Skip to content


Hooghly Mills Co. Ltd. Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Kolkata
Decided On
Judge
Reported in(1985)13ITD173(Kol.)
AppellantHooghly Mills Co. Ltd.
Respondentincome-tax Officer
Excerpt:
1. these appeals are by the assessee in which common points are raised and the facts are identical. accordingly, the counsels of both the sides have addressed us in one set. we, accordingly, consolidate the appeals for disposal by this common order.2. the appeals are directed against the consolidated order of the commissioner (appeals), dated 30-11-1979. the issue involved is regarding the claims made by the assessee under the companies (profits) surtax act, 1964 ('the surtax act').3. the appeals have been fixed for hearing on several occasions. but the same have been adjourned from time to time at the request of the assessee on some ground or the other. ultimately, the appeals were fixed up for hearing during which arguments are made before us by both the sides. briefly speaking, the.....
Judgment:
1. These appeals are by the assessee in which common points are raised and the facts are identical. Accordingly, the counsels of both the sides have addressed us in one set. We, accordingly, consolidate the appeals for disposal by this common order.

2. The appeals are directed against the consolidated order of the Commissioner (Appeals), dated 30-11-1979. The issue involved is regarding the claims made by the assessee under the Companies (Profits) Surtax Act, 1964 ('the Surtax Act').

3. The appeals have been fixed for hearing on several occasions. But the same have been adjourned from time to time at the request of the assessee on some ground or the other. Ultimately, the appeals were fixed up for hearing during which arguments are made before us by both the sides. Briefly speaking, the facts of the case are as stated below.

4. The ITO noted in the assessment order for the assessment year 1969-70 that the order was being passed under Section 6(2) of the Surtax Act. The assessee is a company and the method of accounting was mercantile. He noted that in pursuance of the settlement of the assessee's Income-tax matters under Section 245A of the Income-tax Act, 1961 ('the 1961 Act'), notice under Section 8(a) of the Surtax Act was issued to the assessee. Hearing was fixed by him from time to time.

After being given sufficient time, the assessee submitted a revised balance sheet for the purpose of computation of chargeable profit under the Surtax Act. The ITO referred to para 18 of the Settlement Commission's order dated 14-1-1977 under which the assessee claimed that the extra profit declared before the Commission should be treated as a reserve for the purpose of computation of capital. He noted the facts of the case that the assessee made a settlement before the Commission as a result of which extra profit offered by the assessee was assessed to tax in the assessment years 1968-69 to 1976-77. The assessments for the assessment years 1968-69 to 1973-74 had been completed earlier and were reopened, accordingly. The assessee recast the balance sheet in line with the order of the Commission. In the computation of the net chargeable profit, the assessee claimed that the unaccounted income offered should be treated as a reserve for the different years and should be considered in computing he capital for charging surtax. The assessee placed reliance on the terms of para 18 of the Settlement Commission's order in which it was observed that the Settlement Commission would recommend sympathetic consideration of the assessee's plea, when the surtax assessments are finalized and that the surtax liability is practically tied up with the computation of income for Income-tax purpose. The assessee deserved some credit for disclosure to the extent of Rs. 2,61,41,229. It also observed that any penalty under the Surtax Act would not obviously be in consonance with the spirit of the settlement. Apart from deserving the same treatment in the matter of penalty, the assessee's request for permission to recast its balance sheet for various years in the light of the present settlement for assessing its surtax liability, also merits acceptance.

5. The ITO considered the various aspects made before him by the assessee. He found that the assessee's claim cannot be accepted. He was of the opinion that the recommendation of the Commission in this respect was not binding on the department and that the observation of the Commission was not mandatory and the same was contrary to the Second Schedule of the Surtax Act, where rule relating to the computation of capital has been laid down. Accordingly, the ITO felt that he cannot act as such. He pointed out that the balance sheet submitted along with the return was neither audited nor signed by the auditors and directors and that those balance sheets did not conform to the provisions of Section 215 of the Companies Act, 1956, which lays down that the balance sheet is to be signed by the managing director, etc. He also noted that Section 218 of the Companies Act requires that if the balance sheet is issued or circulated which is not audited or not signed, the company or the principal officer would be liable to punishment. The ITO, therefore, concluded that an unaudited and unauthenticated balance sheet is not to be treated as a balance sheet for any purpose. Moreover, he noted that under no law the additional profit lying with the credit balance in the profit and loss account can be treated as a reserve as it was a mass of undistributed profit which was not a reserve at all. He pointed out that it was necessary for the directors to recommend how this balance profit should be apportioned and in this case, it would not be permissible in view of the fact that the balance sheets of the company for the years have been finalized and assessed. He, therefore, held that in view of the additional income offered for taxation before the Commission, after the finalization of the balance sheet for the year, the same cannot be treated as a reserve for the purpose of computation of capital base of the company. He proceeded on to compute the capital of the company under the provision of the Surtax Act, in the assessment order.

