The petitioner, the Hindustan Sugar Mills Limited, is engaged in the manufacture of sugar and its bye-products. Its total income for the accounting year July 1, 1953, to June 30, 1954, was Rs. 37,02,444. Taxes payable on this amount came to about Rs. 16,08,250. This left distributable surplus of Rs. 20,94,195, out of which Rs. 9,25,000, which is 45 per cent. of the distributable surplus, was the amount distributed as dividend. The assessment year is 1955-56.
On June 28, 1955, the petitioner moved an application before the Commissioner of Income-tax under sub-section (3) of section 23A of the Income-tax Act, 1922, that it may be exempted from declaring a further dividend, than what it had declared already out of the distributable surplus, for the assessment year 1955-56, on the grounds (a) that the value of the fixed asset comes to Rs. 81,17,459, whereas its accumulated profits, at the relevant time, came to Rs. 79,08,699, which figure is obviously less than the figure proceeding it, and (b) that it was entering into a scheme of considerable development of its business and needed large part of the distributable surplus to finance that. The Commissioner of Income-tax by his order of March 9, 1956, and, on reference by him under sub-section (4) of section 23A, the board of referees by its order of January 16, 1957, did not accept those two grounds and the petitioner was ordered to declare additional dividend to the extent of Rs. 5,75,000 which additional amount for this purpose was considered reasonable by the authorities. The dividend already declared and this additional dividend that was ordered to be declared come to the amount of dividend of Rs. 16,00,000 out of distributable surplus of Rs. 20,94,195, and this amount of the dividend is thus slightly less than 75 per cent. of the distributable surplus.
It has been accepted on both sides that under proviso (b) to sub-section (1) section 23A if the accumulated profits and reserves exceed the cost of the fixed assets the whole of the total income is distributable surplus or is the amount available as dividend, but if the actual cost of the fixed assets exceeds the accumulated profits and reserves then the distributable surplus of dividend is 60 per cent. of the total income. According to sub-section (3) of this section, 'where..... the Commissioner of Income-tax is satisfied, having regard to the current requirements of the companys business or such other requirements as may be necessary or advisable for the maintenance and development of that business, the declaration or payment of a dividend or a larger dividend than that proposed to be declared or paid would be unreasonable, he may reduce the amount of the minimum distribution required of that company under sub-section (1) to such figure as he may consider fit and further determine the period within which such distribution should be made.' What the Commissioner of Income-tax had to consider for his satisfaction is (a) the current requirements of companys business or such other requirements as may be necessary or advisable for the maintenance and development of that business, and (b) having regard to the first consideration whether the declaration or payment of a dividend or a larger dividend than that proposed to be declared or paid would be unreasonable. It is when he is satisfied on these two considerations that he is to make an order reducing the amount of the distributable surplus. Sub-section (4) of that section provides for obtaining a reference of the matter by the Commissioner of Income-tax to the board of referees, which later authority has been given power to confirm, cancel or vary the order of the former, and sub-section (5) of the section makes the decision of the Commissioner of Income-tax under sub-section (3) or of the board of referees under sub-section (4), as the case may be, final as respects matters concluded by it and appeal to the Appellate Assistant Commissioner of Income-tax or to the Appellate Tribunal is barred and it is also provided that no reference shall lie to the High Court respect of such decision.
It is common ground that accumulated profits and reserves of the petitioner were Rs. 79,08,699. The petitioner claimed the actual cost of its fixed assets Rs. 81,71,459. The details of this are given in paragraph 8 of the petition. There is no difference between the parties in regard to the other items giving actual cost of the fixed assets except one item of Rs. 3,86,000. If this amount is excluded from that cost the actual cost of the fixed assets of the petitioner dies not exceed the amount of the accumulated profits and reserves, but if this amount is included, the actual cost of fixed assets exceeds the amount of accumulated profits and reserves of the company. If the former the whole of the total income of the petitioner is distributable but if the latter 60 per cent. of that is surplus available for distribution as dividend. The amount in question is the cost of machinery purchased by the petitioner in the accounting year and shipped in the same year. The accounting year expired before the machinery arrived in this country. It actually arrived in July, 1954, a few weeks after the end of the accounting year. It was erected and installed in November, 1954. It could not possibly be installed while it was in transit on the high seas. The Commissioner of Income-tax and the board of referees have come to the conclusion that the machinery thus purchased not having been installed in the factory of the petitioner cannot come under the meaning of the expression 'fixed assets', as that expression is used in proviso (b) to sub-section (1) of section 23A. The board of referees is of the opinion that if they were to hold otherwise, that would lead to an impossible situation, though it does not explain in what manner or respect the result would be so. Having come to this conclusion the authorities excluded this amount of Rs. 3,86,000 from the actual cost of the fixed assets of the petitioner, with the obvious result, as already pointed out, that the cost of the actual fixed assets of the petitioner because less than its accumulated profits and reserves with the further result that the total income of the petitioner because available for dividend instead of only 60 per cent. of it. On the second consideration the authorities have considered the financial aspects of the business of the petitioner in detail and having found that it is financially sound, that its credit is rising, and that it is likely to be in funds they have come to the conclusion that the cost of expansion can to a fairly large extent be met by the means and assets of the petitioner and its distributable surplus can, therefore, pay dividend as required by law.
