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Commissioner of Income-tax, Bombay City Iii Vs. Century Spg. and Mfg. Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 164 of 1976
Judge
Reported in[1978]111ITR6(Bom)
ActsIncome Tax Act, 1961 - Sections 84; Gift Tax Act, 1958 - Sections 5(1)
AppellantCommissioner of Income-tax, Bombay City Iii
RespondentCentury Spg. and Mfg. Co. Ltd.
Appellant AdvocateR.J. Joshi, Adv.
Respondent AdvocateS.P. Mehta, Adv.
Excerpt:
(i) direct taxation - capital computation - section 84 of income tax act, 1961 - whether entire dividend equalisation reserve to be included in capital computation without deducting amount of dividend paid out of such reserves - as per judicial precedent sum representing dividend equalisation reserve reduced by amount of dividend paid to be included in capital computation. (ii) capital computation - whether provision for taxation in excess of liability finally determined and provision for gratuity to be treated as reserve for inclusion in capital computation for purpose of surtax assessments - as per judicial precedent provision for taxation in excess of liability finally determined and provision for gratuity to be treated as reserve for inclusion in capital computation for purpose of.....kantawala, c.j.1. the questions that are referred for our determination are as under : '1. whether, on the facts and in the circumstances of the case, the tribunal was right in holding that the entire dividend equalisation reserve amounting to rs. 83,01,416 should be included in the capital computation without deducting the amount of dividend paid out of such reserve 2. whether, on the facts and in the circumstances of the case, the tribunal was right in holding that the sum of rs. 12,85,500 being the proposed dividend on preference shares could not be treated as a liability to be excluded from the capital base for the purposes of statutory deduction under the companies (profits) surtax act, 1964 3. whether, on the facts and in the circumstances of the case, the tribunal was right in.....
Judgment:

Kantawala, C.J.

1. The questions that are referred for our determination are as under :

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the entire Dividend Equalisation Reserve amounting to Rs. 83,01,416 should be included in the capital computation without deducting the amount of dividend paid out of such reserve

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 12,85,500 being the proposed dividend on preference shares could not be treated as a liability to be excluded from the capital base for the purposes of statutory deduction under the Companies (Profits) Surtax Act, 1964

3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that, (i) provision for taxation in excess of the liability finally determined, and (ii) provision for gratuity of Rs. 99,294 should be treated as reserve for inclusion in the capital computation for the purpose of surtax assessments

4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the capital should be increased to the extent of bonus shares issued out of the general reserve even though the entire amount utilised for issue of bonus shares out of the general reserve has already been included in the capital

5. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that rule 4 of the Second Schedule to the Surtax Act, 1964, is applicable only to a case where a part of the income of a company is not includible in its total income by virtue of the provisions contained in Chapter III of the Income-tax Act, 1961, and not a case where a part of the income of the company is not included in its total income by virtue of that part of the income being allowed as deduction under section 84/80J of the Income-tax Act, 1961 ?' These question relate to the assessment year 1967-68, for which the previous year was the calendar year 1966. As questions Nos. 1 to 3 are already covered by the decisions in the earlier matters already disposed of, the facts necessary in respect of them need not be stated in detail.

2. So far as the first question is concerned, on the first day of the previous year, i.e., on January 1, 1966, the position of the dividend equalisation reserve was as under : A sum of Rs. 46,89,816 was already standing to the credit of the dividend equalisation reserve account on January 1, 1966. From the profits of the year ending December 31, 1965, a sum of Rs. 36,11,600 was transferred to the dividend equalisation reserve account, with the result that after this transfer the total sum standing to the credit of the dividend equalisation reserve account was Rs. 83,01,416. The directors in their report recommended a sum of Rs. 66,38,589 to be distributed as dividend subject to it being approved by the shareholders at the annual general meeting. Such approval was granted and the amount was distributed. What part of the amount standing to the credit of the dividend equalisation reserve account in such a case should be included in the computation of capital under the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as 'the Act'), has been decided by us in Commissioner of Income-tax v. Geoffrey Manners & Co. Ltd. : [1977]109ITR172(Bom) and, following that decision, a sum of Rs. 46,89,816 has to be included in the computation of capital in accordance with the Second Schedule to the Act. Thus, our answer to question No. 1 is that a sum of Rs. 46,89,816 out of the amount standing to the credit of the dividend equalisation reserve account should be included in the computation of the capital under the Second Schedule to the Act.

