Shri Ram Refrigeration India Ltd. vs Commissioner Of Sur-Tax, Delhi
2002 Latest Caselaw 1261 Del

JUDGMENT

S.B. Sinha. C.J.

1. This reference under Section 18 of the Companies (Profits) Sur-tax Act, 1964 (hereinafter referred to as 'the said Act') read with Section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as 'IT. Act') has been made by the Income Tax Appellate Tribunal, Delhi Bench 'B', New Delhi (hereinafter referred to as 'the Tribunal') to this Court for its opinion on the following questions:-

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that Rs. 4,55,000/- being the cost of shares from which the assessed did not derive any income during the relevant accounting period was to be excluded for determining the assessed's capital for purposes of sur-tax under Rule 2 of the Second Schedule of the Companies (Profits) Sur-tax Act, 1964?"

2. The factual matrix leading to the aforementioned dispute is as follows :-

The assessed held shares in certain companies worth Rs. 4,55,000/-. During the assessment year 1982-83, the assessed did not derive any dividend income there from. The cost of the said shares was excluded by the assessing officer as also the appellate authority from the capital of the assessed company for calculating statutory deduction.

Thereafter, the assessed company preferred an appeal before the Tribunal wherein it was found that the assessed had not led any evidence, which might have been relevant for determining the question. It further observed :-

"8. As is evident, the Hon'ble Karnataka and the Madras High Courts have taken contrary views relating to the interpretation of Rule 2 contained in the Second Schedule to the Companies (Profits) Sur-tax Act, 1964. The Hon'ble Supreme Court has held that if a provision of a taxing Statute can reasonably be interpreted in two ways that interpretation, which is favorable to the assessed, has got to be accepted. What should be the reasonable interpretation has to be determined with reference to the object of the legislation. We have to keep in mind that the old concept of there being a King and the subject has vanished in most parts of the World, particularly in India, where we have a welfare state and a democratic government, elected by the people. Our laws are, therefore, laws made by the people from themselves through their elected representatives and the object of all fiscal laws is to advance the objects of social and economic justice as enshrined in the Constitution. The Companies (Profits) Sur-tax Act, 1964 was enacted with the object to impose special tax on companies on their excess profits. Assessment the amount, by which the profits exceeded 10% of the capital of a company. Schedule I and II to the Act contain Rules for determining the chargeable profits and capital respectively of a company. Under Rule 1 of Schedule I certain incomes are required to be excluded from the total income of the company. The total income is the basis on which the chargeable profits of a company are determined. Rule 2 of the Second Schedule correspondingly makes provision that where certain incomes are required to be excluded from its total income in computing the chargeable profits, the amount of the company's capital shall also be diminished by the cost of such assets. Clauses (iii), (vi) & (viii) of Rule 1 of first Schedule refer to the following incomes :--

(i) .....

(ii) .....

(iii) Profits and gains of any business of life insurance ......

(iv) .....

(v) .....

(vi) Income chargeable under the Income-tax Act under the head "Interest on securities" derived from any security of the Central Government issued or declared to be income-tax free, or from any security of a State Government issued income-tax free, the income-tax whereon is payable by the State Government.

(vii) .......

(viii) Income by way of dividends from an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends within India; .....

The principle arising from Schedule I and II appears to be simple that if certain income is not included in the chargeable profits the value of the asset from which that income arises would be correspondingly excluded from the capital. ..."

The Tribunal dismissed the said appeal of the assessed company holding :-

"10. The purpose of the Companies (Profits) Sur-tax Act, 1964 is to levy additional tax on companies earning larger profits. The Act is, therefore, intended not only to raise additional funds for the functioning of a welfare state but also to act as an instrument of social engineering by restricting competition & further equitable distribution of wealth. Rule 1 of the I Schedule excludes certain incomes from the computation of chargeable profits and Rule 2 of the Second Schedule excludes from capital the cost of corresponding assets. Where, therefore, a certain asset does not earn any income to be included in chargeable profit, the value of the same is rightly excluded in terms of Rule 2 of the Second Schedule. The view taken by the Madras High Court would lead to incongruous results, if accrual of some positive income is a precondition for the application of Rule 2 of the Second Schedule. By that interpretation for example, if an assessed incurs a loss in a business of life insurance, the entire amount corresponding assets of that business would be included in the capital for calculating the statutory deduction but if the computation of income from that source results in a meager profit of say Re. 1/- then the value of assets of the insurance business would be excluded from capital. In this respect the view taken by the Hon'ble Karnataka High Court appears to be a more reasonable view because it yields uniform results. Whether there is any positive income or not, the value of respective assets has to be excluded from capital in all events. We are, therefore, of the view that although two views have been taken about the interpretation of Rule 2 of the Second Schedule it is the view taken by the Karnataka High Court that appears to be a reasonable view and that should be followed. We, therefore, agree with the authorities below that the value of the shares amounting to Rs. 4,55,000/- was to be excluded in the calculation of capital and, therefore, this appeal has to be dismissed."

3. Before proceeding to deal with the question involved in this reference, we may notice some of the relevant provisions of the said Act :-

Section 2(5) of the said Act defines 'chargeable profits' as the total income of an assessed computed under the I.T. Act for any previous year or years, as the case may be and adjusted in accordance with the provisions of the First Schedule of the said Act.

