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Travancore Chemical and Mfg. Co. Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Cochin
Decided On
Judge
Reported in(1983)6ITD788(Coch.)
AppellantTravancore Chemical and Mfg. Co.
Respondentincome-tax Officer
Excerpt:
.....on the wrong assumption that for the assessment year 1977-78 the income-tax payable by the assessee-company therein included surcharge on income-tax payable without noticing the effect of the proviso to section 2(1) of the finance (no. 2) act, 1977. what is deductible under rule 2 to the first schedule appended to the act, is the amount of income-tax payable by the company in respect of its total income under the provisions of the 1961 act after making allowance for any relief, rebate or deduction in respect of income-tax to which the company may be entitled under the provisions of the said act or the annual finance act .3. it is the finance act which authorises the income-tax and surcharge to be charged and prescribes the rate at which these can be charged.section 4 of the 1961.....
Judgment:
1. The Companies (Profits) Surtax Act, 1964 ('the Act') levies a tax called 'Surtax' on every company for every assessment year commencing from 1-4-1964, in respect of so much*of its chargeable profits of the previous year as exceed the statutory deduction. The term 'chargeable profits' has been defined by clause (5) of Section 2 of the Act as the total income of an assessee computed under the Income-tax Act, 1961 ('the 1961 Act'), for any previous year and adjusted in accordance with the provisions of the First Schedule. Rule 2 of the First Schedule appended to the Act provided that the total income arrived at after making certains exclusions referred to in Rule 1 shall be further reduced by the amount of income-tax payable by the company in respect of its total income under the provisions of the 1961 Act after making certain allowances and after excluding the income-tax payable in respect of certain items. The amount of income-tax payable by a company in respect of the total income under the provisions of the 1961 Act includes surcharge payable as stipulated by the annual Finance Acts.

2. The Finance Act, 1976 has introduced a scheme by which certain relief was sought to be given in respect of companies which are required to pay surcharge. By clause (8) of Section 2 the Finance Act, 1976 provided that where an assessee, being a company, makes, during the financial year commencing on 1-4-1976, any deposit with the Industrial Development Bank of India under any scheme made by the Central Government in this behalf, then, the surcharge on income-tax payable by the company for the assessment year commencing on 1-4-1977 in a case where the amount of deposit is equal to or exceeds the amount of surcharge on income-tax payable by it, shall be nil, and in a case where the amount of the deposit so made falls short of the amount of surcharge on income-tax payable by it, shall be reduced by the amount of the deposit. That is to say, if a company makes a deposit with the Industrial Development Bank of India, an amount equal to surcharge payable on its income-tax, then that company need not pay the surcharge on income-tax.

3. The assessee before us is a company which has paid a deposit of Rs. 94,544 on 14-2-1976, with the Industrial Development Bank of India, and it claimed that for the purpose of computing its chargeable profits, the deposit so made should also be construed as surcharge paid and included in the income-tax payable by it so that the aggregate amount of income-tax and its deposit could be deducted under Rule 2 of the First Schedule.

4. The ITO who made the assessment on the assessee accepted the claim and determined the surtax payable. This was done by an order passed on 11-8-1978. Subsequently, the ITO noticed that the deposit made with the Industrial Development Bank of India, is not surcharge as one is not equivalent to the other but one is in substitution of the other.