3. So far as question No. 2 is concerned, in view of our decision in Shree Ram Mills Ltd. v. Commissioner of Income-tax : [1977]108ITR27(Bom) , question No. 2 should be answered in the negative, in favour of the revenue and the amount of the proposed dividend ought not to be included in the computation of capital for the purposes of the Act.

4. So far as question No. 3 is concerned, in view of our decisions in the earlier references, it is not disputed that provision for taxation in excess of the liability finally determined should be regarded as forming part of the reserve to be included in capital computation for the purpose of the sur-tax assessment. Thus our answer to the first part No. 3 is in the affirmative. The same is our answer to the later part of question No. 3 relating to provision for gratuity of Rs. 99,294, because there was no approved scheme as a result of which the amount was allocated towards the gratuity reserve, nor was any actuarial basis adopted for the same. Thus, the provision for gratuity of Rs. 99,294 should be treated as reserve for inclusion in the capital computation for the purpose of surtax assessments.

5. So far as question No. 4 is concerned, the relevant facts are as under : As on January 1, 1966, the amount standing to the credit of the general reserve was Rs. 3,08,06,716. The directors in their report in respect of the balance-sheet and the profit and loss account for the period ending December 31, 1965, recommended that subject to the approval of the shareholders a sum of Rs. 25,49,100 out of the general reserve should be capitalised and 25, 491 bonus equity shares should be issued and they should be distributed on the basis of one such bonus share for every 10 equity shares held by a shareholder registered on June 10, 1966. The directors also stated in the report that when effect will be given to this recommendation the paid-up equity capital will be increased to the amount of Rs. 2,80,40,000 consisting of Rs. 2,80,400 shares of Rs. 100 each. It was contended on behalf of the assessee that having regard to the provisions of rule 3, even though the paid-up capital is increased during the course of the previous year proportionate increase should be made in the capital employed in the business in accordance with rule 3 of the Second Schedule to the Act, because as a result of such issue of bonus shares, the paid up share capital of the company was increased to that extent. The contention of the assessee was rejected by the Surtax Officer. He held that the sum of Rs. 25,49,100 would not enter into the capital base of the company for arriving at a statutory deduction. He pointed out that if the contention urged on behalf of the assessee was accepted then there will be an anomalous position inasmuch as the amount of reserve and the proportionate increase in capital will enter into the computation twice. He, however, took the view that in respect of the item of general reserve a sum of Rs. 25,49,100 should be disallowed and by reason of issue of bonus shares in the paid-up capital a proportionate increase under rule 3 of the Second Schedule to the Act should be allowed to the extent of Rs. 11,82,264.

6. In the appeal by the assessee before the appellate Assistant commissioner both the findings of the Surtax Officer qua reduction of the amount standing to the credit of the general reserve and making an increase in the capital were set aside. He took the view that the Surtax Officer was not justified in reducing the general reserve by Rs. 25,49,100 being the amount capitalised during the relevant accounting year. He also took the view that upon proper reading of rule 3 of the Second Schedule to the Act, the Surtax Officer was in error in making addition of Rs. 11,82,264 being proportionate increase in the capital under that rule.

