1. Two questions of law stand referred to us in this reference which is at the instance of the commissioner under s. 256(1) of the I. T. Act, 1961. The assessee before us is M/s. Banque Nationale De-Paris (hereinafter referred to as 'the French bank' for the sake of brevity). The said bank is a non-resident company and, admittedly, it had not made the prescribed arrangements for the declaration and payment of dividends within India. We are concerned with the assessment year 1963-64, the relevant previous year for the assessee being the calendar year 1962. The point to be determined by us in this reference is the assessment of the said bank for super profits tax.
2. A sum of Rs. 2,18,802 was included in the total income of the assessee for the previous year January 1, 1962, to December 31, 1962, relevant to the assessment year 1963-64, computed under the I. T. Act, 1961, under the head 'Interest on securities'. The question then was of computation of super profits tax, if any, payable by the assessee. In terms of s. 2(5) of the S. P. T. Act, 1963, 'chargeable profits' for super profits tax purposes mean the total income as taken for income-tax purposes subject to adjustments in accordance with the First Schedule to the S. P. T. Act, 1963. Rule 1 of the said first Schedule provides that income, profits and gains and other sums falling within the thirteen clauses to the said Schedule are to be excluded in computing the chargeable profits for super profits tax purposes. It was the assessee's case that its income by way of interest on securities in the amount of Rs. 2,18,802 was to be excluded. The SPT Officer, however, declined to do so without any observation on the point in his assessment order. The French bank carried the matter to the AAC. The AAC upheld the contention of the assessee that the interest on securities received from Government fell within the purview of clause (x) of r. 1 and was, therefore, liable to be excluded. The AAC, however, took the figure of income from interest on securities as reduced by the proportionate interest on borrowings, viz., Rs. 87,904, and other expenses, viz., Rs. 93,215. After deduction these two amounts from Rs. 2,18,802, the AAC determined the net amount of interest on securities at Rs. 37,683 and excluded the same from the chargeable profits for super-tax purposes.
3. The department then filed an appeal to the Tribunal against the aforesaid order of the AAC. The Tribunal, after setting down the regal contentions, held that the interest earned on Govt. securities was directly covered in the case of the French bank by clause (x) of r. 1. It was, inter alia, contended by the department that clause (vi) provided for exclusion of interest on securities which were declared to be income-tax free and, therefore, interest on securities cannot be considered to be within the purview of interest contemplated by clause (x) of r. 1. This contention was not accepted by the Tribunal. It held that the two sub-rules provided for different matters and whereas the benefit of sub-r. (iv) was to be available to all assessees, that of sub-r. (x) was available only to non-resident companies and that too if such companies had not made the prescribed arrangements for declaration and payment of dividends within India.
4. In addition to interest on securities, the assessee had also received a sum of Rs. 12,93,828 by way of interest on advances given to Indian concerns. It claimed before the SPT Officer that its income by way of interest of Rs. 12,93,828 should be excluded in computing the chargeable profits for super profits tax purposes in terms of clause (x) of r. 1 of the First Schedule to the SPT Act, 1963. The ITO conceded the principle of deduction as far as this interest was concerned, but reduced the amount to Rs. 1,61,617 holding that the amount was required to be reduced by the amount of Rs. 10,12,252 which had been paid by the French bank by way of interest to its creditors and depositors. In addition to this amount of interest, the officer also deducted proportionate expenses which were calculated at Rs. 1,19,959. The SPT Officer thus determined the net income by way of interest to be excluded from chargeable profits in terms of clause (x) of r. 1 at Rs. 1,61,617. When the matter was carried by the assessee to the AAC, the latter took the view that the interest of Rs. 12,93,828 received by the assessee from Indian concerns should be reduced not in the sum of Rs. 10,12,252 but only by that proportion of the interest paid by the assessee which the amount of interest received from Indian concerns bore to the total interest receipts of Rs. 25,19,560. This figure was worked out at Rs. 5,19,804. The proportionate expenses, however, were worked out at Rs. 5,51,207. The AAC thus worked out the net figure of interest to be excluded under clause (x) of r. 1 at Rs. 2,22,817.
5. The decision of the AAC appears to have been accepted by the assessee and we are informed by Mr. Dastur appearing on its behalf that this was because under the calculations made there was no liability for super profits tax. The department, however, felt aggrieved and contended that the AAC was wrong on several different counts. The principal grievances of the department were that interest on Govt. securities was not eligible for deduction under clause (x) of r. 1. It was further contended that the entire interest paid by the assessee to its depositors and creditors was required to be deducted from the interest earned by the assessee from Indian concerns for the purposes of arriving at the net figure of interest which was deductible under clause (x) of r. 1 and the AAC was in error in considering only the proportionate interest in the manner he has done. The Tribunal; extracted clause (x) of r. 1 and held that it was unable to accept either of the department's contentions. As far as the formula adopted by the AAC was concerned, it found the formula to be a fair one and, therefore, dismissed the appeal of the department in toto. It is from this decision that the following two questions stand referred to us :
'(1) Whether, on the facts and in the circumstances of the case income by way of any 'interest on securities' received from Government could be excluded in the computation of chargeable profits in terms of clause (x) of rule 1 of the first Schedule to the Super profits Tax Act, 1963
(2) Whether, on the facts and in the circumstances of the case, the tribunal was right in holding that only the proportionate interest of Rs. 5,19,804 on borrowings should be deducted from the interest amount of Rs. 12,93,828 received by the assessee from the Indian concerns, and not the whole of the interest amount of Rs. 10,12,252 load the assessee to various parties, in order to determine the net interest income for the purposes of exclusion from the chargeable profits in terms of clause (x) of rule 1 of the First Schedule to the Super Profits Tax Act, 1963 ?'
