A. N. GROVER J. - The main point, which has to be determined in this appeal under clause 10 of the Letters Patent against a judgment of a learned single judge is whether the cost of machinery on board a ship on the high seas and which has been ordered by an assessee can be regarded to fall within the expression 'fixed assets' which is to be found in proviso (b) to sub-section (1) of section 23A of the Indian Income-tax Act, 1922.
The facts have been set out fully in the judgment of the learned single judge and need only be briefly recapitulated. The respondent, the Hindustan Sugar Mills Limited, carries on the business of manufacturing sugar and its by-products. For the assessment year 1955-56, which covered the period from 1st July, 1953, to 30th June, 1954, a net distributable surplus of Rs. 20,94,195 was left out of its income. Out of this amount, a sum of Rs. 9,25,000, which came to 45 per cent. of the distributable surplus was in fact distributed as dividend to the shareholders. In June, 1955, the respondent moved the Commissioner of Income-tax under section 23A(3) seeking exemption from declaring a further dividend on the grounds, inter alia, that the value of its fixed assets came to Rs. 81,17,459, whereas its accumulated profits amounted to Rs. 79,08,699, and that it was entering into a scheme of considerable development of its business for which a large part of distributable surplus was required. The Commissioner of Income-tax declined to accede to the prayer and the respondent was directed to distribute an additional dividend to the extent of Rs. 5,75,000. Under section 23A(4) the board of referees agreed with the Commissioner and in this manner the respondent was required to distribute by way of dividend a total amount of Rs. 16,00,000, out of the distributable surplus of Rs. 20,94,195.
Now, it is common ground that, in the present case, according to the provisions of section 23A, if the cost of the fixed assets of the respondent came to Rs. 81,17,459, only 60 per cent. of the distributable surplus had to be paid as dividend, whereas if an item of Rs. 3,86,000, being the cost of the machinery which had been ordered by the respondent and which was on its way on board the ship on the high seas, were to be deducted as fixed assets, the entire amount of distributable surplus would have to be distributed by way of dividend. However, under sub-section (3) of section 23A the Commissioner could, on requirement of that provision being made out, reduce the amount of the minimum distribution required under sub-section (1) to such figure as he may consider fit. In the present case the Commissioner and the board of referees decided the matter principally on the basis that the amount of Rs. 3,86,000 could not form part of the actual cost of the fixed assets of the respondent and what the learned single judge was called upon to determine was whether their view was not erroneous on its face.
The learned single judge referred to the observations of Lord Alverstone C.J. in Galloway v. Schill, Seebohm & Co. Limited as also to the statement in Buckly on the Companies Acts, 1949 edition, page 902, and various other books on accountancy and came to the conclusion that the expression 'fixed assets' means 'fixed capital' or 'capital expenditure' which includes machinery actually purchased for installation and used in the business and not for resale. Mr. Hardyal Hardy, who appears for the appellant, has canvasses the correctness of that view and relied largely on certain observations of Swinfen Eady L.J. in Ammonia Soda Company Limited v. Chamberlain. This is what the learned Lord Justice had said :
What is fixed capital That which a company retains, in the shape of assets upon which the subscribed capital has been expended, and which assets either themselves produce income, independent of any further action by the company, or being retained by the company are made use of to produce income or gain profits. A trust company formed to acquire and hold stocks, shares, and securities, and from time to time to divide the dividends and income arising therefrom, is an distance of the former. A manufacturing company acquiring of erecting works with machinery and plant is an instance of the latter. In these case the capital is fixed in the sense of being invested in assists intended to be retained by the company more or less permanently and used in producing an income.'
Mr. Hardy has laid stress on the requirement of acquiring or erecting works with machinery and plant, his suggestion being that unless the machinery which has been ordered, as was admittedly done in the present case, is actually installed or workers are erected with it, it cannot fall with the meaning of the expression 'fixed capital' which has the same connotation and meaning as 'fixed assets'. But the last sentence in the portion, which has been extracted above, shows that where assets are intended to be retained more or less permanently and used in producing an income, the capital will nevertheless be fixed and not circulating. It was never the case of the department either before the Commissioner or before the board of referees pr before the learned single judge that the machinery in question in the present case was in fact sold or was meant to be sold and not installed in the workers belonging to the respondent. The observations of Swinfen Eady L.J., therefore, can be of no avail to the department.
Mr. R. J. Kolah for the respondent has adverted to the admitted facts that the first and second plants for manufacture of sugar, etc., were installed in the years 1930 and 1934 respectively and, during the following years, in order to increase the capacity for production, machinery of the value over Rs. 1,00,00,000 was imported which dully installed. Even the machinery in question now of the value of Rs. 3,86,000 was being imported under licence granted by the competent authorities and it was meant to be installed. Thus, there was no question at any stage of this particular asset not being intended to be retained by the company more or less permanently and used in producing an income. Mr. Kolah has fortified his arguments by calling attention to Form F (balance-sheet) in the Third Schedule to the Indian Companies Act, 1913, in which under 'Property and assets' the first heading is 'fixed capital expenditure'. Schedule VI, Part I, of the Companies Act, 1956, contains the form of balance-sheet and there the corresponding head under 'assets' has the expression 'fixed assets'. It is suggested that the same meaning should be attributed to the expression 'fixed assets' as to 'fixed capital expenditure'. Mr. Hardy has not referred to say principle, authority or statutory provision which would militate against the view commended by Mr. Kolah which was accepted by the learned single judge.
For the reasons given above, the appeal must fail and it is dismissed with costs.
S. K. Kapur J. - I agree.