6. For the other years under appeal also, the ITO concluded the surtax assessment in the same manner as indicated in the preceding paragraph.

7. The assessee took up the matter before the Commissioner (Appeals) raising various contentions and certain facts were noted. It was pointed out that the assessee was running a jute mill at Calcutta and its premises were searched under Section 132 of the 1961 Act and a huge discrepancy between the stock of goods in the godowns and as per accounts was detected on verification. As a result, the assessee submitted applications for settlement for the three assessment years 1974-75, 1975-76 and 1976-77 under Section 245C(1) of the 1961 Act. The Commission took up the matter and processed the applications. At para 18 of its order, the Commission has noted that as far as penalty liable under Section 9 or 20 of the Surtax Act is concerned, its reduction or waiver is beyond the scope of Section 245H of the 1961 Act. It, however, noted that considering the co-operation extended by the assessee, the Commission would recommend for sympathetic consideration of the assessee's plea in respect of the assessee's request for permission to recast its balance sheet for the various years in the light of the present settlement for assessing its surtax liability.

8. It was pleaded before the Commissioner (Appeals) that the order of the Commission under Section 245D of the 1961 Act is conclusive as to matters stated therein. In view of Section 245-I of the 1961 Act and, therefore, the matter noted by the Commission at para 18 briefly mentioned above, was binding. It was also pleaded that the recast balance sheet and not the balance sheet of the assessee-company, audited and passed as per the Companies Act, is to be considered.

Reliance was placed on a decision of the Hon'ble Supreme Court in the case of CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566.

9. The Commissioner (Appeals) examined the issue and considered the different contentions made before him, which he found to be not acceptable. Briefly speaking, he noted that the Commission can pass an order of settlement on the matters covered by the application and any other matter relating to the 'case' not covered by the application, but referred to in the report of the Commissioner under Section 245D(1) or (3). He pointed out that what was referred to the Settlement Commission, was matter concerning Income-tax proceedings and what the Commission was authorized to settle, were also matters concerning Income-tax proceedings. The Commissioner (Appeals) was of the view that the Commission cannot, for example, order settlement of surtax proceedings or waive penalties under any Act other than the 1961 Act and, therefore, any remark made by the Commission, cannot be mandatory or binding on the ITO, referring to the decision of the Hon'ble Supreme Court in the case of CIT v. S.N. Bhattachargee [1979] 118 ITR 461. He also observed that the surtax assessments and the computation of capital were not matters covered by the assessee's application to the Commission and were not matters relating to the case, i.e., Income-tax proceedings. He also pointed out that the application of the assessee also did not include any reference to surtax assessments.

10. The Commissioner (Appeals) was also of the view that the ITO was right in disregarding the recast balance sheet filed by the assessee along with the surtax returns. He took into account the observations and the points made out by the ITO in the assessment order regarding the acceptance of the balance sheet conforming to the relevant sections of the Companies Act. He pointed out that in the present case, the assessee wanted that such audited balance sheet should be superseded by the recast balance sheet (which were not audited nor reported on by the directors and not passed in the annual general meeting of the shareholders). The Commissioner (Appeals) referred to the case law relied on by the assessee, i.e., Mysore Electrical Industries Ltd.'s case (supra), which he found to be not applicable to the facts of the case. He pointed out that in the present case, he was concerned with the balance sheets of the earlier years and that too for the purposes of the Act. He observed that the assessee could not seriously suggest that the recommendation of the directors on 3-2-1977 in respect of the accounts of 1975-76, the financial year would relate back to any earlier period. It may be pointed out here that it was claimed that there was an annual general meeting on 31-3-1977 during which the transfer of Rs. 1,13,15,000 to the general reserve was accepted as recommended by the directors on 3-2-1977.