In this petition under articles 226 and 227 of the Constitution, which is against five respondents, the Union of India, the two members of the board of referees, the Commissioner of Income-tax and the Income-tax Officer, the petitioner company questions the order of the board of referees as illegal, without jurisdiction, and based on no evidence, attacking both the grounds on which it has proceeded. On the side of the respondents the order is supported and the position is taken that it is none of the things as the petitioner says in its petition.
The main argument in this petition has been concerned with the meaning of the expression 'foxed assets', as this expression has been used in proviso (b) to sub-section (1) of section 23A. The Act nowhere defines the expression. The learned counsel no either side had not been able to refer to any statute in which the expression has been used. There is only one reported case to which reference has been made during the arguments that refers to this expression and that is Galloway v. Schill, Seebohm & Co. Ltd. in which at page 359, Lord Alverstone C.J. observes' I think that for the purposes of this case fixed assets may be taken to mean the same thing as the fixed capital employed in the particular year to which the balance-sheet relates.' The observation was made in a case in which value of fixed assets had to be stated in a balance-sheet of a public company required to be annually forwarded to the Registrar of Companies, and it has been based on a statement in this respect in Buckley on the Companies Acts. In Buckley on the Companies Acts, 1949 edition, page 902, it is stated :
'In some cases an attempt has been made to express the distinction here pointed to by the use of the terms fixed capital and circulating capital, fixed capital being defined as property acquired and intended for retention and employment with a view to a profit as distinguished from circulating capital, meaning property acquired or produced with a view to re-sale or sale at a profit;......'
In words and Phrases, permanent edition, volume 17, at page 107, under the head 'fixed asset' reference is to 'fixed or capital assets'. In Spicer and Peglers Book-keeping and Accounts. fourteenth edition, reference to this expression appears at pages 3 and 4 this manner :
Fixed assets are those which are acquired for continuous use in the business, and not for conversion into cash. The life of such assets usually extends over a number of years, and the operations of any accounting periods derive benefit from them. The cost of fixed assets, therefore, represents capital expenditure, which, instead of being charged wholly against the revenue of the period in which it is incurred, is spread over the effective lifetime of the assets, by charging a proportion thereof against the revenue of each of the years in which they are used. Examples of fixed assets are buildings, plant and machinery, fixtures and fittings, goodwill, etc..... The distinction between capital and revenue expenditure is broadly analogous to that between fixed and current assets. Capital expenditure is all expenditure incurred in acquiring fixed assets and in placing the business in a position in which it is able to commence or continue operations. Revenue expenditure is incurred in the purchase of goods for resale, in selling those goods, and in administering and carrying on the business.'
It seems clear that 'fixed assets' broadly mean the same thing as 'fixed capital' or 'capital expenditure'. It is also clear that capital expenditure may be incurred in placing the business in a position to be able to commence operations. This means obviously that capital expenditure may be incurred before operations actually commence, and it follows that when it is so incurred and assets are acquired to commence that when it is so incurred and assets are acquired to commence the business, the assets are capital or fixed assets without yet having been actually erected or installed in the factory that is to commence operations. So that cannot be laid down as an incontrovertible proposition that assets can only be fixed assets when the same are actually installed in a factory or plant. Reference has also been made to Carters Advanced Accounts, fourth edition, page 2, where it is stated that 'fixed assets' are those acquired and held permanently for the purpose of earning income, as, for example, plant and machinery, lease, etc.' and to Accountancy by Pickles, second edition, page 134, where it is stated that 'Fixed Assets may be regarded as those assets of a business which are of a permanent nature, and are definitely held for the purpose of earning revenue and not with a view to resale, e.g., plant and machinery, buildings'. These expressions of opinions just support what has already been stated. The expression 'fixed assets' in the context under consideration, therefore, means 'fixed capital' or 'capital expenditure', which includes machinery actually purchased for installation and used in the business and not for resale. The learned counsel for the respondents contends that the decision of that board of referees whether the purchase of machinery in this case is or is not 'fixed assets' of the petitioner is a question of fact and in this respect the makes reference to the opinion of the authors of Spicer and Peglers Practical Auditing, eleventh edition, at page 283, where it is stated :
'It is apparent, therefore, that the classification of assets in any particular case as between fixed and current is a question of fact which will be decided by the court, having regard to all the circumstances, and to the opinions of experts and businessmen, and further that the courts are strongly disinclined lay down general rule on the subject.'
