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Punjab National Bank Vs. Surtax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Delhi
Decided On
Judge
Reported in(1985)14ITD450(Delhi)
AppellantPunjab National Bank
RespondentSurtax Officer
Excerpt:
.....rejected.13. the third ground is in respect of the dividend income. for working out the chargeable profits, rule 1(viii) provides for deduction of income by way of dividend from an indian company. the question arose whether the gross income was to be so deducted or the income arrived at after deducting the expenses. before the commissioner (appeals), reliance was placed on the decision of the supreme court in the case of cloth traders (p.) ltd. (supra), the commissioner (appeals) held that the gross amount of dividends should be deducted in working out the chargeable profits and, thus, he allowed a reduction of rs. 4,850 in the working of the chargeable profits.14. the departmental representative has referred to the amendment made in the income-tax act by insertion of section 80aa which.....
Judgment:
1. These are two cross-appeals, one by the assesses and the other by the department, both directed against the order of the Commissioner (Appeals) in respect of the surtax assessment for the assessment year 1979-80.

2. The assessee is a banking company and the accounting period ended on 31-12-1978. For the purpose of surtax liability, the assessee had claimed before the STO/ITO that the chargeable profits should be computed by treating contingency reserve and foreign exchange fluctuation reserve as reserves and should, therefore, be deducted from the income as per profit and loss account. The ITO, however, did not accept the plea of the assessee and while he allowed the deduction in respect of general reserves, he did not treat contingency reserve, foreign exchange fluctuation reserve and development rebate reserve for the purpose, of computing the chargeable profits of the company.

Similarly, for computing the capital of the assessee for working out the statutory deduction the ITO deducted the balances in the contingency reserve account, foreign exchange fluctuation reserve account and development rebate reserve account. After, reducing the above amounts from the capital as shown by the assessee the standard deduction was computed.

3. The assessee filed an appeal before the Commissioner (Appeals). The contention of the assessee was both in respect of computation of chargeable profits as well as computation of capital. It was contended that for the purpose of chargeable profits, the amounts transferred to contingency reserve, the amount transferred to foreign exchange fluctuation reserve and amount transferred to development reserves should be deducted. For this purpose, reliance was placed on the decision of the Delhi High Court in the case of the assessee for the assessment year 1963-64. - This case is reported in Addl. CIT v. Punjab National Bank [1983] 142 ITR 673 (Delhi). In that case a question arose whether contingency reserve was to be treated as a reserve and the amount transferred to contingency reserve was to be deducted from the chargeable profit. The High Court had upheld the order of the Tribunal holding that contingency reserve was a reserve within the meaning of the Companies (Profits) Surtax Act, 1964 ('the Act'). In respect of the other two accounts, the reliance was placed on the orders passed in the earlier two years. The Commissioner (Appeals) accepted this plea of the assessee and held that contingency reserve, foreign exchange fluctuation reserve and development rebate reserve were reserves and the amounts transferred to them have to be taken into consideration for this purpose.