11. The Commissioner (Appeals) pointed out that on the dates of the relevant balance sheets, the assessee had undisclosed income not brought into the accounts as it was a mass of unappropriated profits to which the directors had no occasion to apply their mind as to what to do with it and for what future purpose it was to be set apart.

Accordingly, the Commissioner (Appeals) concluded that such concealed income was not a reserve for the purpose of surtax, following the ratio of the decision of the Hon'ble Supreme Court in the case of CIT v.Century Spg. & Mfg. Co. Ltd. [1953] 24 ITR 499. He also referred to the decision of the Hon'ble Calcutta High Court in the case of A.P.V. Engg.

Co. Ltd. v. CIT [1979] 119 ITR 937. Accordingly, this ground of the assessee common to all the years under appeal was rejected. Hence, these appeals before us.

12. It is submitted by the assessee's learned Counsel that the authorities below erred in disregarding the order concluded by the Commission on the matters referred to the Settlement Commission as per the provisions of Section 245C. The arguments made before the authorities below are repeated before us as well to the effect that Section 245-I would make the order of the Commission conclusive as to the matters stated therein and no matter covered by such order shall be reopened in any proceeding under the 1961 Act or under any other law for the time being in force. According to the assessee's learned Counsel, the subject-matter in the present appeals before us is concluded and covered by that order of the Settlement Commission and, therefore, the ITO erred in reopening the issue or disregarding the directives of the Commission and in rejecting the claim of the assessee in respect of the points discussed by us briefly above. It is stressed before us that the Commission accepted the prayer of the assessee to spread over the amount for the purpose of income-tax, which is directly linked with the computation of capital for the purpose of Surtax Act, which the lower authorities rejected without any sanction of law. He also refers to Sundaram on Law of Income-tax in India, Vol. 3, 12th edn. at p. 3085, in which Circular No. 204 dated 24-7-1976 was dealt with. He also refers to the case as reported in CIT v. Rao Thakur Narayan Singh [1965] 56 ITR 234 (SC). In this connection, it is pointed out that the assessee after the Settlement Commission gave the order, approached the CBDT to give necessary direction to the ITO to give effect to the Settlement Commission's order, while completing the surtax assessments of the assessee for the years under appeal also. It was pointed out that the CBDT have not acceded to the claim of the assessee by its laconic order. At the time of hearing, the assessee's learned Counsel refers to the decision in the case of Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 (SC) with emphasis on page 10. He also refers to another decision in the case of P.Palaniswami v. CIT [1977] 106 ITR 811 (Mad.) with emphasis on page 815.

It is argued vehemently on behalf of the assessee that the department has not taken any issue before the High Court, etc. in respect of the direction, etc., given by the Commission and, therefore, the issue now is closed. It is also stated that after the disclosure, the unaccounted profits were transferred to the reserve account and this was a distinguishable feature of the facts of the case. He refers to the different pages of the paper book in order to stress the claim of the assessee. According to him, the resolution passed by the shareholders in the annual general meeting dated 31-3-1977 should relate back to the earlier years also. A copy of the resolution is at page 23 of the paper book, in which it has been indicated that the amount disclosed after tax provision, stood at Rs. 1,13,25,302 and the entire amount was carried to the general reserve. It is urged, therefore, that on the facts of the case and having regard to the applications for settlement and the terms of the settlement, the claim of the assessee has been wrongly disallowed by the authorities below and injustice has been done to the assessee in this respect. It is urged, therefore, that the claim of the assessee may be allowed.

13. The learned departmental representative supports the order of the Commissioner (Appeals) while contending that the finality in any order is not disputed in the present case also as per the terms of the settlement. He stresses the point that in the case of settlement, no reference could be made to gift-tax matter, estate duty matter and also surtax matter, as the settlement related entirely to matters under the Income-tax proceedings and, therefore, the recommendation of the Commission as spelt out earlier, was only a recommendation and not an order and, therefore, the assessee's learned counsel was wrong in urging that the terms of the settlement covers surtax assessment proceedings as well. The points raised and considered by the authorities below are highlighted by the learned departmental representative, while stating that the amount in question was an unauthorised mass of profit. According to him, only the general meeting of the shareholders can create or approve reserve, while referring to the decision in Southern Roadways Ltd. v. CIT [1981] 130 ITR 545 (Mad.) (FB). In course of his arguments, the learned departmental representative refers to the decision of the Hon'ble Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559, in order to stress the point made out in the orders of the authorities below. According to him, the resolution of the company related to the year under consideration only and it cannot go back to the earlier years as claimed on behalf of the assessee. It is argued that, in fact, it was admitted that there was no record of the concealed income and secret stock of the assessee for all those years. It is emphasized that the recast balance sheet has no authenticity and no action can be taken on such balance sheet, while referring to the case as reported in CIT v. Ajax Products Ltd. [1965] 55 ITR 741 (SC) with emphasis on page 747.

