Seshasayee Paper and Boards Ltd. vs Commissioner of Income Tax

K.A. Thanikkachalam, J.—At the instance of the assessee, the Tribunal referred the following question for the opinion of this court, u/s 18 of

the Companies (Profits) Surtax Act, 1964 :

For the assessment years 1975-76 and 1976-77 :

Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that though the interest on long-term

borrowings of the assessee-company is included in the chargeable profits, the Income Tax relatable to the said amount of interest is not liable to be

reduced in the computation of chargeable profits ?

For the assessment years 1975-76 and 1976-77 relating to the surtax proceedings before the Assessing Officer, the claim of the assessee was

that since interest payable in respect of debentures is to be disallowed, the Income Tax payable relatable to such disallowance must be calculated

and allowed to the assessee as a deduction under rule 2 because under that rule the amount of Income Tax payable by the company in respect of

its total income must be deducted. The Income Tax Officer negatived this claim on the ground that there was no provision made for making such

deduction. This disallowance has been upheld by the Commissioner of Income Tax (Appeals) and also by the Appellate Tribunal in the second

appeal. When the Tribunal agreed with the view expressed by the authorities below, it was relying mainly upon the language used in rule 2. Rule 2

says that the amount of Income Tax payable by the company in respect of its total income under the provisions of the Income Tax Act must be

deducted. The expression ""income tax payable by the company in respect of its total income under the provisions of the Income Tax Act"",

according to the view of the Tribunal, meant only the actual amount of Income Tax determined as payable and not the notional Income Tax

attributable to the amount of interest payable on debentures disallowable under rule 3. The Tribunal pointed out that if the reason for disallowance

of the interest paid on debentures is borne in mind, it would become apparent that the scheme of the Act was not to allow even the Income Tax

component attributable to the addition of interest. The Tribunal found that in the absence of any specific provision for the deduction by way of

intendment (sic). For this reason, i.e., in the absence of a specific provision, the Tribunal felt that the claim made on behalf of the assessee was not

tenable.

Learned counsel appearing for the assessee submitted that since interest payable in respect of debentures is to be disallowed, the Income Tax

payable on such disallowance must be allowed to the assessee-company as a deduction under rule 2 because the rule provided that the amount of

Income Tax payable by the company in respect of its total income must be deducted from the total income arrived at.

Learned counsel further submitted that the deduction of the tax payable on interest on long-term borrowals is to be deducted following what is

stated under clause (ii) of Schedule I. According to learned counsel if the tax payable on interest is not deducted that would increase the total

income and the tax payable thereon. According to learned counsel in order to bring the true meaning of the provisions contained in the First

Schedule, the court can interpret the provisions contained in the First Schedule so as to enable the assessee to benefit. In order to support this line

of argument, learned counsel for the assessee relied upon the decisions in Coimbatore Salem Transports Ltd. Vs. Commissioner of Income Tax,

and K.P. Varghese Vs. Income Tax Officer, Ernakulam and Another, .

On the other hand, learned standing counsel appearing for the Department submitted that the interpretation given by learned counsel appearing

for the assessee is not acceptable. According to learned standing counsel, a plain reading of the First Schedule would go to show that there is no

provision for including the tax payable on interest. Therefore it is not possible for the assessee to ask for deduction of the tax payable on interest

which was not actually paid. Learned senior standing counsel submitted that when there are definite provisions in the matter of determining the

chargeable profits under the Companies (Profits) Surtax Act, 1964, it is not possible to read something which is not stated therein. Learned

standing counsel further submitted that if the arguments advanced by learned counsel for the assessee are accepted that would amount to granting

double deduction in the Income Tax assessment. According to learned counsel the surtax assessment is based upon the Income Tax assessment

which cannot be either modified or altered, while determining the chargeable profits under the Companies (Profits) Surtax Act.

We have heard the rival submissions.