7. In a second appeal by the assessee before the Tribunal, the Tribunal felt that rule 3 of the Second Schedule to the Act permits a proportionate increase to be made in the capital computation whenever there is an increase in the paid-up share capital, but it does not permit a corresponding reduction to be made from the general reserve as it stood on the first day of the previous year. The Tribunal, following the decision of the Himachal Pradesh High Court in the case of Commissioner of Income-tax v. Mohan Meakin Breweries Ltd. , took the view that the expression 'paid up capital' occurring in the Act would include even such reserve as has been capitalised without corresponding decrease in the reserve as computed with reference to the first day of the previous year. The Tribunal accepted the contention of the assessee and question No. 4 is raised by the revenue against this finding of the Tribunal.

8. Mr. Joshi on behalf of revenue contended that the provisions of rule 3 will only be attracted when after the first day of the previous year relevant to the assessment year the capital of a company as computed in accordance with the provisions of rules 1 and 2 of the Second Schedule will be increased by any amount during the previous year on account of increase of paid-up share capital or by issue of debentures or by borrowing of money referred to in clause (v) of rule 1 and when such is the case the capital has to be increased in the manner indicated in rule 3. He submitted that in the present case after the first day of the previous year the company has not increased the paid-up capital by issuing shares on payment in cash, but what has been done in the present case is that a part of the amount standing to the credit of the general reserve has been capitalised by issue of paid-up share capital. He submitted that when such is the case, the capital computed in accordance with rules 1 and 2 of the Second Schedule to the Act is not increased by any amount. According to his submission what has really happened is that the amount standing to the credit of one of the sub-items in rule 1 is transferred to another items in the said rule and when that is done, the capital computed is not increased by any amount what soever. By capitalising a part of the amount standing to the credit of the general reserve, bonus shares are issued as fully paid up shares after the first day of the previous year. Within the meaning of this rule the capital computed in accordance with rules 1 and 2 cannot be said to have increased by any amount. He, therefore, submitted that the provisions of rule 3 are not attracted in the present case. He also emphasised the fact that the Tribunal was in error in relying upon the decision of the Himachal Pradesh High Court reported in Commissioner of Income-tax v. Mohan Meakin Breweries Ltd., which was a case arising under the Super Profits Tax Act, 1963, while we are concerned with the provisions contained in the 1964 Act. Mr. Mehta, on the other hand, on behalf of the assessee contended that the provisions of rule 3 will be attracted whenever after the first day of the previous year the paid-up share capital of the company has increased during the previous year relevant to the assessment year. The manner in which such paid up capital has increased is entirely immaterial. He submitted that even when such paid-up capital is increased by issue of free bonus shares or when it is issued upon payment of the share capital amount, in either case, the paid up share capital is increased and the assessee is entitled to adjustment to be made in the capital computation as provided by rule 3. He emphasised the fact that there is nothing in rule 3 to indicate that when a part of the general reserve is utilised for issue of bonus shares after the first day of the previous year relevant to the assessment year, the capital computed in accordance with rules 1 and 2 has to be adjusted by reason of such reduction of the amount standing to the credit of the general reserve. He submitted that whenever there is increase in the paid up capital either by issue of right shares or bonus shares the provisions of rule 3 will be attracted and the proportionate increase in the capital employed has to be made as provided therein.

9. Section 4 of the Act is the charging section and under that section subject to the provisions contained in the Act there shall be charged on every company for every assessment year commencing on and from the 1st day of April, 1964, a tax (in the Act referred to as the surtax) in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the Third Schedule. The expression 'chargeable profits' has been defined in section 2(5) while the expression 'statutory deduction' is defined in section 2(8). Under the said definition, unless the context other wise requires, '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. There are two provisos to this sub-section but they are not relevant for the present purpose. The rules as regards computation of capital are provided in the Second Schedule to the Act. The material rule relating to computation of capital is rule 1 and it is as under :

'1. Subject to the other provisions contained in this Schedule, the capital of a company shall be the aggregate of the amounts, as on the first day of the previous year relevant to the assessment year, of - (i) its paid-up share capital;

