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income-tax Officer Vs. South Indian Bank Ltd - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Cochin
Decided On
Judge
Reported in(1985)14ITD1a(Coch.)
Appellantincome-tax Officer
RespondentSouth Indian Bank Ltd
Excerpt:
.....rs. 4,56,000, which the assessee had transferred to the reserve fund, should be excluded from the total income of the assessee as computed under the income-tax act, 1961 ('the 1961 act'). the assessee had claimed that the transfer of the amount was under section 17(1) of the banking companies act, 1949. the claim was rejected by the ito on the ground that the transfer of the amount by the assessee was not from the total income of the assessee for the previous year. the commissioner (appeals) held that the amount transferred should be excluded from the total income even if the transferred amount did not come from out of the income of the previous year. aggrieved by the same, the department has come up in appeal.2. the grounds taken by the department are to the effect that the.....
Judgment:
1. This appeal by the department relates to the assessment year 1976-77, for which the previous year ended on 31-12-197$. The assessee is a banking company. The assessee claimed that in working out the chargeable profits of the assessee under the First Schedule to the Companies (Profits) Surtax Act, 1964 ('the Act') a sum of Rs. 4,56,000, which the assessee had transferred to the reserve fund, should be excluded from the total income of the assessee as computed under the Income-tax Act, 1961 ('the 1961 Act'). The assessee had claimed that the transfer of the amount was under Section 17(1) of the Banking Companies Act, 1949. The claim was rejected by the ITO on the ground that the transfer of the amount by the assessee was not from the total income of the assessee for the previous year. The Commissioner (Appeals) held that the amount transferred should be excluded from the total income even if the transferred amount did not come from out of the income of the previous year. Aggrieved by the same, the department has come up in appeal.

2. The grounds taken by the department are to the effect that the Commissioner (Appeals) erred in holding that the amount transferred to the reserve fund can be excluded from the total income even if it did not form part of the total income assessed to income-tax and that the Commissioner (Appeals) also erred in holding that the assessee had transferred the amount under Section 17(1).

3. At the time of the hearing of the appeal, it was conceded by the learned counsel for the assessee that the transfer of the amount was not out of the income of the assessee for the previous year as assessed to income-tax.

4. Before dealing with the contentions advanced by the parties, it will be useful to refer to the scheme of the Act. Under Section 4 of the Act, the charge of surtax is in respect of the 'chargeable profits' of the assessee for the previous year to the extent it exceeded the statutory deduction. The term 'chargeable profits' is defined in Section 2(5) of the Act, as the total income of the assessee computed under the 1961 Act for the previous year as adjusted in accordance with the provisions of the First Schedule. The dispute in the present appeal relates to the adjustment as per the rules of the First Schedule. The term 'statutory deduction' has been defined in Section 2(8) of the Act.

It has to be worked out as per the provisions of the Second Schedule of the Act and this working is not at issue in the present appeal.

5. The First Schedule contains the rules for computing the chargeable profits. The provisions which are relevant for the purpose are the following : In computing the chargeable profits of a previous year, the total income computed for that year under the Income-tax Act shall be adjusted as follows : 1. Income, profits and gains and other sums falling within the following clauses shall be excluded from such total income, namely :- (b) any sum transferred by it during the previous year to any reserves in India including reserves not shown as such in its published balance sheet in so far as the sums transferred to such reserves are attributable to income chargeable to tax under the Income-tax Act and have not been allowed as a deduction in computing its total income under that Act, and in so far as...

In view of the admission by the assessee that the transfer of the amount was not from out of the income of the previous year, it was not a transfer under Section 17(1) of the Banking Companies Act. Sub-clause (a) of Clause (xi) of Rule 1 of the First Schedule is not, therefore, attracted to the present case. The transfer could come only under Sub-clause (b) which has been extracted above.