According to the revenue, the order of the Commissioner (Appeals) suffers from no infirmity either on facts or in law and, therefore, his order requires to be sustained.

14. We have gone through the orders of the authorities below along with the other papers placed before us for our consideration. We have also gone through the assessee's application for settlement and the terms of the settlement as made by the Commission under Section 245-I. It is seen that there is considerable force in the submissions made on behalf of the revenue that it was admitted that there were no accounts or records in respect of the concealed income for those years and considering the complications involved, etc., a settlement was made by the Commission under the provisions of the above section. True, the assessee in its application for settlement, copies of which have been placed before us, did mention surtax assessment which would be entirely based on the total income determined by the Settlement Commission for the relevant years of assessment. It was the assessee's submission that no penalty should be imposed or prosecution started for any default under the Super Profits Tax Act, 1963 or the Surtax Act, 1964 as the case may be, either for non-submission of returns or for submission of incorrect returns for those years. It was also submitted in the applications that in each of the Income-tax assessments relevant to the surtax or super profits tax assessments, the total income already assessed or returned was likely to be enhanced considerably and, therefore, due effect of such enhancement of the total income should be given to the capital base computed for the Companies (Profits) Surtax Act or the Super Profits Tax Act, in computing the standard deduction available to the company. It was also submitted that the submissions made was after taking into account of such undisclosed reserves in the capital base in addition to the reserves disclosed in the balance sheet.

15. The Settlement Commission heard both the sides and recorded different aspects of the matter dealt with by it in its order. The Commission while stating that for the purpose of spreading the unaccounted income over the different assessment years, pointed out that the assessee's representative undertook the exercises to reconstruct manufacturing and trading account to ascertain the suppressed stock/PDO at the beginning of each year. It was pointed out that they could not vouch for the correctness of the figures so computed in the absence of accurate day-to-day records of the production and stock. The Commission pointed out that the assessee had neither insured its unaccounted stock or hypothecated it to any bank and there was no means to know at any particular point of time what was the position of such stock.

16. The Commission at para 13 was satisfied that on the facts of the case, there should be no liability to penalty for non-payment of advance tax on the basis of escaped income disclosed before the Commission. Similarly, the Commission at para 16 considered the issue of penalty under the 1961 Act. It was of the opinion that the case did not justify the levy of any penalty under the 1961 Act. At para 18, it was clearly stated that as for the penalty under Section 9 or 20 of the Surtax Act, its reduction or waiver was beyond the purview of Section 245H of the 1961 Act. It, however, observed that in view of the co-operation extended by the assessee, the Commission would recommend sympathetic consideration of the assessee's plea, when the relevant surtax assessments are finalized, as the surtax liability was practically tied up with the computation of income in respect of the unaccounted income of Rs. 2,61,41,229. It was also pointed out that any penalty under the Surtax Act would not obviously be in consonance with the spirit of the settlement. The Commission also noted that in respect of the assessee's request for permission to recast its balance sheet for the various years in the light of the settlement for surtax liability may be accepted.

17. We have gone through the case laws and the decisions cited before us by both the sides and also the case laws considered by the authorities below for our consideration. It is clear that the Commission settled only matters relating to Income-tax proceedings and that too on the applications made by the assessee. In the applications of the assessee as well as in the order of the Commission, there was reference to questions of penalty, interest, etc., under the 1961 Act, on which the Commission has given its directions, In fact, it is stated at para 18 that reduction or waiver of penalty under the Surtax Act would be beyond the purview of Section 245H of the 1961 Act. It, however, recommended for sympathetic consideration of the assessee's case at the time of surtax assessments. There is no directive at all to the ITO to accept the claim of the assessee, as it has been made out by the assessee before the authorities below in the present appeals by the assessee. The Commissioner (Appeals) noted in his consolidated order that the settlement made under Section 245D(4) related to matters on the Income-tax proceedings and, therefore, in our opinion, the claim of the assessee in the present case before us cannot be conceded to. In fact, the ITO in the absence of anything to the contrary has to compute the surtax liability of the assessee as per the provisions of the Surtax Act and the rules thereunder.