(ii) its reserves, if any, created under the proviso (b) to clause (vib) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922, or under sub-section (3) of section 34 of the Income-tax Act, 1961;

(iii) its other reserves as reduced by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the indian Income-tax Act, 1922, or the Income-tax Act, 1961;

(iv) its debentures, if any; and

(v) any moneys borrowed by it from Government or the Industrial Finance Corporation of India or the Industrial Credit and Investment Corporation of India or any other financial institution which the Central Government may notify in this behalf in the Official Gazette or any banking institution (not being a financial institution notified as aforesaid) or any person in a country outside India :

Provided that such moneys are borrowed for the creation of a capital asset in India and the agreement under which such moneys are borrowed provides for the repayment thereof during a period of not less than seven years.'

10. There is an Explanation to this rule but its provisions are not relevant for the present purpose. For the purposes of surtax, computation of capital has to be made by making an aggregate of the various items described in sub-clauses (i) to (v) of rule 1. Any amount standing to the credit of general reserve as on the first day of the previous year relevant to the assessment year will be included in computation of capital for the purposes of surtax, as such reserve will fall under clause (iii) referred to above.

11. The question that we have to decide will depend upon the correct interpretation of rule 3 of the Second Schedule and it is necessary to quote the provisions of the said rule. The said rule runs thus :

'3. Where after the first day of the previous year relevant to the assessment year the capital of a company as computed in accordance with the foregoing rules of this schedule is increased by any amount during that previous year on account of increase of paid-up share capital or issue of debentures or borrowing of any moneys referred to in clause (v) of rule 1 or is reduced by any amount on account of reduction of paid-up share capital or redemption of any debentures or repayment of any such moneys, such capital shall be increased or reduced, as the case may be, by a sum which bears to that amount the same proportion as the number of days of the previous year during which the increase or the reduction remained effective bears to the total number of days in that previous years.' Before we deal with the true construction of the provisions of rule 3 it will not be out of place if the cardinal principles of interpretation of a taxing statute which are well-settled are noted. In Elphinstone Spinning and Weaving Mills Co. Ltd. v. Commissioner of Income-tax : [1955]28ITR811(Bom) , Chagla C.J. observed :

'The Advocate-General says we should avoid giving a construction which would lead to absurd results. That canon is applicable where the language of a statute is capable of bearing a construction which would avoid absurd results. But where the language is clear and not capable of any other construction, then however illogical the position, however absurd the result, however much the construction put may defeat the object of the legislature, the statute must be construed according to the plain language used by the legislature and the more so if that plain language supports the subject against the taxing department.'

12. These principles laid down by Chagla C.J. where approved by the Supreme Court in an appeal from the said case, Commissioner of Income-tax v. Elphinstone Spinning & Weaving Mills Co. Ltd. : [1960]40ITR142(SC) .

13. In Commissioner of Income-tax v. Shahzada Nand & Sons [1966] 40 ITR 392, the Supreme Court enunciated the principles in the following terms :

'In a taxing Act one has to look merely at what is clearly stated and, in case of reasonable doubt the construction most beneficial to the subject is to be adopted. But even so, the fundamental rule of construction is the same for all statutes, whether fiscal or otherwise. The underlying principle is that the meaning and intention of a statute must be collected from the plain and unambiguous expression used therein rather than from any notions which may be entertained by the court as to what is just or expedient. The expressed intention must guide the court.'

14. It will not be out of place to refer to the classical observations of Rowlatt J. in the case of Cape Brandy Syndicate v. Inland Revenue Commissioner [1921] 1 KB 64 :

'.......... in a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.'

15. We have to bear these principles in mind for interpreting the provisions of rule 3. The provisions of rule 3 will be attracted so far as increase in the computation of capital employed in a business is concerned only if the following conditions are fulfilled :

1. There must be an increase in the capital of the company as computed in accordance with rules 1 and 2 of the Second Schedule after the 1st day of the previous year relevant to the assessment year.

