Skip to content


Parle Products (P.) Ltd. Vs. First Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1985)14ITD257(Mum.)
AppellantParle Products (P.) Ltd.
RespondentFirst Income-tax Officer
Excerpt:
.....under rule 2 of the second schedule. according to him, rule 2 provided for the exclusion of the cost of assets from the capital, the income from which was to be excluded while computing the chargeable profits under rule 1 of the first schedule. he held that the capital shall have to be reduced by the cost of the assets in question whether there was any income or not from those assets as rule 1 of the first schedule required the exclusion of such income in the computation of the chargeable profits.3. on appeal, the commissioner (appeals) agreed with the ito. he did not agree with the submission of the appellant that for the exclusion of the cost of the assets in question from the capital, the assets should have yielded some income which was actually excluded in the computation of the.....
Judgment:
1. This appeal under the Companies (Profits) Surtax Act, 1964 ('the Act') is against the order of the Commissioner (Appeals) in his appeal No. CIT(A)VI/ST of 1982-83 dated 14-2-1983 relating to the assessment year 1979-80. An interesting question has arisen for our consideration, namely, whether in computing the capital of a company for the purposes of surtax under Rule 2 of the Second Schedule to the Act, the amount of capital computed under Rule 1 of the said Schedule shall be diminished by the cost of the assets as on the first day of the previous year owned by it, the income from which, in accordance with Clause (iii) or Clause (vi) or Clause (viii) of Rule 1 of the First Schedule to the Act, is required to be excluded from its total income in computing its chargeable profit, even though the assets in question did not yield any income during the previous year and, consequently, there was no question of excluding such income from the total income of the company in arriving at the chargeable profits. The facts relating to this issue are briefly as under.

2. The appellant computed its capital under the Second Schedule at Rs. 4,69,99,606 and claimed standard deduction at 15 per cent thereof, namely, Rs. 70,49,941. The investments of the company consisting of debentures, Government securities and shares of subsidiary companies were of the value of Rs. 67,73,775 as on the first day of the previous year. The appellant did not reduce the capital as computed under Rule 1 of the Second Schedule by the cost of investments as the income from these investments as required to be excluded from the total income in accordance with Clause (iii), Clause (vi) and Clause (viii) of Rule 1 of the First Schedule in computing its chargeable profits. According to it, since these investments did not yield any income during the year, the question of excluding any income from the investments under Clause (iii), Clause (vi) and Clause (viii) of Rule 1 of the First Schedule while computing the chargeable profits did not arise. Since there was no income from these investments to be excluded while computing the chargeable profits under the First Schedule, the stand of the company was that the corresponding reduction of the cost of the assets in question while computing the capital under Rule 2 of the Second Schedule was not necessary or, in other words, obviated. The ITO did not agree with this view. He disminished the capital by the cost of investments as reduced by borrowings as required under Rule 2 of the Second Schedule. According to him, Rule 2 provided for the exclusion of the cost of assets from the capital, the income from which was to be excluded while computing the chargeable profits under Rule 1 of the First Schedule. He held that the capital shall have to be reduced by the cost of the assets in question whether there was any income or not from those assets as Rule 1 of the First Schedule required the exclusion of such income in the computation of the chargeable profits.

3. On appeal, the Commissioner (Appeals) agreed with the ITO. He did not agree with the submission of the appellant that for the exclusion of the cost of the assets in question from the capital, the assets should have yielded some income which was actually excluded in the computation of the chargeable profits. He was of the opinion that the mere existence of such assets was sufficient to attract Rule 2 of the Second Schedule. Moreover, he also relied on the decisions of the Karnataka High Court in CIT v. United Breweries Ltd. [1978] 114 ITR 901 and the Calcutta High Court in Nav Bharat Vanijya Ltd. v. CIT [1980] 123 ITR 865 (Cal.).

4. Aggrieved with this decision, the assessee is in appeal before us.

The submissions made in this behalf by Shri N.J. Damania may be summarised as under : Rule 2 of the Second Schedule requiring exclusion of the cost of the assets from the capital as computed under Rule 1 of the said Schedule, the income from which is required to be excluded in accordance with Clause (iii), Clause (vi) or Clause (viii) of Rule 1 of the First Schedule in computing chargeable profits will come into operation only, when there was actually income with reference to those assets which required exclusion under Rule 1 of the First Schedule. In the present case, the assets in question did not yield any income which required exclusion under Rule 1 of the First Schedule. Consequently, Rule 2 of the Second Schedule will have no operation. In other words, his submission was that whenever there was any income from the assets in question, which was actually excluded in the computation of the chargeable profits, then only the capital as computed under Rule 1 of the Second Schedule shall be diminished by the cost of the said assets, as on the first day of the previous year. In other words, he submitted that the exclusion or inclusion of the assets in the capital base would vary from* year to year, depending upon whether the assets in question yielded any income or otherwise requiring exclusion of the same in computation of the chargeable profits under Clauses (ii), (vi) or (viii) of Rule 1 of the First Schedule. Our attention was invited to the judgment of the Madras High Court in Addl. CIT v. Madras Motor & General Insurance Co. Ltd. [1979] 117 ITR 354 supporting this proposition.

