth Traders (P) Ltd. Vs. Additional Commissioner of Income Tax , Gujarat-I, which decision was reversed by the Supreme Court in the case of Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and Others, . In view of the foregoing discussion, we are of the opinion that the Tribunal was not correct in holding that while computing the chargeable profits, the gross royalty income should be deducted. In that view of the matter, we answer the second part of the question referred to us in the negative and in favour of the Department. No costs.