2. There should be an increase by any amount during the previous year in the capital computed in accordance with rule 1 and 2 of the Second Schedule.

3. Such increase by any amount may be brought about by -

(a) on account of increase of paid-up share capital, or (b) issue of debentures, or (c) borrowing of any moneys referred to in clause (v) of rule 1.

16. When these conditions are fulfilled then the capital has to be increased in the manner indicated by the operative part of the rule. We are concerned in the present case with increase of paid-up share capital. It cannot be disputed that after the first day of the previous year relevant to the assessment year the paid-up capital of the company had been increased by a sum of Rs. 25,49,100 by issue of 25,491 free bonus shares of Rs. 100 each as a result of capitalisation of a part of the amount standing to the credit of the general reserve. The question is whether merely because during the previous year there was an increase of paid-up share capital, the provisions of rule 3 will automatically attracted. Mr. Mehta, on behalf of the assessee, has submitted that when after the first day of the previous year the paid up capital is increased in any manner whatsoever, whether by issue of bonus shares or by issue of right shares upon payment of cash, provisions of rule 3 are attracted. In our opinion, mere increase of paid-up capital is not sufficient to attract the provisions of rule 3. The provisions of rule 3 will be attracted on account of increase of paid-up capital only if by reason thereof the capital of a company as computed in accordance with rules 1 and 2 of the Second Schedule of the Act is increased by any amount. The question that we have to consider is, is the capital of the assessee-company as computed in accordance with the provisions of rule 1 of the Second Schedule increased by any amount simply because a part of the amount standing to the credit of the general reserve, namely, Rs. 25,49,100, has been capitalised by issue of fully paid up 25,491 bonus shares of Rs. 100 each. For proper interpretation of rule 3 the items which are to be taken into account for computation of capital under rule 1 ought not to be overlooked. Under the said rule 3 the mere paid-up capital of the company itself is not an isolated item which is to be included in the computation of capital but there are several other items which are to be so included and amongst them are its reserves as specified in clauses (ii) and (iii) of the said rule, its debentures specified in clause (iv) and the borrowed money specified in clause (v). If during the course of the previous year a part of the amount standing to the credit of general reserve is capitalised by issue of fully paid up bonus shares, then it is difficult to say that the capital of a company computed in accordance with rule 1 of the Second Schedule is increased by any amount by such issue of bonus shares. What has been done in such a case is that a part of the sum standing to the credit of one of the sub-items to be included in the computation of capital is during the previous year transferred to another item to be included in computation of capital under rule 1. When such a thing is done the capital of a company computed in accordance with rule 1 is not increased by any amount whatsoever. It is merely a transfer of a particular sum included in one item into another item, but as a result of such alteration or transfer the capital to be computed in accordance with rule 1 will not be increased by any amount whatsoever. That such is the result when bonus shares are issued is clearly borne out by a passage in Palmer's Company Law, twenty-first edition, page 673 :

'Technically the transaction of bonus shares is carried out in the following manner : the bonus is provided out of the credit balance of the profit and loss account or out of reserves - both being items appearing on the liabilities side of the balance-sheet, so that the balance-sheet thence-forward shows the profit and loss account or reserves at a reduced figure and the issued capital at a correspondingly increased figure. As far as the balance-sheet is concerned, the only effect of the transaction is that one item on the liabilities side of the balance-sheet and in the company's books becomes replaced (in whole or in part) by another : the assets side of the balance-sheet is unaffected.'

17. Thus, it is quite clear and apparent that when bonus shares are issued as fully paid up shares by capitalisation of a part of the amount standing to the credit of general reserve the capital as computed in the manner provided by rule 1 of the Second Schedule is not increased in any manner whatsoever.