Therefore, he proceeded to amend the order by rectifying it under Section 13 of the Act. The assessee was, therefore, called upon to explain why the amount of surcharge allowed as a deduction in computing the chargeable profits, should not be withdrawn. The assessee objected to the rectification by pointing out that what was paid by way of deposit was strictly not a deposit but a tax in lieu of surcharge and that the surcharge should, therefore, be allowed as a deduction, and was rightly allowed in the original proceedings. Rejecting this contention and pointing out that since the deposit made by the assessee would be refunded to the assessee by the bank after a certain period, the ITO held that it could not be regarded as a tax paid. He, therefore, withdrew the deduction originally allowed. As a consequence, a further liability of Rs. 26,636 was imposed on the assessee by the order passed by the ITO under Section 13, on 5-10-1978. Aggrieved by this order, the assessee appealed to the Commissioner (Appeals) contending, inter alia, that in any case the deduction allowed for surcharge originally could not be regarded as a mistake apparent from record, because it is a highly controversial and debatable issue which could not be rectified as a mistake apparent from record. There was also an appeal filed by the assessee against the assessment made to surtax. The Commissioner (Appeals) was hearing both the appeals together. Since he was hearing the appeal against the assessment also, a request was made by the ITO to enhance the assessment by withdrawing the deduction allowed for surcharge. That is to say, what was objected to by the assessee as not rectifiable by treating as a mistake apparent from record, was sought to be overcome by proposing an enhancement in the reassessment. The Commissioner (Appeals) accepted the plea of the ITO and after recording his reasons as to why he was not able to agree with the assessee's contention that the deposit of tax could not be regarded as equivalent to payment of surcharge, directed the ITO to enhance the assessment by withdrawing the deduction allowed towards surcharge. In this view of the matter, he regarded the appeal filed against the order of rectification as infructuous.

5. Aggrieved by these orders, the assessee appealed to the Tribunal.

During the course of hearing of these appeals, the assessee contended that the proposed enhancement was not correct, that the payment made was in lieu of surcharge and, therefore, was equivalent to surcharge.

The withdrawal of the deduction allowed for surcharge paid is thus, wrong. There is also a decision given by the Tribunal Delhi Bench, in ST Appeal No. 17 (Delhi) of 1979 dated 12-8-1980 [since reported in STO v. Daulat Ram Dharambir Auto (P.) Ltd. [1981] 6 Taxman 11] holding that the asses-see-company would be entitled to the deduction of surcharge on income-tax equal to the amount of deposit made, to which decision, the judicial member was a party. The Accountant Member, who is a party to this Bench, had some doubts about the correctness of that view. In view of this, the matter was referred to the President for constituting a large Bench to resolve the dispute as to the correctness of the view expressed by the Delhi Bench, whether the deposit made by a company under Section 2(5) can be taken as paying surcharge on income-tax payable by a company so that that amount could be aggregated with the income-tax payable and deducted in arriving at the chargeable profits.

Hence, this Special Bench.

6. Shri K.S. Paripoornan, appearing for the assessee contended, after explaining to us the beneficial scheme under which this deposit was to be made, that since the deposit was made in lieu of payment of surcharge it had the same effect of burdening the assessee with the same amount of money payable by way of surcharge with the same consequences of not having to pay the surcharge. Since the liability to pay surcharge has been liquidated by making the deposit, the deposit should not be treated as different from surcharge payable. He tried to support his argument from the language used in the Companies Deposits (Surcharge on Income-tax) Scheme, 1976 ('the Scheme') that the Central Government has framed in exercise of the powers conferred by clause (8) of Section 2 of the Finance Act, where in paragraph 3 the expression 'in lieu of payment of surcharge' has been used. That section provided that a deposit in lieu of payment of surcharge on income-tax under clause (6) of Section 2 may be made by a company at any time before the last instalment of advance tax is due in its case. Sub-paragraph (2) of paragraph 3 provided that a deposit in lieu of payment of surcharge on income-tax under clause (8) of Section 2, may be made by a company at any time during the financial year commencing on 1-4-1976. While sub-paragraph (1) of paragraph 3 dealt with the deposit to be made in lieu of payment of surcharge on income-tax, Sub-paragraph (2) dealt with the deposit to be made in lieu of payment of surcharge due on income-tax. Since in both places, the expression 'in lieu of payment of surcharge' has been used, the expression 'in lieu of construed grammatically must mean the surcharge and deposit should have the same character and, thus, are one and the same. Merely because it is described as a deposit and merely further because it is a deposit which is returnable, it does not cease to be in lieu of payment of surcharge.

When a deposit has been made in lieu of surcharge, the liability to pay surcharge ceases. Merely because on the cessation of that liability to pay surcharge, the deposit made does not lose its character as surcharge. A concession conferred on an assessee, whatever may be its object, must be taken to its logical consequences, and a person who made the deposit in lieu of surcharge must be deemed to have paid the surcharge also, because both deposit and surcharge were the imposts under the statute, having the same effect of withdrawing the money and mobilising the resources for the State, and consequently, have the same effect as surcharge. Therefore, the amount of surcharge deposit paid must be aggregated with the income-tax payable by the assessee so that the total amount is allowed as deduction in arriving at the chargeable profits.

