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Second Income-tax Officer, Company Circle, Bangalore and anr. Vs. Stumpp, Schuele and Somappa Private Ltd. First Income-tax Officer, Company Circle, Bangalore and anr. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKarnataka High Court
Decided On
Case NumberWrit Appeal Nos. 735 and 909 to 913 of 1974
Judge
Reported in[1977]106ITR399(KAR); [1977]106ITR399(Karn)
ActsConstitution of India - Article 226; Income Tax Act, 1961 - Sections 2(5), 2(8), 2(45), 5, 80B and 80-I; ;Income Tax Rules - Rule 4
AppellantSecond Income-tax Officer, Company Circle, Bangalore and anr.;senapathy Whitely Private Ltd. First I
RespondentStumpp, Schuele and Somappa Private Ltd. First Income-tax Officer, Company Circle, Bangalore and anr
Appellant AdvocateS.R. Rajashekhara Murthy, Adv.
Respondent AdvocateG. Sarangan, Adv.
Excerpt:
.....the claim has to be considered and disposed off keeping in view the formula provided in the ii schedule of the act, i.e., on structured formula, having regard to the age of the victim and his income. the award made under the said provision shall be in full and final settlement of the claim. the note appended to column 1 from the total amount of compensation, 1/3rd thereof, has to be reduced in consideration of the expenses, which the victim would have incurred, towards maintaining himself had he been alive. further, section 163-a read with schedule ii of the act, itself having provided the percentage of deduction to be effected, the deduction can be in terms thereof only and not otherwise. award is justified. - this principle is well-settled. for the reason stated above, the..........assessment was made under the income-tax act, 1961, after the enquiry of december 31, 1971, on a total income of rs. 26,16,490. based on this assessment, surtax was computed on december 13, 1971. the income-tax officer modified the income-tax assessment by an order dated september 12, 1972, the total income being computed at rs. 26,07,560. consequent on this, the surtax assessment was also modified on september 25, 1972, which resulted in a small refund of rs. 892 in the surtax that had been paid in the meanwhile. 3. subsequently, the commissioner issued a notice dated november 19, 1973, under section 16(1) of the act. apparently, as this notice contained some mistakes, he issued a fresh notice in cancellation of the former dated november 27, 1973, which was served on the assessee on.....
Judgment:

Srinivasa Iyengar, J.

1. These appeals are against the common judgment in W. Ps. Nos. 3447, 3448 and 3578 of 1973 and 1121, 2551 and 2552 of 1974, dated 13th September, 1974, by which the notices issued under sections 8/16 of the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as 'the Act') by the appellants, were quashed. The facts and circumstances in which the notices had been issued being the same in all the cases, it is sufficient to state the facts relating to W. P. No. 3578 of 1973.

2. M/s. Stumpp. Schuele & Somappa Private Ltd. is a company registered under the Companies Act, 1956, and an assessee under the Act. For the assessment year 1971-72 (previous year ending December 31, 1970), assessment was made under the Income-tax Act, 1961, after the enquiry of December 31, 1971, on a total income of Rs. 26,16,490. Based on this assessment, surtax was computed on December 13, 1971. The Income-tax Officer modified the income-tax assessment by an order dated September 12, 1972, the total income being computed at Rs. 26,07,560. Consequent on this, the surtax assessment was also modified on September 25, 1972, which resulted in a small refund of Rs. 892 in the surtax that had been paid in the meanwhile.

3. Subsequently, the Commissioner issued a notice dated November 19, 1973, under section 16(1) of the Act. Apparently, as this notice contained some mistakes, he issued a fresh notice in cancellation of the former dated November 27, 1973, which was served on the assessee on November 29, 1973. This notice, marked as exhibit 'F' in the writ petition, was impugned in the writ petition. The relevant portion in the said notice, viz., paras. 2 and 3, are as follows :

'2. While completing the surtax assessment, the capital base has been computed at Rs. 76,71,176 and statutory deduction at 10% thereof amounting to Rs. 7,67,118 has been given. It is seen from the Income-tax assessment order that under Chapter VI-A of the Income-tax Act, the Income-tax Officer while completing the assessment has allowed the following deductions, in all amounting to 3,45,282 :

Rs.80-I Deduction in respect of profits of priority industries 2,14,24980-J Deduction in respect of newly established undertakings 1,31,033---------3,45,282--------- Therefore, under rule 4 of the Second Schedule to the Surtax Act, the Income-tax Officer should have proportionately reduced the capital base which had not been done while completing the assessment. This has resulted in a larger statutory deduction from chargeable profits than admissible under the law.