18. The Tribunal accepted the contention on behalf of the assessee relying upon the decision of the Himachal Pradesh High Court in Mohan Meakin Breweries Ltd.'s case . This was a case arising under the Super Profits Tax Act, 1963, and the ratio of the decision is based upon construction of rule 2 of the Second Schedule to the said Act. The facts of the case show that during the course of the previous year, on July 31, 1962, the assessee-company issued bonus shares for the amount equivalent to the paid up capital of Rs. 28,36,160 and thus the said figure was doubled. Under rule 2 of the Second Schedule of the Super Profits Tax act, 1963, the capitalised part of the reserve as a result of the issue of bonus shares was to be proportionately added to the paid-up capital. The increase was of Rs. 18,90,773. The total capital including this increase was to be computed for standard deduction, which was 6% of the total capital. The Super Profits Tax Officer did not increase the total capital, as, according to him the proportionate increase in paid-up capital led to proportionate decrease in reserves. On appeal, the Appellate Assistant Commissioner agreed with the Super Profits Tax Officer, as, in his opinion, paid-up share capital only means capital subscribed by payment and does not include capitalised value of reserve. The Appellate Tribunal allowed a second appeal to it by the assessee holding that, upon a plain reading of rule 2 of the Second Schedule, it was incumbent upon the revenue to increase the paid-up capital by Rs. 18,90,773 due to the issue of bonus shares, that as such there was proportionate increase in the total capital, and, making the standard deduction at 6% of the total capital, the super profits for tax liability were held to decrease by Rs. 1,13,447. On a reference to the High Court, at the instance of the Commissioner, the Division Bench of the Himachal Pradesh High Court took the view that the decision of the Tribunal was correct. The issue of bonus shares necessarily leads to addition in the paid-up share capital. Following the strict rule of interpretation, especially when the language is plain and is amenable to only one meaning, the reserve could not be reduced to the extent of its capitalised value and the paid-up capital was to be boosted up so as to increase the capital base. Nothing can be read within the statute which is not apparently within its ambit and even if an apparent double benefit is being given, the inference is that such double benefit was intended to give the tax relief. Therefore, the expression 'paid-up capital' occurring in the super Profits Tax Act does include therein even such reserve as has been capitalised without corresponding decrease in the reserve as computed with reference to the first day of the previous year. Therefore, the chargeable profits, in the present case, should be reduced by Rs. 1,13,447.

19. This was the view taken by the Himachal Pradesh High Court upon proper interpretation of the provisions of rule 2 of the Second Schedule to the super Profits Tax Act, 1963. Rule 2 which came up for construction before that High Court was in the following terms :

'2. Where after the first day of the previous year relevant to the assessment year, the paid-up share capital of a company is increased or reduced by any amount during that previous year, the capital computed in accordance with rule 1 shall be increased or decreased, as the case may be, by a portion of that amount which is proportional to the portion of the previous year during which the increase or the reduction of the paid-up share capital remained effective.'

20. The Tribunal in the present case has mainly based its conclusion relying upon this decision of the Himachal Pradesh High Court overlooking the fact that the provisions of rule 2 of the Second Schedule to the Super Profits Tax Act, 1963, were materially different from those of rule 3 of the Second Schedule to the Act. In the case before the Himachal Pradesh High Court adjustment of capital computation has to be made in every case when the paid up share capital of a company is increased irrespective of the manner in which it is brought about. Further, under the Second Schedule to the Super Profits Tax Act, 1963, the items which were to be aggregated for the computation of capital under rule 1 of the Second Schedule were materially different from those contained in rule 1 of the Second Schedule to the Act. As we have pointed out above, the provisions of rule 3 will be attracted only when capital computed in accordance with the provisions of rule 1 and 2 of the Second Schedule to the Act is increased by any amount in any manner prescribed therein. We have pointed out that when a part of the amount standing to the credit of general reserve is, during the course of the previous year, capitalised by issue of fully paid up free bonus shares, there is no increase by any amount in the capital computed in accordance with the provisions of rules 1 and 2 of the Second Schedule to the Act, and, therefore, this decision of the Himachal Pradesh High Court which was based upon interpretation of a different rule is not of much assistance in the present case.