Alternatively he submitted that, in any event, the cost of the assets shall not include the value of debentures in Industrial Credit and Investment Corporation of India of the extent of Rs. 4,61,500 as they do not partake of the character of the assets referred to in Clause (iii) or (vi) or (viii) of Rule 1 of the First Schedule.

5. The learned departmental representative relied on the orders of the lower authorities and submitted that the decision of the Karnataka High Court in United Breweries Ltd.'s case (supra) laid down the correct view in this regard.

6. We have carefully considered the rival submissions and also the authorities relied upon by either side. The interpretation sought to be placed on Rule 2 of the Second Schedule on behalf of the appellant would, in our view, lead to an anomalous state of affairs, which is not intended either in Rule 1 of the First Schedule or Rule 2 of the Second Schedule. According to the learned representative for the appellant, the exclusion or inclusion of the cost of the assets in question in the capital of the company would depend upon the presence or absence of income from the assets in question. If this view is accepted, in the year in which there is income from the assets in question which has to be excluded under Rule 1 of the First Schedule in the computation of chargeable profits, the capital under Rule 2 of the Second Schedule will have to be reduced by the cost of such assets. In any year in which there is no such income, which requires exclusion from the computation of chargeable profits, the capital for the purposes of Second Schedule would include the cost of such assets. Such alternative results in different years is not, according to us, the real import or intention of the rules under both these Schedules. A reference to Rule 2 indicates that the reduction of the capital by the cost of the assets in question is not at all dependent upon the yield or absence of yield of income from such assets. The operative part of the rule is as under : 2. 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 of this Schedule shall be diminished by the cost to it of the said assets.

7. A reference to Rule 1 of the First Schedule is also quite revealing in this context. The said rule is as under : 1. Income, profits and gains and other sums falling within the following clauses shall be excluded from such total income, namely : - (vi) income chargeable under the Income-tax Act under the head 'Interest on securities' derived from any security of the Central Government issued or declared to be income-tax free, or from any security of a State Government issued income-tax free, the income-tax whereon is payable by the State Government ; (viii) income by way of dividends from an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends within India ; Rule 1 as well indicates that the income referred to in the sub-clauses shall be excluded from the total income in computing the chargeable profits. If these two rules are read together, there is absolutely no basis to come to the conclusion that only when there is a physical exclusion of the income, if any, from these assets in the computation of the chargeable profits, Rule 2 of the Second Schedule would come into operation. If these rules are read without straining their meaning, the only inference possible is that the capital shall be ascertained after reducing the same by the cost of assets, the income from which is not includible in the chargeable profits. This is quite rational as the incidence of surtax is on profits other than those referred to in Rule 1 of the First Schedule. The Karnataka High Court had to consider an identical question in the case of United Breweries Ltd. (supra). After considering the salient aspects, their Lordships have laid down as under : ...What Rule 2 of the Second Schedule says is that where a company owns any assets the income from which in accordance with Clause (Hi) 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 circumstance that the assets in 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 First Schedule, the cost of the said asset to the assessee should be deducted from the capital as determined under Rule 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 Rule 1 (viii) of the First Schedule for purposes of Rule 2 of the Second Schedule.

We are of the opinion that under Rule 2 of the Second Schedule of the Act, the sum of Rs. 26,33,201 representing 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 should 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. (p. 904) The Calcutta High Court in Nav Bharat Vanijya Ltd.'s case (supra) has come to a similar finding. No doubt, the Madras High Court in Madras Motor & General Insurance Co. Ltd.'s case (supra) has taken a different view in this regard. With great respect, we follow the Karnataka and the Calcutta High Courts decisions in this respect. Accordingly, we confirm the view taken by the ITO as well as the Commissioner (Appeals) with regard to the exclusion of the cost of the investments from the capital base.

8. As regards the alternative contention, we agree with the learned representative for the assessee, inasmuch as the debentures of ICICI do not partake of the character of the items mentioned in Clause (iii) or (vi) or (viii) of Rule 1 of the First Schedule. As such, we are of the opinion that the cost of investments should be taken as reduced by the sum of Rs. 4,61,500 for purposes of arriving at the capital base under the Second Schedule.


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