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Commissioner of Income-tax, Bangalore Vs. United Breweries Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKarnataka High Court
Decided On
Case NumberTax Referred Case No. 32 of 1974
Judge
Reported in[1978]114ITR901(KAR); [1978]114ITR901(Karn)
ActsCompanies (Profits) Surtax Act, 1964 - Sections 2(5), (4) and (8); Companies (Profits) Surtax Rules - Rules 1 and 2
AppellantCommissioner of Income-tax, Bangalore
RespondentUnited Breweries Ltd.
Appellant AdvocateS.R. Rajasekharamurthy, Adv.
Respondent AdvocateG. Sarangan, Adv.
Excerpt:
.....refund earnest money agreement for sale of immovable property - breach of contract by purchaser held, defendant-seller is not entitled to forfeit earnest money in the absence of forfeiture clause in agreement. however earnest money was allowed to be refunded @ 6% interest. .....there was no occasion in the instant case for excluding the income from the shares in question rule rule 1(viii), because there was no income at all, the cost of such shares would not come within the ambit of rule 2 of the second schedule, we are of the view that the contention urged on behalf of the assessee which has been accepted by the tribunal is not warranted by the language of the relevant provisions. what rule 2 of the second schedule says is that where a company owns any assets the income from which in accordance with clause (iii) or clause (vi) or clause (viii) of rule 1 of the first schedule, is required to be excluded from its total income in computing its chargeable profits, the amount of its capital as computed under rule 1 shall be diminished from the cost of the.....
Judgment:

Venkatramaiah, J.

1. This case arises out of a reference made by the Income-tax Appellate Tribunal, Bangalore Bench, Bangalore, under section 18 of the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as 'the Act'), read with section 256(1) of the Income-tax Act, 1961. The assessee is M/s. United Breweries ltd., Bangalore. The assessment year is 1969-70. The assessee during the relevant assessment year held certain shares in some Indian companies. It transpired that during that assessment year, the assessee did not derive any income by way of dividend in respect of some of those shares, the cost of which to the assessee was Rs. 26,33,201.

2. In the course of the assessment proceedings under the Act, the assessee claimed that while determining its capital base for purposes of computing the statutory deduction to which it was entitled under the Act, the aforesaid cost of the shares which had not yielded dividend, viz, Rs. 26,33,201, should not be deducted under rule 2 of the Second Schedule to the Act in other words, the contention of the assessee was that the said amount should also be treated as part of the capital for purposes of determining the statutory deduction to which it was entitled. The Income-tax Officer rejected the contention of the assessee and excluded Rs. 26,33,201 under rule 2 of the Second Schedule of the Act from the capital base while determining the statutory deduction. Consequently, the amount of statutory deduction claimed by the assessee got correspondingly reduced. Aggrieved by the order of the Income-tax Officer, the assessee filed an appeal before the Appellate Assistant Commissioner of Income-tax. The Appellate Assistant Commissioner of Income-tax upheld the plea of the assessee and included the cost of such shares of the Indian companies which had not yielded any income in the capital base for the purpose of determining the statutory deduction. The appeal filed by the department before the Income-tax Appellate Tribunal, Bangalore Bench, was dismissed. The Tribunal was of the opinion that 'the plain meaning of the expression 'any assets the income from which in accordance with ..... clause (viii) of rule 1 of the First Schedule is required to be excluded from the chargeable profits

3. At the instance of the department, the following question of law has been referred by the Tribunal :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 26,33,201 representing the investment in shares from which the assessee received no dividends, should not be excluded from the capital base under rule 2 of the Second Schedule of the Companies (Profits) Surtax Act, 1964 ?'

4. Section 4 of the Act provides that subject to the provisions contained in this Act, there shall be charged on every company for every assessment year commencing on and from the first 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.