3. It is, therefore, proposed to pass such order under section 16(1) of the Surtax Act, 1964, as the circumstances of the case warrant, to enable the Income-tax Officer to diminish the capital proportionate to the deduction under Chapter VI-A of the Income-tax Act, 1961, allowed in the income-tax assessment under rule 4 of the Second Schedule to the Surtax Act and work out your surtax liability for the assessment year 1971-72.' Therefore, the Commissioner was the opinion that the assessment under the Act was erroneous in so far as it was prejudicial to the interest of the revenue and proposed to take action accordingly to enable the Income-tax Officer to diminish the capital proportionate to the deduction under Chapter VI-A of the Income-tax Act, 1961, and to work out the surtax liability for the assessment year 1971-72. The assessee was called upon to file his objections, if any on or before December 3, 1973, and the hearing was also fixed for that date.

4. Contending that the proposed action was without jurisdiction and not warranted by the provisions of rule 4 of the Second Schedule to the Act, the writ petition (W. P. No. 3578 of 1973) was filed. The learned judge, upholding the contention of the assessee, quashed the notice.

5. In these appeals it is urged that the assessee had an alternative remedy by way of an appeal, against the order that may be made by the Commissioner, to the Tribunal and had also a remedy by way of reference of this court and, therefore, the learned judge should not have interfered under article 226 of the Constitution. It is further urged that the interpretation placed by the learned judge on rule 4 of the Second Schedule to the Act is not correct. We will considered these points seriatim.

6. Point No. 1. - That the assessee was entitled to relief under sections 80-I and 80J of the Income-tax Act and quantum of relief allowed is not in dispute. The assessment under the Income-tax Act has become final and, therefore, the total income computed thereunder is not in dispute. The action proposed under section 16(1) of the Act was only on the ground that under rule 4 of Schedule II of the Act, there should have been a proportionate deduction in the computation of the capital base in respect of the relief allowed under section 80-I and 80J of the Income-tax Act. Therefore, jurisdiction was invoked only on the interpretation sought to be placed on the said rule. If the interpretation sought to be placed on that rule ins not warranted by law, then the authority had no jurisdiction to take action as proposed under section 16(1) of the Act and such action would be without and in excess of jurisdiction. The authority functioning under a statute has to act in accordance with the provisions of the statute and if he exceeds the jurisdiction thereunder his action can be questioned by way of a writ under article 226 of the Constitution and the High Court is entitled to interfere in exercise of its powers under article 226 of the Constitution. The existence of an alternatives remedy is not an absolute bar for such interference. This principle is well-settled. In Champalal Binani v. Commissioner of Income-tax : [1970]76ITR692(SC) , the Supreme Court observed :

'A petition for a writ of certiorari may lie to the High Court, where the order is on the face of it erroneous or raise the question of jurisdiction or of infringement of fundamental rights of the petitioner.'

7. In the instant cases no disputed question of fact arise. The question raised was one of jurisdiction which depended upon the interpretation of the provisions of a statute. An authority cannot by placing a wrong interpretation on the statutory provisions assume jurisdiction. I had also been alleged in the writ petition that in certain other cases the Commissioner had taken a similar view and that departmental instructions had also been issued to that effect, and, therefore, no useful propose would be served in pursuing the matter before the authorities and the alternative remedy would not be an adequate remedy. It has not been denied that in other cases, a similar view had been taken by the authorities and in the cases of the assessee under the assessee for an earlier year the Income-tax Officer had completed the assessment under the Act in spite of it being pointed out that it was without jurisdiction. In these circumstances, we are of the opinion that the assessee was justified in invoking the jurisdiction of the court under article 226 of the Constitution and the court would not refuse relief merely on the ground that there was an alternatives remedy.