'Statutory deduction' has been defined in Section 2(8) of the said Act as 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.

Section 4 of the said Act provides that subject to the provisions contained therein, there shall be charge on every company for every assessment year on and from the 1st day of April, 1964, sur-tax in respect of its chargeable profits of any previous year or previous years, as the case may be, exceeding the statutory deduction at the rate or rates specified in the Third Schedule.

Rule 1 of the First Schedule of the said Act reads thus :-

"Rule 1 : In computing the chargeable profits of a previous year, the total income computed for that year under the Income-tax Act shall be adjusted as follows :-

... ... ... ... ... ...

(vi) income chargeable under the Income-tax Act under the head "Interest on securities" derived from any security of the Central Government issued or declared to be income-tax free or from any security of a State Government issued income-tax free, the income-tax whereon is payable by the State Government;

(vii) an amount equal to fifty per cent, of the sum with reference to which a deduction is allowable to the company under the provision of Section 80G of the Income-tax Act;

(viii) income by way of dividends from an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends within India;

Explanation :-- Notwithstanding anything contained in any clause of this rule, the amount of any income or profits and gains which is required to be excluded from the total income under that clause shall be only the amount of such income or profits and gains as computed in accordance with the provisions of the Income-tax Act (except Chapter VIA thereof), and in a case where any deduction is required to be allowed in respect of any such income or profits and gains under the said Chapter VIA, the amount of such income or profits and gains computed as aforesaid as reduced by the amount of such deduction."

Rule 2 of the Second Schedule of the said Act provides for the procedures for computing the capital of a company for the purpose of sur-tax.

In terms of the aforesaid Rule 2 of the Second Schedule appended to the said Act where a company owns any assets whose income is required to be excluded from its total income in computing its chargeable profits, the amount of its capital as computed under Rule 1 of the First Schedule shall be diminished by the cost to it of the said assets.

4. As noticed by the learned Tribunal, similar question came up for consideration before the Karnataka High Court in Commissioner of Income Tax, Banglore v. United Breweries Ltd. (1978) 114 ITR 901 wherein Venkataramaiah, J. ( as his Lordship then was ) held :-

"... The word "income" in the words "any assets the income from which" in rule 2 should be read as meaning "income, if any", in the context in which it appears. If there is an asset, which answers the description or is of the category described in Clause (viii) of Rule 1

of the First Schedule, the cost of the said asset to the assessed should be deducted from the capital as determined under Rule 1 of the Second Schedule. The rule does not say that its application is dependent upon the actual receipt of the dividend in respect of those shares."

5. However, a contrary view has been taken by the Madras High Court in Additional Commissioner of Income-tax, Madras - II v. Madras Motor & General Insurance Co. Ltd., (1979) 117 ITR 354, wherein P. Govindan Nair, C.J. held:-

"... It is only the "chargeable profits", that is, profits adjusted in accordance with Rule 1 of the First Schedule that are brought to charge. Accordingly, the proper interpretation to be placed on the First and Second Schedules to the Act is to understand Rule 2 of the Second Schedule as attracted only to 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) ad (viii) of Rule 1 of the First Schedule at all in a particular assessment year, Rule 2 of the Second Schedule will not at all be attracted. This would be a reasonable view that can be given to the Schedules, which would be in consonance with the general object and purpose of the Act. If Rule 2 of the Second Schedule is interpreted otherwise in a grammatical and literal way, the result would be an unjust provision for which there is no rhyme or reason."

Unfortunately, the decision of the Karnataka High Court in United Breweries Ltd.'s case (Supra) was not brought to the notice of the Madras High Court.

We, with respect, cannot subscribe to the said view and would prefer to follow the decision of the Karnataka High Court.

6. A Division Bench of the Bombay High Court, we may notice in Commissioner of Income-tax v Hindustan Construction Co. Ltd. (1995) 211 ITR 535 also dissented from the decision of the Madras High Court in Madras Motor & General Insurance Co, Ltd, 's case ( Supra ) and followed the decision of the Karnataka High Court in United Breweries Ltd.'s case ( Supra ) as also the decision of the Calcutta High Court in Nav Bharat Vanijya Ltd. v. Commissioner of Income-Tax, (1980) 123 ITR 865.

7. Having considered the aforementioned decisions, we are of the opinion that the view of the Madras High Court in Madras Motor & General Insurance Co. Ltd.'s case (Supra) cannot be accepted as its opinion was based upon equitable consideration. An interpretation of statute cannot be based on equity.

A taxing statute, as is well known, must be given its literal meaning. Rule 2 of the Second Schedule of the said Act is merely description of the assets, which has no nexus with the question as to whether any profit was derived from the assets or not. If Rule 2 is given a literal interpretation, it must be held that if the company owns any assets the income of which is to be included inter alia under Clause (vii) of the Rule 1 of the First Schedule, the cost of such assets would be diminished from the capital assets of the company.

Thus, earning of any income from the assets is not a sine qua non for attracting Rule 2 of the Second Schedule of the said Act. What is relevant is as to whether the assets are capable of generating any income or not.

8. In this view of the matter, we are of the opinion that the decision of the learned Tribunal is correct.

This reference is answered in the affirmative, i.e., in favor of the Revenue and against the assessed.

This reference is disposed of accordingly.