4. The Commissioner (Appeals) considered the provisions of the First Schedule to the Act. The First Schedule lays down the rules for computing the chargeable profits. It is laid down that in computing the chargeable profits the total income computed under the Income-tax Act, 1961 has to be adjusted and the following sums have to be excluded from such total income. In the case of a banking company, the exclusion was in the following terms : (i) any income chargeable under the Income-tax Act under the head 'Capital gains' ; (ii) any compensation or other payment as is referred to in Clause (ii) of Section 28 of the Income-tax Act; (iv) any income referred to in Sub-section (2) of Section 41 of the Income-tax Act; (v) [omitted by the Finance (No. 2) Act, 1967, with effect from 1-4-1968 ;] (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 ; (vii) an amount equal to fifty per cent of the sum with reference to which a deduction is allowable to the company under the provisions of Section 80G of the Income-tax Act ; (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 ; (ix) income by way of royalties received from Government or a local authority or any Indian concern ; (x) in the case of a non-resident company which has not made the prescribed arrangements for the declaration and payment of dividends within India, its income by way of any interest or fees for rendering technical services received from Government or a local authority or any Indian concern ; (a) any sum which during the previous year is transferred by it to a reserve fund under Sub-section (1) of Section 17 of the Banking Companies Act, 1949 (10 of 1949), or is deposited by it with the Reserve Bank of India under Sub-clause (ii) of Clause (b) of Sub-section (2) of Section 11 of that Act ; not exceeding the amount required under the aforesaid provisions to be so transferred or deposited, as the case may be, or (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 insofar 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 insofar as the aggregate of such sums does not exceed the highest of the aggregate of such sums, if any, so transferred during any one of the three years prior to the previous year, whichever, is higher; The Commissioner (Appeals) observed that Rule 1(xi)(a) and Rule 1(xi)(b) of the First Schedule to the Act were alternative provisions and the banking company can either claim the sum transferred to a reserve fund under Sub-section (1) of Section 17 of the Banking Companies Act, 1949 or deposited with the RBI under Section 11 of that Act. In the alternative, the banking company could claim the exclusion of any sum transferred to any reserve in India including reserves not shown in the published balance sheet insofar 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 the total income under the Income-tax Act. For the first type of reserve, there was a limit that it could not exceed the amount required under the aforesaid provisions requiring the transfer or deposit of the amounts. For the second type of reserves, it was provided that the aggregate of such sums should not exceed the highest of the aggregate of such sums, if any, so transferred during any one of the three years prior to the previous year. The banking company could claim the higher of the two alternatives as a deduction. The Commissioner (Appeals) was of the view that under rule (1)(xi)(b), the reserves falling under Section 17 of the Banking Companies Act could not be included. He referred to the language of the provision and particularly referred to the words 'whichever is higher* and inferred that the sums falling under Clause (a) and sums falling under Clause (b) were mutually exclusive and Clause (b) could not include the sums falling under Clause (a) also. It was pointed out by the Commissioner (Appeals) that if the contention of the assessee was to be accepted, the expression 'whichever is higher' will cease to have any meaning and such an interpretation could not be accepted. The Commissioner (Appeals), therefore, held that the assessee was entitled to claim either the reserves statutorily transferred under Section 17(1) or the other reserves created during the year subject to the limitations and restrictions laid down in the said rule. Having come to this conclusion, the Commissioner (Appeals) ascertained the amounts transferred to the reserves other than the statutory reserves in the earlier three years, After ascertaining it he directed that as against Rs. 590.82 lakhs transferred to the other reserves in this year, the assessee was entitled for a deduction of Rs. 534.78 lakhs which had been transferred to reserves in 1977. As the ITO had merely allowed a deduction of Rs. 85 lakhs in the computation of chargeable profits, the Commissioner (Appeals) directed that a further amount of Rs. 449 J8 lakhs should be further deducted in computing the chargeable profits.

5. The Commissioner (Appeals) also considered the treatment of the balance in the contingency reserve, foreign exchange fluctuation reserve and development reserve as on 1-1-1978 in the computation of capital under the Second Schedule to the Act. Relying on the Delhi High Court's decision in the case of the assessee, the Commissioner (Appeals) held that the balances in these accounts had to be treated as interest and were forming part of the capital for working out the standard deduction.

6. Another question which came up for consideration before the Commissioner (Appeals) was regarding the deduction under Rule 1(viii).

This provides for the exclusion of income by way of dividends from an Indian company. The question was whether the amount of gross dividend was to be deducted or the amount of income after deducting expenses.

The Commissioner (Appeals) referred to the decision of the Supreme Court in the case of Cloth Traders (P.) Ltd. v. AM. CIT[1979] 118 ITR 243 and also the decision of the Madras High Court in the case of CIT v. Madras Motor & General Insurance Co. Ltd. [1975] 99 ITR 243. He, therefore, directed that the gross amount of dividend be deducted and, thus, the further amount of Rs. 4,850 should be reduced from the computation of chargeable profits.

7. It is against this order of the Commissioner (Appeals) that both the parties are in appeal before us. The ground taken by the assessee is as under: 2. That the learned Commissioner of Income-tax (Appeals) was not justified in restricting deduction in respect of amounts transferred to 'Reserves', during the current year, out of the chargeable profits, to Rs. 534.78 lakhs as against Rs. 603.28 lakhs claimed by the appellant. The learned Commissioner of Income-tax (Appeals) has erred in restricting the deduction under Sub-rule (xi) of Rule 1 of the First Schedule to higher of the amounts under Clause (a) and Clause (b) of rule (1). The learned Commissioner (Appeals) has thereby erroneously excluded the amount transferred to 'Statutory reserves' from the deductible amounts of reserves.

3. That the learned Commissioner (Appeals) has failed to appreciate the significance of the words 'any reserves' appearing in Clause (b) of Sub-rule (xi) of Rule 1 of the First Schedule and has erroneously equated these words to 'any other reserves'. It is prayed that the words 'any reserves' appearing in Clause (b) of Sub-rule (xi) of Rule 1 of the First Schedule would include the amount transferred to the 'Statutory reserves'. It is prayed that the deduction of Rs. 603.28 lakhs as claimed be allowed.