7. These attractive and weighty arguments have been countered by the learned standing counsel, Shri P.K. Ravindranatha Menon, who contended that whatever may be the eventual result of the levy, each impost has got a purpose/character and a nature distinct from the other. The deposit is neither a tax nor vice versa. A tax has irretrievably gone out of the coffers of the citizen to the State, whereas a deposit is a temporary measure of depriving a citizen of the use of the money. Since a deposit is to be returned eventually, it cannot partake the character of a tax. When it cannot partake the character of tax, it cannot be equated to surcharge which is nothing but additional tax. A careful reading of the relevant provisions should show that the liability to pay surcharge gets extinguished by the making of the deposit because the making of a deposit under the scheme formulated by the Government has this consequence of reducing the liability to pay surcharge to 'nil'. When there was no liability to pay surcharge, it cannot be said that there was a liability to pay surcharge and it was satisfied by making the deposit. Stressing the greatest emphasis on the language used in the Scheme, particularly the word 'nil', the learned standing counsel submitted that the liability having been extinguished by the making of the deposit, the amount paid towards the deposit is not equal to surcharge and consequently, it cannot be said that surcharge had been paid by the assessee. He commented upon the decision of the Delhi Bench in the case referred to above and submitted that that decision overlooked the effect of the expression 'nil' used in the scheme and :needed reconsideration.

8. We have gone through the relevant provisions of the law as well as the decision of the Delhi Bench of the Tribunal and carefully considered the arguments addressed to us. The difficulty in accepting the argument advanced by Shri K.S. Paripoornan is to equate the deposit made with surcharge liability payable. If we carefully analyse the Scheme, it would appear that the object of the Scheme is to confer a benefit on companies having to pay surcharge on income-tax. A surcharge at 2\ per cent on income-tax was levied on companies in 1971 at the time of the Bangla Desh crisis. In 1972 that surcharge was raised to 5 per cent. In order to exempt companies from the payment of the surcharge, a Scheme has been introduced under which an equivalent of deposit is to be made with the Industrial Development Bank of India for a period of five years. That measure is also intended to secure rotation of funds available for corporate sector for investment. Since the object of introducing this Scheme is to exempt companies from paying surcharge, if they pay equivalent amount with the Industrial Development Bank of India, the simple question would be that the deposit is not equivalent to surcharge, because the companies who made the deposit secure exemption from the payment of surcharge. If a company makes before the last instalment of advance tax is due, a deposit with the Industrial Development Bank of India under a scheme to be framed by the Central Government in this behalf, the amount of surcharge payable by it shall be reduced by the amount of the deposit.

Normally the surcharge is payable only after an assessment is made, along with the income-tax. But, by making a deposit in advance, the liability to pay the surcharge is reduced and if the deposit is equal to the amount of surcharge payable, there is no liability to pay the surcharge at all. Similarly, where a company makes a deposit during the financial year 1976-77 under the scheme, the surcharge on income-tax payable by it for the assessment year 1977-78 would also be reduced by the amount of deposits so made. The company has an option whether to make a deposit and then not pay the surcharge at all, or pay the surcharge as and when demand is raised and not pay any deposit at all.

But, by choosing to pay the deposit much in advance of the due date of advance, which is generally after the assessment is completed, the deposit paid is returnable subject to certain conditions stipulated under the scheme. This Scheme is in force for a period of one year only. To avail the benefit conferred by the Scheme, the deposit has to be made before the last date of advance tax is due. The benefit to be availed of by making the deposit is not having to pay surcharge. When by making the deposit no surcharge is payable, we found it difficult to accept the contention that the making of deposit is equivalent to paying the surcharge. Unless surcharge is paid as such, it cannot be regarded as part of income-tax so that the total amount is available for deduction in arriving at the chargeable profits. When surcharge was not all at paid and the liability got extinguished by making a deposit, how can the deposit which was not paid can be regarded as paid for the purpose of aggregation with income-tax. If the contention put forward on behalf of the assessee is accepted, it would only mean that the amount paid by way of deposit is also treated as income-tax payable, which is against the very object and purpose for which the scheme of making the deposit had been introduced as suggested by the Finance Minister While introducing the Finance Bill in the Parliament in March 1976. Keeping in view the object for which this scheme had been introduced and the provisions made to secure implementation, the meaning of the expression 'in lieu' has to be understood not as 'in substitution of as is now canvassed by Shri K.S. Paripoornan, but as meaning 'instead of or 'in place of.