The First Schedule to the Companies (Profits) Surtax Act lays down the rules for computing the chargeable profits. It says that in computing the

chargeable profits of a previous year, the total income computed for that year under the Income Tax Act shall be adjusted in the manner provided

in rules 1 to 3. Rule 1 provided for exclusion of certain incomes from the total income computed for the purpose of Income Tax. Rule 2 provided

that from the income so adjusted the amount of Income Tax payable by the company in respect of its total income under the provisions of the

Income Tax Act, after making allowance for any relief, rebate or deduction in respect of Income Tax to which the company may be entitled under

the provisions of the said Act or the annual Finance Act, and after excluding from such amount the amount of Income Tax relatable to the excluded

incomes, must be reduced. Rule 3 provided that the net amount of income calculated in accordance with rule 2 shall be increased by the aggregate

amount of any interest payable by the company in respect of the debentures referred to in clause (iv) or moneys referred to in clause (v) of rule 1

of the Second Schedule for the previous year relevant to the assessment year allowed as a deduction in computing its total income.

Rule 3 has been amended with effect from April 1, 1977. We are concerned with the said rule as it stood before its amendment. This rule

provided for the addition, i.e., add back of the interest payable by the company in respect of the debentures to the income. This was also because

by the amendment made in the Second Schedule, long-term borrowings and debentures are not to be included in computing the capital of the

company, since the debentures are not to be included in computing the capital of a company. Consequently, it has been amended to add back the

interest payable on such debentures to the income. According to the assessee, since the interest payable in respect of the debentures is to be

disallowed, the Income Tax payable on such disallowance must be calculated and allowed to the assessee as a deduction under rule 2 because

under that rule the amount of Income Tax payable by the company in respect of its total income must be deducted, from the total income arrived

at.

A plain reading of the First Schedule and rules 1 to 3 thereof would go to show that there is no provision for including the tax payable on the

interest on long-term borrowals. When the tax payable on the long-term borrowals was not included for the purpose of determining the chargeable

profits it is also not possible for giving deduction of the tax payable on interest which was not actually paid. Rule 2 specifically says exclusion of

Income Tax payment on certain income. There also Income Tax payable on interest on long-term borrowals was not mentioned. What items of

income have to be included and excluded are mentioned in clause (i) of the First Schedule. What kind of Income Tax is to be paid or to be

deducted is also stated in clause (ii). What items of income have to be added are also stated in rule 3. A plain reading of rules 1 to 3 of the First

Schedule would go to show that if the tax on interest on long-term borrowals is not calculated for the purpose of computing the chargeable profits,

therefore, there is no question of deduction of tax supposed to be paid on interest payment.

In K.P. Varghese Vs. Income Tax Officer, Ernakulam and Another, , it has been observed that a statutory provision must be so construed that

absurdity and mischief may be avoided. Where a plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result

which could never have been intended by the Legislature, the court may modify the language used by the Legislature or even do some violence to

it, so as to achieve the obvious intention of the Legislature and produce a rational construction.

In the present case, the Tribunal had arrived at its conclusion on a plain reading of Schedule I to the Act. What learned counsel appearing for

the assessee wants us is to read something which is not in the provision. When there is no absurdity and mischief in the provisions contained in the

Act, it is not possible for us to interpret it in a different way by substituting or re-writing the provisions. Therefore, in the present case, the

observations made by the Supreme Court in K.P. Varghese Vs. Income Tax Officer, Ernakulam and Another, would not be applicable.

In Coimbatore Salem Transports Ltd. Vs. Commissioner of Income Tax, , it was held that the Income Tax Officer functioning under the Super

Profits Tax Act can recompute the total income as per the provisions of the Income Tax Act if considered necessary in the proceedings under the

Super Profits Tax Act. Such a contingency does not arise according to the facts arising in this case. In the present case, while computing the

chargeable profits under the Surtax Act the Income Tax Officer followed the provisions contained in Schedule I to the Act. We cannot expect the

Assessing Officer to read something which is not contemplated in the provisions of the Act.

The fact remains that in the present case, the Income Tax was not computed on the interest on long-term borrowals. There is no provision in

the First Schedule to include the tax on interest on long-term borrowals. When such alleged tax was not included in computing the chargeable

profits, the claim of deduction cannot be made. In view of the foregoing reasons, we consider that there is no infirmity in the order passed by the

Tribunal in refusing to allow deduction of the alleged tax payable on interest on long-term borrowals.

In that view of the matter, we answer the question referred to us in the affirmative and against the assessee. No costs.