8. Point No. 2. - Under the Act, surtax is charged on every company in respect of so much of its chargeable profits of the previous year as exceed the statutory deduction at the rate specified in the Third Schedule. 'Chargeable profits' is defined in section 2(5) of the Act as follows :

' 'Chargeable profits' means the total income of an assessee computed under the Income-tax Act, 1961 (XIII of 1961), for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule.' 'Statutory deduction' is also defined under section 2(8) as follows :

''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.' (Provisos omitted as unnecessary)

9. The basic factor in computation of the surtax is the Income as computed under the Income-tax Act, for the previous year. The first step is to make adjustment in the income as computed under the Income-tax Act, in accordance with the provisions of the First Schedule to the Act which mentions specific items which are to be excluded by way adjustment. The relief granted under sections 80-I and 80J of the Income-tax Act are not among those specified items. The next step is the computation of the capital of the company in accordance with the Second Schedule and thereafter determine the statutory deduction which would we an amount equal to ten per cent. of the capital as computed or an amount of two hundred thousand rupees, whichever is greater. The Second Schedule consists of four rules. There is no dispute about the computation of the capital so far as the provisions of rules 1 to 3 are concerned in the instant cases. Rule 4 is as follows :

'Whether 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 the aforesaid income, profits and gains bears to the total amount of its income, profits and gains.'

10. According to the Commissioner, the amount of relief allowed under sections 80-I and 80J of the Income-tax Act must be treated as income, profits or gains which is not includible in its total income and, therefore, the capital ascertained in accordance with rule 1, 2 and 3 should be diminished by an amount in the proportion as mentioned in the rule. The learned judge has held that the deductions allowed under section 80-I and 80J cannot be said to be amounts not includible in the total income and, therefore, no deduction in this behalf can be made in the capital as computed under rules 1, 2 and 3. He has held that the expression 'income, profits and gains' not includible in the total income has a specific connotation and would mean items such as agricultural income, income of non-resident company, income from property held for charitable or religious purposes as coming within the purview of Chapter III of the Income-tax Act.

Section 2(45) of the Income-tax Act, 1961, defines 'total income' as meaning :

'.......total amounts of income referred to in section 5, computed in the manner laid down in this Act.'

Section 5 provides what the total income in a previous year of a person shall include. The heading of Chapter III of the Income-tax Act is 'Incomes which do not form part of total income'. Chapter IV deals with the computation of total income. It classifies the income under different heads and the deductions to be made in respect of an different heads of income. Chapter V bears the heading 'Income of other persons included in assessee's total income' and the sections in that Chapter make provisions in this behalf. In the Income-tax Act, the expression 'income includible in the total income' has a definite connotation. The expression 'deductions and allowances' have also particular connotations. Income connotes what comes in and in general receipts by an assessee. Receipts are classified as capital or revenue, and receipts of revenue nature are treated as income. Capital receipts except in so far as they are liable for capital gains, and deemed to be income for that purpose, are not treated as income. Section 2(9) of the Act provides that the words and expressions used in the Act but not defined in it and defined in the Income-tax Act shall have the meanings respectively assigned to them in that Act (Income-tax Act). Therefore, when rule 4 of the Second Schedule refers to part of the income, profits and gains of a company not includible in its total income as computed under the Income-tax Act, the expressions 'not includible' should be understood and interpreted in the lights of the provisions in the Income-tax Act. Relief granted under sections 80-I and 80J cannot be said to be income, profits and gains not includible in the total income. As noticed earlier the basic material for the computations of surtax is the total income as computed under the Income-tax Act. Adjustments in that total income have to be made as specified in Schedule I. There is no specific provisions for making any adjustment in respect of relief under section 80-I and 80J in Schedule I. The expression 'part of income, profits and gains not includible in the total income' in rule 4 of the Second Schedule cannot be construed or understood as referring to deductions, allowances, etc., made under the Income-tax Act for purposes of computations of the total income. In our opinion it is impossible to put such a construction. If the contention the appellants is to be accepted as correct then every kind of deductions or allowances for expression made in the computations of the total income under Income-tax Act would have to be treated as income not includible in total income and deductions would have to be made in that behalf also under rule 4. It is not the case of the appellants that such other deductions and allowances come within the ambit of rule 4. Exception sought to be made in respect of the relief under sections 80-I and 80J of the Income-tax Act is quite understandable. We asked the learned standing counsel as to what is that income that is not includible in the total income as computed under the Income-tax Act. When the expression used is 'total income', such a proposition would be really meaningless. The learned counsel suggested that the expression 'total income' should be construed as gross total income. Acceptances of such construction would dislodge and destroy the basis on which surtax is to be charged. The basis factor, viz., the total income as computed under the Income-tax Act, would then have to be ignored and fresh computations made on the basis of the gross receipts. That is not the scheme of the Surtax Act.