21. Accordingly, our answer to question No. 4 is in the negative.

22. That takes us to question No. 5. At the outset it may be stated that though in the question framed there is reference to section 80J of the Income-tax Act, 1961, on the facts of the case such reference is uncalled for and we, therefore, modify question No. 5 by deleting reference to section 80J therefrom and we will merely consider the remaining part of the question No. 5. The assessee company had obtained relief under section 84 of the Income-tax Act, 1961, to the extent of Rs. 24,63,318. The Tribunal noticed that rule 4 of the Second Schedule of the Income-tax Act is applicable only to cases where a part of the income, profits and gains of a company is not includible in its total income as computed under the Income-tax Act, and not to any part of the income, profits and gains which under the provisions of the Income-tax Act had earned tax reliefs. Accordingly, the Tribunal took the view that the profits and gains of a company not includible in its total income are only those coming under Chapter III of the Income-tax Act, 1961, and would not take in any of the reliefs granted under the provisions of Chapter VI-A of that Act. The Tribunal took the view that rule 4 of the Second schedule to the Act relates to income, profits and gains which are not includible by virtue of the various provisions contained in Chapter III of the Income-tax act and has no application in respect of the deductions to be made in computing the total income under chapter VI-A. It is from this view taken by the Tribunal that, at the instance of the revenue, question No. 5 has been referred for our determination.

23. In respect of the income-tax assessment, relief was obtained by the assessee-company under section 84 contained in Chapter VII of the Income-tax Act, 1961, to the extent of Rs. 24,63,318 and decision of the question referred depends upon the interpretation of rule 4 of the Second Schedule to the Act. The provisions of rule 4 are as under :

'4. Where a part of the income, profits and gains of a company is not includible in its total income as computed under the Income-tax Act, its capital shall be the sum ascertained in accordance with rules 1, 2 and 3, diminished by an amount which bears to that sum the same proportion as the amount of the aforesaid income, profits and gains bears to the total amount of its income, profits and gains.'

24. The provisions of rule 4 will be attracted only if a part of the income, profits and gains of a company is includible in its total income. The assessee-company had obtained relief under section 84 as stated above, in relation to income of newly established industrial undertakings or hotels. Chapter VII is headed 'Incomes forming part of total income on which no income-tax is payable', while Chapter III is headed 'Incomes which do not form part of total income'. There is material difference between the topics dealt with in Chapter III and those dealt with in Chapter VII. Chapter III only deals with such items of income which do not form part of the total income while Chapter VII on the other hand deals with items of income which form part of total income on which no income-tax is payable. Section 84 which appears under Chapter VII deals with items of income forming part of total income on which no tax is payable. Simply because under the provisions of the said Chapter no tax is payable on a particular item of income forming part of the total income it cannot be said that such an item will not be includible in the total income. Rule 4 only applies when a part of the income is not includible in the total income under the Income-tax Act. If a part of the income was includible in the total income under the Income-tax Act then the provisions of rule 4 will not be attracted. Rule 4 will only apply in respect of items of income which are referred to in Chapter III, but rule 4 will not include any item of income which is included in chapter VII which deals with incomes forming part of total income on which no income-tax is payable. At the relevant time as section 84 was in operation, the relief as provided by that section was granted to the assessee-company, but merely by reason of such relief being granted it is not possible to take the view that the provisions of rule 4 are attracted. Notwithstanding the fact that relief is granted under section 84 it is not possible to say that such income was not includible in the total income. Normally, the provisions of rule 4, as stated above, will be applicable only to items of income which are included in chapter III which do not form part of total income. Thus, our answer to question No. 5 as altered above is in the affirmative and in favour of the assessee. As the assessee as well as the revenue have partially succeeded in this reference, each party will bear its respective costs of the reference.


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