Deposit when to be made.--(1) A deposit in lieu of payment of surcharge on income-tax under Sub-section (6) of Section 2 of the Finance Act, 1976 (66 of 1976), may be made by a company at any time before the last instalment of advance tax is due in its case.

(2) A deposit is lieu of payment of surcharge on income-tax under subsection (8) of Section 2 of the Finance Act, 1976 (66 of 1976), may be made by a company at any time during the financial year commencing on the 1st day of April, 1976.

(3) A deposit under sub-paragraph (1) or sub-paragraph (2) may be made either in one lump sum or in two or more instalments.

It is by laying emphasis on the expression 'in lieu of payment of surcharge' that Shri K.S. Paripoornan argued at some length that the making of a deposit was nothing but paying surcharge. It is to understand this provision that we had a close look at the object of introducing this provision of making a deposit with reference to the speech made by the Hon'ble Finance Minister in the Parliament. Since the object of introducing the scheme for making a deposit was to exempt companies from paying surcharge, the paying of surcharge cannot be construed with the expression 'in lieu of used in paragraphs 3(1) and 3(2) which will have the effect of converting the deposit into surcharge. Moreover, there is more to be said in favour of the argument that a deposit is not a tax because the nature of the two is so different. While one is returnable, the other is not. Tax and surcharge are never returnable except in case of excess payment, validly so determined by following the established procedures in law. Otherwise, the deposit remains a deposit though temporarily the assessee lost control and dominion of the use of the money. The Scheme also provided for the payment of simple interest at 6 per cent per annum, which means it is something like deposit made in a bank, except that the assessee lost the custody of the money and the use of it for the period for which the deposit remained with the bank, the assessee can be said to be even the owner of the money comprised in the deposit while that was not the effect or consequence to follow in case payment was made by way of tax or surcharge on tax.

10. The Supreme Court held in the case of CIT v. K. Srinivasan [1972] 83 ITR 346, that the term 'income-tax' as employed in Section 2 of the Finance Act, 1964, includes surcharge and additional surcharge wherever provided. Therefore, the expression 'income-tax' used in the First Schedule of the Act, if it is to include surcharge, as contended for on behalf of the assessee, there must be a payment made towards surcharge and when by making the deposit under the Scheme if exemption for payment of surcharge is secured, that exempted amount of surcharge cannot be considered as surcharge paid for the purpose of inclusion in the income-tax. We are, therefore, unable to see our way in accepting either the contention put forward on behalf of the assessee by Shri Paripoornan or the views expressed by the Delhi Bench. With great respect, we differ from that view and hold that the deposit made is not payment of surcharge and, therefore, the deposit cannot be aggregated with income-tax. Thus, the view taken by the Commissioner (Appeals) in enhancing the assessment by withdrawing the deduction allowed for surcharge is correct and we uphold it.

11. The view canvassed before the Commissioner (Appeals) that the ITO is not empowered to rectify this mistake by having recourse to Section 13 is, to our mind, a valid contention having great force. The matter is so highly controversial that it is not open to the ITO to rectify it treating it as a mistake apparent from the records. But, the Commissioner (Appeals) did not pursue that line of argument. He dismissed the appeal filed against that order under Section 13 as infructuous, and accepted the plea of the ITO for enhancement of the assessment. Since the appeal filed against the order under Section 13 has been dismissed by the Commissioner (Appeals) as infructuous, we endorse the view of the Commissioner (Appeals) thereon also.

1. I agree with the conclusions drawn by the Vice President. I may, however, briefly state my reasons why a contrary view held by the Delhi Bench of the ITAT to which I have been a party requires to be reconsidered.