The learned counsel for the assessee submitted before us that the Commissioner (Appeals) erred in restricting the deduction under Rule 1(xi) by deducting only the higher of the two sums falling under Rule 1(xi)(a) and Rule 1(xi)(b). It was submitted that the Commissioner (Appeals) had excluded the statutory reserves from the deductible amounts. In this connection, it was pointed out that the language of Rule 1(xi)(b) was very clear and it uses the words 'any sum transferred by it during the previous year to any reserves'. He contended that the language used was not 'any other reserves'. It was, therefore, submitted that the implied language should include the amount transferred to the statutory reserves also. On this interpretation, it was submitted that the deduction from the chargeable profits would come to Rs. 603.28 lakhs.

8. The departmental representative submitted that the language of the relevant rule was very clear and the two deductions were alternative to each other as the language was disjunctive. Relying on the order of the Commissioner (Appeals), it was submitted that the claim of the assessee that both could be allowed, ran contrary to the language and spirit of the provision. In this connection, it was submitted that the assessee's reliance on the Finance Minister's speech delivered in 1963 is not of much help and the language of the statute itself should be interpreted.

It was, therefore, contended that the Commissioner (Appeals) was justified in directing the computation of chargeable profits in the manner that he did.

9. We have carefully considered the rival submissions and we have perused the provisions of the First Schedule. The language of Rule 1(xi) provides for the computation of chargeable profits in the hands of the banking company. It is very clear from the language of this sub-rule that from the total income computed under the Income-tax Act, one of the two deductions as laid down in Sub-rule (xi) has to be deducted. The sum to be deducted would fall either under Clause (a) or under Clause (b). They too also have been provided with their own limitations. The sub-rule further provides that only the higher of the two could be allowed as a deduction. The contention of the learned counsel for the assessee that under Rule 1(xi)(b), the statutory reserves falling under Clause (a) would also be covered, cannot be accepted. We agree with the Commissioner (Appeals) that the language used is very clear and the sums under Clauses (a) and (b) have to be ascertained and the higher of the two has to be allowed as a deduction.

The interpretation which the assessee wants us to place on this provision would make it anomalous. Under Rule 1(xi)(a), the reserve to be deducted is as provided in Section 17(1) of the Banking Companies Act. That section provides that every banking company shall create a reserve fund out of its profits by transferring a sum equivalent to not less than 20 per cent of its profits. The RBI had the power to modify or cancel the requirement in a particular case. If the banking company transfers a higher amount, the deduction to be allowed could be only the amount which is required to be so transferred. It was so decided by the Andhra Pradesh High Court in the case of CIT v. Andhra Bank Ltd. [1984] 18 Taxman 210.

10. As an alternative to the above deduction, Rule 1(xi)(b) provides for deduction of transfers to reserves in India if such reserves were attributable to the income chargeable to tax under the Income-tax Act and had not been allowed as a deduction in computing its total income under that Act. This provision also limits the deduction by providing that the sum to be deducted was not to exceed the highest of the aggregate of such sums so transferred during any one of the three years prior to the previous year. After ascertaining the sums, which falls under Clause (a) or (b), the higher of the two has to be allowed as a deduction. We may clarify that this issue had not been decided by the Tribunal in the case of the assessee or by the Delhi High Court when the matter was decided by them in Punjab National Bank's case (supra).

The question which arose for consideration was about the nature of the contingency reserve account and charity reserve account. While deciding this question, their Lordships observed that there was no known liability or contingency which could make this account as a provision.

Their Lordships held that describing it as a contingency reserve could not make it a provision as the contingency was only a possible contingency. In respect of the charity reserve, it was held by the High Court that there was no existing liability and, therefore, it was a reserve. The question of the deduction under Rule 1(xi)(a) or (b) did not as such arise either before the Tribunal or before the High Court.

Even in the later years in the case of the assessee-company, this question has not arisen in this manner. We have looked into the directions given by the learned Commissioner (Appeals) and we find that he has ascertained as to which sum was higher of the two and he has directed that the higher amount should be deducted in computing the chargeable profits. The direction of the learned Commissioner (Appeals) is in accordance with law and we do not find any merit in the submission of the learned counsel for the assessee that while working out the deduction under Rule 1(xi)(b), the contingency reserves under Clause (a) should also be included. On this point, therefore, we uphold the order of the learned Commissioner (Appeals).

11. This takes us to the departmental appeal. The grounds taken by the department are as under : 1. On the facts and in the circumstances of the case, the Commissioner of Income-tax (Appeals) erred in holding that the amounts transferred to the 'Contingency Reserve', 'Foreign Exchange Fluctuation Reserve' and 'Development Reserve' should be treated as sums transferred to reserves for the purpose of Rule 1(xi)(b) of the First Schedule to the Companies (Profits) Surtax Act, 1964 and were deductible in computing chargeable profits under the Act.