6. For the purpose of answering this reference, we are concerned with the S. P. T. Act, 1963, and the same may be found at page 748 of Vol. II of Kanga and Palkhivala's law of Income Tax, 5th Edn. Section 2(5) of the said Act defines 'chargeable profits' as under :
'2. (5) 'Chargeable profits' means the total income of an assessee computed under the Income-tax Act, 1961 (XLIII of 1961), for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the first Schedule.'
7. Then we are referred to the First Schedule which is to be found at page 757 of the volume. The said Schedule provides for certain adjustments as provided in the rules, and cls. (vi) and (x) of r. 1 read as follows :
'1. Income, profits and gains and other sums falling within the following clauses shall be excluded from such total income, namely : .....
(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; .......
(x) in the case of a non-resident company which has not made the prescribed arrangements for the declaration and payment of dividends within India, its income by way of any interest or fees for rendering technical services received from Government or a local authority or any Indian concern.'
8. Mr. Joshi's submission was that under clause (vi) of r. 1, there was a specific or special provision for income chargeable under the head 'Interest on securities' and the clause provided that only interest received on income-tax free securities either of the Central Govt. or the State Govt. were to be excluded under r. 1. It was contended that in view of this special provision interest on securities would be required to be excluded from the meaning to be ascribed to the word 'interest' in clause (x). This would obviously be on the principle that the special excludes the general. Now, in connection with this argument, it is to be noted that the phraseology of clause (x) of r. 1 is extremely wide. However, the benefit of clause (x) is only available to a special category of assessees, viz., non-resident companies, and further only if such companies have not made the prescribed arrangements for the declaration and payment of dividends within India. For such special assessees income by way of interest received from government or local authority or Indian concerns is to be excluded for the purposes of computing chargeable profits under the S. P. T. Act and similarly fees for rendering technical services received from the very three parties, viz., Government, local authority or any Indian concerns, are to be excluded. Considering clause (x) it is not possible to accept the contention that clause (x) makes a general provision for interest, whereas clause (vi) makes a special provision for 'interest on securities', and, hence, the word 'interest' occurring in clause (x) is to be read excluding 'interest on securities'. Clause (x) appears to us also to be a specific or a special provision for the purposes of dealing with a special type of case based principally upon the type of assessee being considered. Clause (vi) is applicable to all companies, resident as well as non-resident, and is special qua the type of income. Clause (x), on the other hand, is not applicable to all assessees, but is restricted to non-resident companies which have not made the prescribed arrangements for the declaration and payment of dividends within India. It is, therefore, a special provision for a limited category of companies.
9. A curious result would occur if Mr. Joshi's contention for reading the two clauses in the manner he wants us to do is accepted. Clause (vi) does not cover municipal loans and bonds and similar type of public debts within its ambit. Interest paid on such securities, i.e., municipal and local bodies, would then be covered by clause (x), but will not be within clause (vi) at all. Then the question would be : Is clause (x) to be read, accepting Mr. Joshi's contention for the sake of argument, as including within its ambit interest received from securities issued by municipalities and similar local bodies, but excluding interest received on securities issued by the Central Govt. and the State Govt. This cannot be done. In our view, the proper way to read clause (x) would be to consider the language of that provision untrammeled by the so-called restriction or principle of harmonious construction submitted for our acceptance on behalf of the revenue. Clause (vi) deals with a totally different situation and cannot be pressed into service for limiting the operation of clause (x).
10. Reading clause (x) by itself the two questions referred to us present little difficulty. Interest received by the French bank from the Govt. securities is certainly interest received from the Government. If that is so, and the French bank is accepted to be - as it admittedly is - a non-resident company which has not made the prescribed arrangements for the declaration and payment of dividends within India, it will be entitled to the benefit of clause (x) of r. 1. As far as question No. 2 is concerned, the tribunal appears to be aware of the submission that clause (x) provides for deduction of the entire interest earned without any reduction either for interest paid by the assessee or by some notional amounts of expenses which might have been considered to have been expended by the assessee in order to earn the interest. As the assessee had not carried the matter in appeal before the Tribunal, the Tribunal refrained from indicating its view on the said submission, but opined merely that the reduction of the amounts of interest made by the AAC appeared to be fair and, therefore, it chose not to interfere with the same. Clause (x) does not expressly provide for any scaling down of the interest earned. In CIT v. Jupiter General Insurance Co. : 101ITR370(Bom) , a Division Bench of this court considered clause (viii) of r. 1 of the First Schedule to the S. P. T. Act, 1963, where income by way of dividends from an Indian company is, inter alia, to be excluded for the purposes of computation of chargeable profit for the purposes of super profits tax.
11. It was held by the division bench that the Tribunal had rightly taken the view in the said matter that it was the gross dividend received by the assessee-company that was required to be excluded and not the net dividend arrived at by excluding proportionate management expresses. As far as interest in clause (x) is concerned, our view must be similar. There is no warrant for reducing the amount of interest earned by the French bank from Government or local authorities or Indian concerns by any amount by way of interest paid or by way of management expenses. If that be the correct interpretation to be put on the clause, then the Tribunal was right in upholding the calculations made by the AAC, but this would be so in view of the fact that the assessee had accepted these calculations and not carried the matter in further appeal. It is on that footing that the Tribunal's decision would be required to be upheld. The matter is not capable of any further elaboration. Accordingly, the two questions referred to us are answered as follows :
Question No. 1 : In the affirmative and in favour of the assessee.
Question No. 2 : In the affirmative and in favour of the assessee, but on the footing we have earlier indicated in this judgment.
12. The Commissioner will pay the costs of the reference to the assessee.