6. The contention of the department is that Rule 1 of the First Schedule provides for exclusion of income which has been included in the total income of the previous year and that there can be no exclusion under Rule 1, if the amount had not formed part of the income of the previous year. On the other hand, the contention of the assessee was that Rule 1 provides for the exclusion of not only 'income, profits and gains' but also 'other sums' falling within the clauses and that while the 'income, profits and gains' to be excluded may be those which have been included in the income of the previous year, the 'other sums' cover amounts which had not formed part of the income of the previous year. In this context, it was contended by the learned counsel for the assessee that the words 'income, profits and gains' are more than sufficient to cover the income of the previous year that there would have been no other item of income in the previous year which would have fallen outside the scope of the expression 'income, profits and gains' and that the expression 'other sums must, therefore, refer to an item which did not form part of the income of the previous year. In reply, it was contended by the department that rule relates only to exclusion, that the question of exclusion arises only if the amount had been included in the income, that with regard to deductions, it is governed by Rule 2 and that Rule 1 of the First Schedule exclusively relates to exclusion of what was included in the income of the previous year.

7. On a careful consideration of the matter, we are inclined to accept the contention of the department. As already stated, the charge of surtax is on the chargeable profits and this is to be computed as per the rules in the First Schedule. The opening portion of the First Schedule provides that in computing the chargeable profits of a previous year, the total income computed for that year under the 1961 Act shall be adjusted by excluding from such total income, the items mentioned in Clauses (i) to (xii) of Rule 1 of the First Schedule. Rule 1 does not speak of any deduction from the income of the previous year.

On the other hand, Rule 2 specifically deals with deductions from the balance of the total income of the previous year after the exclusions contained in Rule 1. It is, therefore, clear that Rule 1 relates to exclusion of what has been included in the computation of the total income for the previous year. Dealing with the adjustments to be made under Rules 1 and 2, it is stated in the Three New Taxes, 1979 Fifth edn. by Sampath lyengar as under : ...The broad differentiating principle between these two kinds of adjustments is that 'reductions' are of tax liabilities, while 'exclusions' in general are of certain types of income included in the calculation of 'total income' under the Income-tax Act. (p. 387) The commentaries on the various clauses of Rule 1 will show that the scheme of the rule is that although these items constitute income for the purpose of the 1961 Act, the Legislature thought it fit to exclude those items while levying surtax. The scheme of Rules 1 and 2 is, therefore, to exclude under Rule 1 certain items of income which have been included in the income-tax assessment and to reduce the balance amount by the items of tax amounts mentioned in Rule 2. It is also clear from a perusal of the provisions that the exclusion under Rule 1 is from the total income computed for the previous year. This is clear from the use of the expression 'shall be excluded from such total income'. 'Such total income' can only mean the total income computed for the previous year. This is confirmed by the fact that in the earlier portion, the expression used is 'total income computed for that year'. 'That year' clearly refers to the 'previous year' occurring earlier.

8. In the light of what is stated above, we are not inclined to give the term other sums in Rule 1, the scope or importance which the learned counsel for the assessee wanted to give. It has been found that what is excluded by the rule is what has been included in the total income of the previous year and the expression 'other sums' must necessarily relate to a sum which has been included in the income of the previous year. It is not possible to accept the contention of the learned counsel for the assessee that the expression 'other sums' is intended to indicate something other than the income of the previous year. It has to be noted that in Rule 1, the Legislature has not stopped by using the word 'income' which was quite sufficient to cover all items of income which could be brought to tax under the 1961 Act, in view of the inclusive definition of the term under Section 2(24) of the 1961 Act. The definition is operative for the Surtax Act also in view of Section 2(9). The expression used by the Legislature in Rule 1 in the First Schedule is 'income, profits and gains and other sums'.

The rule of ejusdem generis will apply to the interpretation of the words 'other sums'. It should, therefore, be sums which are akin to 'income, profits and gains', which are included in the total income of the previous year. As admittedly, the amount transferred to the reserve fund has not come out of the total income of the previous year, as computed under the 1961 Act, it cannot be excluded from such total income under Rule 1 of the First Schedule. The assessee's claim for exclusion of the amount has, therefore, to fail.


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