2. On the facts and in the circumstances of the case, the Commissioner of Income-tax (Appeals) erred in holding that the amounts standing to the credit of the 'Contingency Reserve', 'Foreign Exchange Fluctuation Reserve' and 'Development Reserve' as on 1-1-1973 are to be taken into account in computing the capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964.

3. On the facts and in the circumstances of the case, the Commissioner of Income-tax (Appeals) erred in directing that the amount of Rs. 4,850 is to be excluded under Rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964 in computing chargeable profits under the Act.

The first two grounds related to the treatment of contingency reserve, foreign exchange fluctuation reserve and development reserve for the purpose of computation of chargeable profits as well as the capital. As pointed out by the learned Commissioner (Appeals), the question of contingency reserve had already arisen in the year 1963-64 and the matter was decided by the Hon'ble Delhi High Court in Punjab National Bank's case (supra). The nature of this account has not changed since then. The other two accounts are also of similar nature. They are not in the nature of provision as no existing liability is connected with them. The question of reserve or provision was considered by the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559. Their Lordships have held that whereas a provision is the charge against the profit to be taken into account against gross receipts in the profit and loss account, a reserve is an appropriation of profit or assets by which it is represented is retained to form part of the capital employed in the business. The Supreme Court observed that the true nature and character of the appropriation must be determined with reference to the substance of the matter and surrounding circumstances have to be looked into for this purpose.

Their Lordships laid down some guidelines as under : (a) The mass of contributed profit cannot automatically become a reserve.

(b) There should be a clear conduct on the part of the directors to create a reserve. Where the amount is set apart for a specific liability, it is a provision and not a reserve. If a provision for known or existing liability is made in excess of the amount, that would be necessary for this purpose, the excess should be treated as a reserve.

12. Applying the above principles, we have no hesitation in upholding the order of the learned Commissioner (Appeals) that the contingency reserve, foreign exchange fluctuation reserve and development reserve were in the nature of reserves and amounts transferred to these reserves had to be deducted in computing the chargeable profits and the amount to the balance of these accounts were to be treated as part of the capital for the purpose of the Second Schedule. These two grounds are, therefore, rejected.

13. The third ground is in respect of the dividend income. For working out the chargeable profits, Rule 1(viii) provides for deduction of income by way of dividend from an Indian company. The question arose whether the gross income was to be so deducted or the income arrived at after deducting the expenses. Before the Commissioner (Appeals), reliance was placed on the decision of the Supreme Court in the case of Cloth Traders (P.) Ltd. (supra), the Commissioner (Appeals) held that the gross amount of dividends should be deducted in working out the chargeable profits and, thus, he allowed a reduction of Rs. 4,850 in the working of the chargeable profits.

14. The departmental representative has referred to the amendment made in the Income-tax Act by insertion of Section 80AA which had retrospective effect. This provided that the deduction under Section 80M of that Act was to be made in respect of the dividend income as computed in accordance with the provisions of the Income-tax Act and not with reference to the gross amount of such dividends. He submitted that in view of this amendment the order of the Commissioner (Appeals) was wrong. On behalf of the assessee, however, our attention has been drawn to the fact that for the purpose of surtax, there was an amendment in the computation of chargeable profits by adding an Explanation to Rule 1 of the First Schedule. This Explanation reads as under : Explanation : Notwithstanding anything contained in any clause of this rule, the amount of any income or profits and gains which is required to be excluded from the total income under that clause shall be only the amount of such income or profits and gains as computed in accordance with the provisions of the Income-tax Act (except Chapter VIA thereof), and in a case where any deduction is required to be allowed in respect of any such income or profits and gains under the said Chapter VIA, the amount of such income or profits and gains computed as aforesaid as reduced by the amount of such deduction.

It was submitted that this Explanation has been given effect from 1-4-1981 and not from 1-4-1968 as in the case of Section 80AA. It was, therefore, contended that only from the assessment year 1981-82 the position would change for the purposes of the Act but before that, the gross amount has to be so deducted.

15. Having considered the facts, we find force in the submission of the learned counsel for the assessee as the statute itself has provided for the changed computation from 1-4-1981 only. It follows that for the earlier period the computation would be different and the gross amount could be deductible. We, therefore, uphold the order of the learned Commissioner (Appeals) on this point.

16. In the result, the order of the Commissioner (Appeals) is upheld and both the appeals are dismissed.


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