18. The facts in the case of Mysore Electrical Industries Ltd. (supra) were different as outlined by the Commissioner (Appeals) in the impugned order which we consider that it is necessary to repeat here also. The facts of that case were that the profits of that company for the period ended on 31-3-1963 were ascertained and out of which certain amounts towards reserves were appropriated on 8-8-1963. The departmental case was that since the appropriation was made after the relevant accounting period, the same could not be treated as components of capital for the purpose of the Act. This stand was not accepted. But the facts of the case before us are distinguishable. The background of the case has been narrated briefly and in details in the Settlement Commission's order. The huge mass of concealed income related to several back years for which no accounts or details were available. In such a situation, and in such a different set of facts, the ratio in the case of Mysore Electrical Industries Ltd. (supra) would not be applicable. We are in agreement with the opinion of the Commissioner (Appeals) on this point also. In fact, in his written argument placed before us, it is stated that the disclosure was accepted by the Settlement Commission on 14-1-1977 and, therefore, the relevant profit was borne on 14-1-1977. In the written submissions also similar contentions were raised on behalf of the assessee.

19. Having regard to the entirety of the facts and circumstances of the case, as discussed by us in the preceding paragraph, we are of the clear opinion that this point of appeal by the assessee cannot be accepted at all. This disposes of ground No. 1 of appeals by the assessee for the years under appeal.

20. We shall now come to the next point of appeal relating to the excess tax provision, which should be considered as capital base. This point is also common to all the years under appeal. Different amounts are involved for the different relevant assessment years.

21. From the impugned order of the Commissioner (Appeals), it is seen that the assessee has raised an additional ground relating to the assessment years 1968-69 to 1972-73 to the effect that the excess taxation reserve should be considered in computing the capital base and such amount was credited to the profit and loss account of the year concerned. The Commissioner (Appeals) noted that in the balance sheet as on 31-3-1972, the taxation reserve account was shown at Rs. 22,88,400 as opening credit, less amount written back Rs. 1,54,781 to which addition on account of provision for taxation of Rs. 5,20,000 was made. Thus, there was a balance of Rs. 26,53,619 for consideration. On the basis of this written back account, the assessee claimed before the Commissioner (Appeals) that there was a reserve of Rs. 1,54,781 for the above years as on 1-4-1967, 1-4-1968, 1-4-1969, 1-4-1970 and 1-4-1971.

The assessee relied on the decision of the Hon'ble Calcutta High Court in the case of CIT v. Braithwaite, Burn & Jessop Construction Co. Ltd. [1978] 113 ITR 577. The Commissioner (Appeals) found that the facts of the assessee's case were distinguishable from those of the case relied on. He noted that the claim of the assessee was not justified. He pointed out that no part of the provision for taxation for the assessment years 1968-69 to 1972-73 could be treated as reserve merely because the assessee thought fit to write back part of it on 31-3-1972, more so in the background of the assessee's having huge concealed income and the tax liability pertaining thereto. The Commissioner (Appeals) referred to another decision of the Hon'ble Calcutta High Court in the case of A P.V. Engg. Co. Ltd. (supra). Considering the facts of the case, the Commissioner (Appeals) rejected the appeal by the assessee on this point. For all the assessment years under appeal except for the assessment year 1975-76, the assessee has raised the second ground of appeal relating to the excess of tax provision which, according to the assessee, should be allowed and considered for computation of the capital base as per details given at page 40 of the paper book. According to the assessee, the Commissioner (Appeals) was not justified in rejecting this ground of appeal raised before him. It is submitted that as far as the provision for taxation is concerned, the same cannot be treated as a reserve. But it is urged that the excess of the tax provision for a known and existing liability that would be reasonably necessary for the purpose, the excess shall have to be treated as a reserve. It is urged that the Commissioner (Appeals) wrongly declined to accept the point of the assessee, although the Commissioner (Appeals) relied on the decision of the Hon'ble Calcutta High Court in the case of A.P.V. Engg. Co. Ltd. (supra). It is urged that the facts of the case of the assessee are similar to those of Braithwaite, Burn & Jessop Construction Co. Ltd.'s case (supra). It is also urged that the Hon'ble Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. (supra) has also decided similar issue in favour of the assessee. It is urged, therefore, by the assessee's learned Counsel that the lower authorities have not seriously examined this vital point in the present case.