2. The decision of the Delhi Bench in the case of Daulat Ram Dharambir Auto (P.) Ltd. (supra) was rendered on the wrong assumption that for the assessment year 1977-78 the income-tax payable by the assessee-company therein included surcharge on income-tax payable without noticing the effect of the proviso to Section 2(1) of the Finance (No. 2) Act, 1977. What is deductible under Rule 2 to the First Schedule appended to the Act, is the amount of income-tax payable by the company in respect of its total income under the provisions of the 1961 Act after making allowance for any relief, rebate or deduction in respect of income-tax to which the company may be entitled under the provisions of the said Act or the annual Finance Act .

3. It is the Finance Act which authorises the income-tax and surcharge to be charged and prescribes the rate at which these can be charged.

Section 4 of the 1961 Act simply provides that where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or rates shall be charged in accordance thereto and subject to the provisions of the Act. Although under the 1961 Act, section 4 is the charging section yet income-tax can be charged only where the Central Act which in the present case is the Finance Act enacts that income-tax shall be charged for any assessment year at the rate specified therein. Surcharge is an additional mode or rate for charging income-tax. The term 'income-tax' would include surcharge on income-tax payable wherever provided. Where there is an additional charge to the basic charge or rate such additional charge forms part of income-tax. However, where there is no such additional mode or rate for charging income-tax, the amount of income-tax payable would not include surcharge.

4. The Finance (No. 2) Act, 1977 prescribes the rates of income-tax for the assessment year commencing on 1-4-1977. The rate is specified in Part I of the First Schedule. Section 2(1) provides that income-tax shall be charged at the rates specified and shall be increased by a surcharge calculated in each case in the manner provided in paragraphs A to E of Part I. This increase by a surcharge is subject to the proviso that in the case of a company that has made, during the financial year commencing on 1-4-1976, any deposit under the scheme then the surcharge on income-tax payable by the company shall be nil in case the amount of the deposit is equal to or exceeds by the surcharge on income-tax payable by it and shall be reduced by the amount of the deposit where the amount of the deposit falls short of the amount of surcharge on income-tax payable by it. The proviso, thus, qualifies the main enactment by providing an exception and taking out as it were from the main enactment the case of certain companies which but for the proviso would fall within the main enactment. The effect of the proviso is to except the case of a company and deal with it, which would otherwise fall within the general language of the main enactment.

Accordingly, in the case of a company which has made a deposit under the scheme, there would be no increase in the income-tax payable by it by a surcharge or the increase by way of surcharge would be reduced proportionately to the amount of the deposit made. Consequently, the income-tax payable at the basic rate by the company that has made the deposit under the Scheme is not increased by a surcharge to the extent of the deposit and, therefore, the amount of income-tax payable by that company does not include surcharge on income-tax payable by it. The deposit under the Scheme is only a condition precedent for getting the benefit of the proviso exempting the case from the charge of surcharge.

5. This being the effect of the proviso to Section 2(1), the assessee-company cannot claim that the deposit made under the Scheme is equivalent to payment of surcharge. Even if the provisions of the Finance Act, 1976 are to be considered relevant, it is significant that the words 'in lieu of particularly emphasized by the assessee's learned counsel, appear only in clause (6) of Section 2 and not in clause (8).

This is material because clause (8) lays down prospectively the provision for exemption from surcharge for the assessment year 1977-78 to the specified category of companies, while clause (6) regulates only the advance tax (including surcharge) payable by the assessee-company.

6. Whatever be the language employed in the Finance Act, 1976, it is the provision contained in the Finance Act, 1977, that determines the liability for income-tax payable for the assessment year 1977-78. The language used in Section 2(1) and the proviso thereunder is clear enough to show that for the assessment year 1977-78, the assessee-company that had made the deposit under the scheme had no liability to pay surcharge on income-tax payable by the company.

Therefore, whatever amount was payable as income-tax for the assessment year 1977-78 did not include surcharge on income-tax payable by it. The admissible deduction under Rule 2 of the First Schedule appended to the Act is, therefore, only the amount of income-tax paid and cannot include the deposit made by the assessee-company under the Scheme.


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