The authors have referred to a number of cases preceding this passage and it is with reference to those cases that this remark has been made. It is a laymans approach to decide cases but what I find from that review of the cases is that it is true that no hard fast rule can be laid down classifying assets into 'fixed' or 'current' without having regard to the facts and circumstances of a particular case, but it is not easy to accept that every time such classification is a question of fact, for where facts are admitted or proved, and the question is whether a particular inference can legitimately be drawn from those facts or from conclusion drawn from those facts, the question may well be one law : Lalchand Bhagat Ambica Ram v. Commissioner of Income-tax. In the present case the facts are admitted that during the accounting year the petitioner had purchased the machinery, that during the same year the machinery has actually been shifted at the risk of the petitioner, and that by the time accounting year expired it had not yet reached this country. The price having been paid and the machinery having been shipped at the risk of the owner, there is no doubt that the purchase was complete and expenditure on the machinery had been incurred by the petitioner during the accounting year. I have no doubt that the expenditure was capital expenditure. On these facts the question is what is the legitimate inference and in view of the meaning of the expression 'fixed assets' as has been considered above, in my opinion, the machinery purchased was the 'fixed asset' of the petitioner. The learned counsel for the respondents then says that proceeding on the facts as stated above the board of referees has pointed out in its order that 'it is not clearly possible to say what machinery, etc., was actually going to be put in the factory', and so, in view of this approach by the board, it could not come to the conclusion that the machinery was acquired by the petitioner for retention and employment to earn profits, in other words, as a part of its machinery so as to augment its business. The petitioner does not deal in selling machinery and as it was expanding its own productive capacity, it is obvious it had purchased the machinery for expansion of its own plant. There was entire absence of basis upon which the board could give opinion that it was not clearly possible for it to say out of the machinery purchased what was actually going to be installed in the factory. There was nothing that could make the board take this view. Apparently, the petitioner being a sugar manufacturer and it having purchased the type of machinery needed for such manufacture and it not being seller of machinery, the purchase was for increase of its own productive capacity. So that this remark of the board does not advance the case on the side of the respondents.
The other argument that has been urged by the learned counsel for the respondents is that if on the question of the meaning of the expression 'fixed assets' there is room for two opinions and the in the words of their Lordships in Satyanarayan Laxminarayan Hegde v. Mallikarjun Bhavanappa Tirumale, such a difference of opinion has to be resolved by a long drawn process of reasoning on point where there may conceivable be two opinions, it cannot be said that there is an error apparent on the face of the record, and the learned counsel urges that this is the position in the present case. He has not been able to refer to any opinion judicial or professional to support his contention, that the expression has two meanings or there can be two opinions about its meaning. The one judicial instance cited above supports the petitioners case and so do the opinions of the professionals from the books on accountancy to which reference has already been made. There is no opinion in favour of the opinion in regard to the meaning of the expression that supports the view taken by the board, which shows that the view of the board was wholly unreasonable and has not the support as has the opposite opinion. There is thus no substance in this contention on behalf of the respondents.
The learned counsel for the respondents has further contended that the order of the Commissioner of Income-tax or the Board of Revenue, as the case may be, has been made final by sub-section (5) of section 23A, and the jurisdiction of the High Court even on reference has been barred. This is correct. From this the learned counsel proceeds further and says that this court cannot do what has actually been prohibited by the legislature in other proceedings, that is to say proceedings like the present, under article 226. The finality given to such an order under sub-section (5) of section 23A does not affect the jurisdiction and powers of this court under article 226 nor can such jurisdiction and power be limited by anything provided in the statute otherwise than by way of amendment of the Constitution. So this argument cannot be accepted. It of course means that this will be slow and considerably cautious with such an order but that always is so when this court exercises jurisdiction under article 226 even in cases where there is no such provision making the order of the last authority as final and not open to challenge before another authority or court.
There remains the other aspect of the matter disposed of by the Commissioner of Income-tax and the board. It has regard to their opinion that the resources and the funds of the petitioner are sound enough to meet the cost of its development programme as it expands. On this question obviously on merits there can be no interference in a petition like this except in those cases in which the conclusion is based on no evidence, or it is a conclusion which no judicial mind would arrive at, or it is a conclusion which is partly based on relevant and admissible material and partly not so in which case it becomes difficult to say to what extend the basis of the conclusion is the relevant and admissible material and the conclusion drawn from it on the question of the capacity of the petitioner to finance its development programmed no such infirmity has been pointed out in regard to it as referred to above. But what has been pointed out is that the decision of the board of referees in considering the petitioners application under section 23A proceeds on the basis that the total distributable surplus of the petitioner is available for dividend, and the learned counsel for the petitioner points out that now the position taken by the petitioner has been found to be correct that only 60 per cent. of its distributable surplus is available for dividend. The learned counsel contends that if the board had been of this opinion it might well have come to a different decision on the application of the petitioner or in any case it cannot be said that it would have called upon the petitioner to make available the same percentage for further dividend of its distributable surplus as has been done. This is obvious for the board was, when making an order on the application of the petitioner, considering that the whole of the distributable surplus of the petitioner is available as dividend, whereas the basis on which it ought to have and could have proceeded was that only 60 per cent of that was available for the purpose.
In consequence this petition succeeds and the order dated January 16, 1957, of the board of refers is quashed and the board will proceed again with the application of the petitioner and dispose of it according to law in view of what has been stated in this judgment. In the Circumstances of this petition the parties are left to their own costs.