11. The learned standing counsel submitted that a new Chapter VI-A was substituted by the Finance (No. 2) Act of 1967, and some of the provisions of Chapter VII were omitted by that Act with effect from April 1, 1968, and the change so effected has an impact on rule 4 of the Second Schedule to the Act and this change is of some significance. The heading of Chapter VII is 'Incomes forming part of total income on which no income-tax is payable'. Therefore, it is implicit that the incomes contemplated therein are incomes forming part of total income though income-tax was not payable on that part. Merely because some of the provisions therein were omitted and made part of the new Chapter VI-A in order to give similar relief, the character and nature of the items do not get changed. It is pertinent to note that even though some of the provisions of Chapter VII were deleted and Chapter VI-A was substituted, no amendment was effected under the Surtax Act. The change in the arrangement of the sections in the Income-tax Act brought about by the introduction of Chapter VI-A does not in any way support the interpretation sought to be put by the department on rule 4 of the Second Schedule.

12. The learned standing counsel submitted that the expression 'gross total income' had been defined under section 80B of the Income-tax Act which occurs in Chapter VI-A and rule 4 of the Second Schedule of the Act should be construed in that light. It is difficult to discern any connection between the definition of 'gross total income' in section 80B and rule 4 of the Second Schedule to the Act. That definition is only for purposes of Chapter VI-A of the Income-tax Act and has no bearing at all on the interpretation to be placed on rule 4 of the Second Schedule. The learned counsel for the assessee invited our attention to the form prescribed in the Surtax Rules, 1964, in respect of the return of chargeable profits to be filed under section 5 of the Act. Part III of the form bears the headings, 'Computation of statutory deduction'. Item No. 13(a) refers to 'amount of income, profits and gains, if any, not includible in the total income as computed under the Income-tax Act, 1961'. In respect of this item, Note No. 8 is as follows :

'Instances of income, profits and gains not includible in the total income as computed under the Income-tax Act, 1961, are agricultural income in India, and in the case of a non-resident company, its income occurring or arising outside India.'

13. Note No. 9 is as follows :

'Item No. 13 is to be filed in only in the case of a company, a part of the income, profits and gains of which is not includible in its total income as computed under the income-tax Act, 1961.'

14. These notings fully support the contention urged on behalf of the assessee that rule 4 of the Second Schedule only refers to such income, profits and gains which are not includible in the total income as computed under the Income-tax Act and not at all to item of deductions or reliefs granted under section 80-I and 80J. This construction stands to reason also. If a company carrying on business having an industrial undertaking derives agricultural income besides income from business, the income from agricultural is not includible in the total income as computed under the Income-tax Act. The capital employed by the company may include capital investment in activities of agriculture, the income from which is not includible in the total income under the Income-tax Act. Surtax being a tax imposed upon companies in respect of the income, profits and gains from business based upon the total income as adjusted and the excess over the statutory deductions which is based upon the capital of the company as computed under Schedule II, the capital employed in respect of the agricultural activities would have to be deducted so as to confine the two item to similar activities. Chargeable profits being of industrial undertaking or business, capital to be considered is also that employed in that undertaking or business. Rule 4 makes provisions for such a contingency where a company has income not includible in the total income under the Income-tax Act so that the capital employed in respect of such income which is not includible gets excluded in the computations of the chargeable profits. The formula prescribed is for a ready computations.

15. We may also notice rule 2 of Schedule II to the Act which provides for diminishing the capital in relation to assets of a company, the income from which are to be excluded from the total income in computing it chargeable profits. Rule 4 is in a way complementary to this so that further deduction in proportion as specified may be made in relation to the income, profits and gains not includible in the total income as computed under the Income-tax Act. The provisions in rule 4 of the Second Schedule cannot be interpreted and invoked so as to make deductions in respect of the relief granted under sections 80-I and 80J of the Income-tax Act.

16. Therefore, the notices issued under sections 8/16 of the Act were without jurisdiction and were liable to be quashed. For the reason stated above, the appeals fail and are dismissed with costs, one set.

17. Advocate's fee Rs. 250.

18. Appeals dismissed.


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