We have heard both the sides and have perused the orders of the authorities below for our consideration, vis-a-vis, the claim of the assessee in the light of the decisions cited earlier. The Commissioner (Appeals) has noted the facts in the case of Braithwaite, Burn & Jessop Construction Co. Ltd. (supra) are different from those of the assessee before us, and, hence, he was of the view that the ratio of the decision would not be applicable to the facts of the case. He was also of the opinion that no part of the provision for taxation for the assessment years 1968-69 to 1972-73 could be treated as a reserve merely because the assessee thought fit to write back a part of it on 31-3-1972, more so, in the background of the assessee's huge concealed income and the tax liability pertaining there to Actually, the Commissioner (Appeals) relied on the ratio of the decision of the Hon'ble Calcutta High Court in the case of A.P.V. Engg. Co. Ltd. (supra), in which, on the facts of that case, it was held that the provision for taxation was not 'reserve' within the meaning of Rule 1 of the Second Schedule to the Super Profits Tax Act, 1963. It was also observed that after providing for taxation, reserves and dividend, the amount of Rs. 11 lakhs and odd was left unappropriated without being set apart for any purpose and this amount was unappropriated profits and not 'reserve' which would not qualify as reserve. The claim of the assessee is that the Commissioner (Appeals) should have considered this aspect of the matter as well. At page 23 of the paper book, the assessee has given a different chart of the appropriation to general reserve in which it was stated that the statement of general reserve appropriation as per directors' recommendation on account for the year ended 31-3-1976 was approved by the shareholders in the annual general meeting dated 31-3-1977 as follows:Amount disclosed 2,68,67,302Less; Tax provision 1,55,42,000 __________ The balance of Rs. 1,13,15,000 was carried to the general reserve. The claim of the assessee is that there was an excess of the provision for taxation and the balance should have been treated straightaway as reserve in view of the decision in the case of Vazir Sultan Tobacco Co.

Ltd. (supra), on the facts of the present case before us, it is seen that as stated in the additional grounds of appeal by the assessee before the Commissioner (Appeals), the excess taxation reserve for the assessment years 1959-60, 1961-62 to 1965-66 for Rs. 1,54,781 was urged to be considered in computing the capital base as this amount has been credited to the profit and loss account for the year ended 31-3-1972.

As held by the Hon'ble Calcutta High Court in the case of A.P.F. Engg.

Co. Ltd. (supra), this excess amount written back by the assessee to the profit and loss account was left unappropriated which being set apart for any purpose and cannot be treated as 'reserve'. As such the conclusion of the Commissioner (Appeals) on the point is justified. Of course, the assessee has relied on the decision of the Hon'ble Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. (supra), but the facts of the case before us are distinguishable. From the facts available and the materials on record, it is seen that the excess of tax provision was written back to the profit and loss account for the year ended 31-3-1972 as reproduced in the Commissioner's order and was left unappropriated. It may be pointed out also that it was held in the case of Vazir Sultan Tobacco Co. Ltd. (supra) that an amount set apart by the board of directors of a company for liability to taxation in respect of the profits which it has earned during the year will have to be regarded as a provision for a known and existing liability, the quantification whereof has to be done later. It is, therefore, a 'provision' and cannot be regarded as a 'reserve'. The excess provision written back by the assessee in the present case was not in respect of the profits it has earned during the year and it also remained unappropriated. At page 23 of the paper book, a copy of the appropriation to the general reserve made after the settlement as indicated above, has been given. But this statement of appropriation apparently was approved by the shareholders on 31-3-1977, i.e., much after the expiry of the period relevant to the assessment years under appeal.