5. The expression 'chargeable profits' is defined by clause (5) of section 2 of the Act as the total income of an assessee computed under the Income-tax Act, 1961, for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule of the Act. Rule 1 of the First Schedule provides that the income, profits and gains and other sums falling within clauses (i) to (xii) thereof shall be excluded from the total income computed for that year under the Income-tax Act for purposes of determining the chargeable profits. Clause (viii), rule 1, of the First Schedule, requires 'income by way of dividends from an Indian company or a company which had made the prescribed arrangements for the declaration and payment of dividends within India' to be excluded from the income computed for that year under the Income-tax Act. After the chargeable profits are determined, it is necessary to determine the statutory deduction for the purposes of computing the liability of the assessee under the Act. The expression 'statutory deduction' is defined in clause (8) of section 2 of the 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. It is not necessary to refer to the two provisions found in section 2(8) of the Act for purposes of this case. The Second Schedule of the Act lays down the rules for computing the capital of a company for the purposes of surtax. The relevant part of rule 2 of the Second Schedule which arises for consideration in this case reads as follows :

'Where a company owns any assets the income from which in accordance with clause (iii) or clause (vi) of clause (viii) of rule 1 of the First Schedule 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 this Schedule shall be diminished by the cost of it of the said assets as on the first day of the previous year relevant to the assessment year in so far as such costs exceeds the aggregate of -....'

6. The question that is referred to us is not happily worded. The real question which arises for consideration in this case is whether, while computing the capital base, in order to determine the statutory deduction, the capital of the assessee as determined by rule 1 of the Second Schedule, should not be diminished by the cost of the assessee of the shares held by it in an Indian company which did not yield any dividend during the relevant year. The contention of the assessee which has been accepted by the Tribunal is that under rule 2 of the Second Schedule, only cost of such assets which had yielded income by way of dividend during that particular year could be deducted from the capital as determined by rule 1. It is argued that the income from the shares of an Indian company would be required to be excluded under rule 1 (viii) of the First Schedule only if there was any income from a particular assets and there would be no occasion to do so when such shares have not yielded any dividend. Since there was no occasion in the instant case for excluding the income from the shares in question rule rule 1(viii), because there was no income at all, the cost of such shares would not come within the ambit of rule 2 of the Second Schedule, we are of the view that the contention urged on behalf of the assessee which has been accepted by the Tribunal is not warranted by the language of the relevant provisions. What rule 2 of the Second Schedule says is that where a company owns any assets the income from which in accordance with clause (iii) or clause (vi) or clause (viii) of rule 1 of the First Schedule, is required to be excluded from its total income in computing its chargeable profits, the amount of its capital as computed under rule 1 shall be diminished from the cost of the assessee of the said assets. It does not say that the application of rule 2 is dependent upon the circumstances that the assets n question in fact earned income by way of dividend during the relevant year. 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 the First Schedule, the cost of assets to the assessee should be deducted from the capital as determined under 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. The construction placed by the Tribunal on rule 2 of the Second Schedule that its application to a particular asset which answers the description mentioned therein would arise only when an occasion to exclude the income therefrom has arisen, cannot be accepted because the words in rule 2 of Schedule II 'income from which in accordance with clause (iii) or clause (vi) or clause (viii) of rule 1 of the First Schedule is required to be excluded from its total income in computing its chargeable profits' are only descriptive of the assets and they have no bearing on the question whether the assets in question had during the relevant period actually earned any income or not. There is no dispute in this case that if the shares in question had yielded any income by way of dividends such income would have been deducted under rule 1(viii) of the First Schedule in computing the chargeable profits. If there was no income the deduction will be zero. But such shares constitute assets the income from which is required to be excluded under the rule 1(viii) of the First Schedule for purposes of rule 2 of the Second Schedule.

7. We are of the opinion that under rule 2 of the Second Schedule of the Act, the sum of Rs. 26,33,201 representing of the cost of the shares in Indian companies to the assessee from which the assessee received no dividends should be excluded from the capital as computed under rule 1 of the second Schedule of the Act, that is, the capital as computed under rule 1 of the Second Schedule be diminished by the said sum of Rs. 26,33,201. The liability of the assessee should be computed on that basis. The question referred is answered accordingly.


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