As indicated earlier, the Commissioner (Appeals) has mentioned that the assessee had huge concealed profits in the past for which a settlement was arrived at between the assessee and the Settlement Commission, and on the basis of that settlement, the ITO completed the present assessment. As per the terms of the settlement, such huge concealed income in the past was allowed to be spread over and the tax payment was allowed to be made in instalments. Thus, after taking into account the extent of the amount so settled, it is seen that the tax liability would be huge. The assessee could also not place any material to show that there was any excess in the tax provision for the different concerned years after meeting this liability. On behalf of the revenue, the chart as per Annexure A to the order is placed in order to stress that there could not be any excess of tax provision.

In our opinion, the tax liability may be known or quantified later on, but the incidence of tax accrued as soon as the income was earned during the concerned years. The assessee in the present case was following the mercantile basis of accounting and, hence, the tax liability had accrued during those years. In this connection, we may refer to the decision of the Hon'ble Supreme Court in the case of Kalwa Devadattam v. Union of India [1963] 49 ITR 165, in which it was held that under the Indian Income-tax Act, 1922, the liability to pay Income-tax arises on the accrual of the income and not from the computation made by the taxing authorities in the course of the assessment proceedings: it arises at a point of time not later than the close of the year of account. Similar is the view of the Hon'ble Allahabad High Court in the case of Balraj Virmani v. CIT[1974] 97 ITR 69 in which it was held that since the assessee followed mercantile system of accounting the interest income on the facts of that case became an accrued income assessable to tax even if it has not been received. In that view of the matter, the huge concealed profits of the assessee for the different years as per the settlement made was saddled with the tax liability at the close of those relevant years, although the quantification of the same was made at a much later date.

Therefore, on the facts of the case before us, we are of the opinion that the claim of the assessee in respect of the excess tax provision for the purpose of surtax as discussed briefly above, cannot be conceded to.

There is another ground of appeal relating only to the assessment years 1973-74, 1974-75 and 1975-76, relating to the claim of the assessee that without prejudice to the claim of the assessee regarding excess tax provision as discussed in preceding paragraphs, different amounts as mentioned in the grounds of appeal, should be deducted from the cost of investment in terms of Rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act. Such amount of investment was shown at Rs. 11,90,411, Rs. 18,95,403 and Rs. 15,47,972 for the above three years, respectively.

The claim before the Commissioner (Appeals) was for the deduction of the cost of investment in computing the capital under the above Schedule. The Commissioner (Appeals) noted that the ITO has deducted various amounts being cost of investment in calculating the capital for each year noting that as 'interest on securities' and 'dividends' on shares of companies was deducted in computing the chargeable profits under Rule 1 (vi) and Rule 1(viii) of the First Schedule to the Surtax Act, the capital also was diminished by the cost of investment in shares and securities as on the first day of the previous year under Rule 2 of the Second Schedule to the Surtax Act. The Commissioner (Appeals) pointed out that the ITO lost sight of the fact that what was to be deducted was the cost of the investments less the sum of money borrowed and the remaining outstanding loans on the first day of the previous year and also the amount of any fund, any surplus and any such reserve as is not to be taken into account in computing the capital under Rule 1.

It was pointed out on behalf of the assessee that there were loans outstanding for various years which were not taken into account in working out the deduction as discussed above. The Commissioner (Appeals) perused the balance sheet and found that the point of the assessee was correct. He noticed that there were loans outstanding for various years, which were not considered by the ITO and he has deducted the gross cost of the investment. He noted the figures relevant to the different years. Having regard to the facts of the case, the Commissioner (Appeals) directed the ITO to recalculate the deduction under Rule 2 of the Second Schedule to the Surtax Act correctly and after giving the assessee an opportunity of being heard. The case of the assessee before us is that in any view of the matter, those amounts mentioned in the grounds of appeal should be deducted from the cost of the investment.

We have gone through the orders of the authorities below for our careful consideration along with the claims of the assessee made for the different years under appeal. Having regard to the findings and observations of the Commissioner (Appeals) in the impugned order, we are of the opinion that the Commissioner (Appeals) was justified and fair in directing the ITO to recalculate the amount on account of the cost of investment after considering the outstanding loans, etc., as per law and after giving the assessee an opportunity of being heard. In the absence of basic materials and facts, it would not be possible for us to decide the issue either way. Accordingly, this direction of the Commissioner (Appeals) is sustained.

In the result, all the grounds of appeals by the assessee for all the years before us are dismissed.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //