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Commissioner of Income-tax, Gujarat-ii Vs. Alembic Chemical Works Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 109 of 1976
Judge
Reported in[1982]133ITR578(Guj)
ActsIncome Tax Act, 1961 - Sections 2(45), 4, 5, 10, 11, 12, 13 and 263(1)
AppellantCommissioner of Income-tax, Gujarat-ii
RespondentAlembic Chemical Works Co. Ltd.
Cases ReferredIn Commr. of Surtax v. Ballarpur Industries Ltd.
Excerpt:
direct taxation - assessment - sections 2 (45), 4, 5, 10, 11, 12, 13 and 263 (1) of income tax act, 1961 and rule 4 of second schedule to companies (profits) surtax act, 1964 - whether deductions allowed to assessee under chapter vi-a amount to deductions from total income or are income, profits and gains not includible in total income under rule 4 - under rule 4 only income of assessee falling within section 10 which is outside sweep of sections 4 and 5 that can be said to be income not includible in total income - any income falling under chapter vi-a capable of being included in total income - by virtue of special provisions relating to deductions in chapter vi-a such income is excluded from total income computed under provisions of act of 1961 - deductions allowed to assessee are.....divan, c.j. 1. in this case, at the instance of the revenue, the following question has been referred to us for our opinion : 'whether, on the facts and in the circumstances of the case, the deductions allowed to the assessee under chapter vi-a of the income-tax act amount to deductions from total income or are income, profits or gains not includible in the total income as contemplated in rule 4 of the second schedule of the companies (profits) surtax act, 1964 ?' 2. we are concerned in the case with the assessment years 1969-70 and 1970-71. for the purpose of companies (profits) surtax act, 1964 (hereinafter referred to as 'the act'), the ito worked out the gross total income for the year 1969-70 at rs. 97,3,682. the assessee was entitled to relief under chap. vi-a of the i. t. act and.....
Judgment:

Divan, C.J.

1. In this case, at the instance of the revenue, the following question has been referred to us for our opinion :

'Whether, on the facts and in the circumstances of the case, the deductions allowed to the assessee under Chapter VI-A of the Income-tax Act amount to deductions from total income or are income, profits or gains not includible in the total income as contemplated in rule 4 of the Second Schedule of the Companies (Profits) Surtax Act, 1964 ?'

2. We are concerned in the case with the assessment years 1969-70 and 1970-71. for the purpose of Companies (Profits) Surtax Act, 1964 (hereinafter referred to as 'the Act'), the ITO worked out the gross total income for the year 1969-70 at Rs. 97,3,682. The assessee was entitled to relief under chap. VI-A of the I. T. Act and the total amount of such relief came to Rs. 4,22,391. Hence, the total income, after deductions under Chap. VI-A came to Rs. 93,11,291.

3. Under the provisions of the Act, the assessee is entitled to standard deduction from the total income and this standard deduction is ten percent. of the capital of the company as computed in accordance with the provisions of the Second Schedule, or rupees two lakhs, whichever is greater. Under r. 4 of the Second Schedule it is provided that where a part of the income as computed under the I. T. Act, its capital ascertained otherwise would be diminished by a proportionate amount. The ITO determined the capital of the company for the purpose of standard deduction according to the Second Schedule.

4. The Commissioner took up the matter in suo motu revision under s. 16 of the Act. The provisions of s. 16 are similar to the provisions of s. 263(1) of the I. T. Act, 1961. In the view of the Commissioner, deductions made under the various sections of Chap. VI-A of the I. T. Act were made in arriving at the total income and since the amounts had been actually deducted from the total income, it could not be said that the said deductions were included in the total income. According to the view taken by the Commissioner on the facts and circumstances of the case, r. 4 of the Second Schedule was applicable and he directed the ITO to recompute the capital employed by the assessee after deducting from the capital computed a figure in the same proportion as the relief allowed under Chap. VI-A bore to what was described as the gross total income, that is, income worked out for income-tax purposes before considering the relief under Chap. VI-A of the I. T. Act. After making the necessary calculation the Commissioner directed that the capital computed should be reduced by Rs. 17,15,921 and be reduced to Rs. 3,60,81,886 instead of to Rs. 3,77,97,807, which was the amount of capital computed by the ITO.

5. A similar situation arose also in the case of this very assessee for the assessment year 1970-71. The income worked out by the ITO before relief under Chap. VI-A of the I. T. Act was Rs. 1,22,33,789 while the relief under Chap. VI-A of the I. T. Act was Rs. 3,50, 319 and the total income was Rs. 1,11,83,470. The ITO computed the capital at Rs. 4,44,55,333, but the Commissioner directed that the capital of the company should be reduced by Rs. 12,71,376, that being the figure arrived at on the basis of the proportion formula indicated in r. 4. the Commissioner reduced the capital to Rs. 4,31,83,957.

6. Against the decision of the Commissioner for these two assessment years, the assessee went up in appeal to the Income-tax Appellate Tribunal. It was contended on behalf of the assessee that the real question involved was whether the deductions allowed under Chap. VI-A of the I. T. Act would amount to 'income, profits and gains not includible in the total income as computed under the Income-tax Act'. If they were held to be profits not so includible then only the proportionate amount had to be deducted form the capital computed. It was urged on behalf of the assessee that Chap. VI-A of the I. T. Act did not deal with deductions to be made in computing the total income. Referring to Chap. III of the I. T. Act, it was urged that the heading there was 'Incomes not includible in total income' and therefore, that this was a type of deduction contemplated under r. 4 of the second Schedule of the C. (P.) S. T. Act. Before the Tribunal, it was urged on behalf of the revenue that Chap. VI-A of the I. T. Act was itself dividend into four sections and almost all the items in dispute fell in group (c), that is deductions in respect of certain income, and only one item fell under group (b) of Chap. VI-A. It was therefore, urged on behalf of thhe revenue that the items falling under group (c) of Chap. VI-A were covered by r.4 of the Second Schedule. It was also urged that all income would be included in the total income but for the special provisions; in these circumstances, it could be said that such income included under the special provision were a part of income, profits gains which were not includible in the total income.

7. The Tribunal held that there was a difference in the headings of Chaps. III and VI-A of the I. T. Act and they made a distinction between certain types of income brought altogether out of the scope of taxable income and which were not includible at all in the total income as computed under the I. T. Act and deductions provided for under Chap VI-A. The Tribunal held that there was no reason why they should differ from the decision of the Bombay Tribunal and following the decision of the Bombay Bench of the Tribunal, the Tribunal set aside the decisions of the Commissioner for the two years under reference and allowed the appeals. Thereafter, at the instance of the revenue, the question hereinabove set out has been referred to us for opinion.

8. In order to appreciate the controversy in this case, it is necessary to refer to some of the provisions of the C. (P.) S. T. Act, 1964. This Act came into force with effect from 1st of April, 1964, and under s. 4 which is the charging section :

'Subject to the provisions contained in this Act, there shall be charged on every company for every assessment year commencing on and from the 1st day of April, 1964, a tax (in this Act referred to as the surtax) in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the Third Schedule.'

9. The Scheme of the Act is that under the First Schedule to the Act, rules have been set out for computing chargeable profits and in computing chargeable profits of the previous year, the total income computed under the I.T. Act has to be adjusted in the manner set out in the different rules in the Schedule. As indicated as by the charging section, it is only those profits earned by a company which exceed the statutory deduction as are liable to surtax at the rate or rates specified in the Third Schedule to the Act.'Statutory deduction', according to s. 2(8), means an amount equal to ten percent, of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of two hundred thousand rupees, whichever is greater. The provisos to s. 2(8) of the Act are not material for the purpose of this judgment. Under s. 2(5) 'chargeable profits' means the total income of an assessee computed under the I.T. Act, 1961 for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule. Thus, under the scheme of the Act, first, the total income as computed for the purposes to the I.T. Act, 1961 has to be ascertained. Thereafter, chargeable profits under the provisions of the Surtax Act have to be ascertained by making necessary adjustments to that total income computed for the purposes of the I.T. Act and adjustment has to be made in the light of the rules set out in the First Schedule. Having thus adjusted the total income computed for the purpose of the I.T. Act and arriving at the figure of chargeable profits, the amount of statutory deduction has to be ascertained. Statutory deductions means as amount of Rs. 2,00,000 or, if the capital of the company computed in accordance with the provisions of the Second Schedule exceeds rupees twenty lakhs, on the basis of that ten percent. mentioned in s. 2(8), ten per cent. of the capital employed by the assessee-company concerned. Hence, the greater the amount of capital computed in the light of the provisions of the Second Schedule, the higher is the amount of statutory deduction and hence the lesser is the burden of the surtax on the assessee-company concerned because from the amount of chargeable profits, the amount of statutory deductions has to be taken out and only the excess above the statutory deduction bears the burden of surtax at the rate or rates specified in the Third Schedule.

10. Under r. 4 of the Second Schedule it is provided :

'Where a part of the income, profits and gains of a company is not includible in its total income as computed under the Income-tax Act, its capital shall be the sum ascertained in accordance with rules 1, 2 and 3 diminished by an amount which bears to that sum the same proportion as the amount of the aforesaid income, profits and gains bears to the total amount of its income, profits and gains.'

11. Now, r. 4 makes it clear that what really counts in this case is, what is the meaning of the words 'not includible in its total income as computed under the Income-tax Act' occurring in r. 4. These are the governing 9 words of r. 4 and it is in the light of the income, profits and gains not includible in the total income that the proportion of the capital attributable to such part of the income, profits and gains not includible in the total income as computed under the I. T. Act that will be taken out from the capital computed for the purposes of statutory deduction. It is to be noted that the legislature when it enacted r. 4 used the words 'not includible'.and the words are not 'not included'. There is a world of difference between 'not includible' and 'not included'.' Not includible' means not capable of being included, according to the dictionary meaning, and this is altogether different from 'income, profits and gains `not included'' in the computation of the total income. The concept of' not includible' is a provision according to the I.T. Act, whereby the very nature of the income, profits and gains concerned, the income cannot be included or is not capable of being included in the total income of the assessee concerned. On the other hand, there are a number of provisions of the I.T. Act, as we later on point out, under which though the income, profits or gains are capable of being included in the total income, yet, by specific provision in that behalf, they are not included in computing total income or, to use the phraseology of the I.T. Act, are 'excluded' while computing the total income of the assessee concerned. Under the I.T. Act, 1961, the charging section s. 4, which enacts and provides :

'Where any central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of this Act in respect of the total income of the previous year or previous years, as the case may be, of every person.'

12. Under sub-s. (45) of s. 2 :

'`Total income' means the total amount of income referred to in section 5, computed in the manner laid down in this Act.'

13. It is the total computed in accordance with the provisions of the I.T. Act which is the basis for proceedings so far as companies are concerned, under the provisions of the Surtax Act.

14. There are certain types of income which, by the very sweep of the provisions of s. 4 of the I.T. Act, are outside the applicability of the I.T. Act altogether. For example, income of a non resident cannot, by any stretch of imagination be brought to tax under the provisions of the I.T. Act. A non-resident earns income abroad. He is not amenable to the jurisdiction of the Indian Legislature and, therefore, by the scope of the I.T. Act because under s. 5 of the I.T. Act the total income of any previous year of a person who is a resident of India includes all income, etc., and in regard to non-resident, it includes all income from whatever source derived which is received or deemed to be received or accrues or is deemed to accrue to a non-resident in India. Therefore, the scheme of ss. 4 and 5 of the I.T. Act indicates what is the area that is covered by the charging s. 4 of the I.T. Act and what income is not capable of being included in the total income of an assessee. So far as non-residents are concerned, it is only income which is received or deemed to be received in India or which accrues or is deemed to accrue or to arise in India that can be brought to tax under the provisions of the I.T. Act and this one is parameter of income which is not capable of being included in the total income of an assessee. It is in the light of s. 5 that one has to judge the sweep of the charging s. 4 because the definition of 'total income' in s. 2(45) indicates that the total amount of income is that which is referred to in section 5 and if by the provisions of s. 5 certain categories of income cannot be brought to tax under the I.T. Act then those categories of income are not capable of being included in the total income of the assessee concerned.

15. Under the provisions of the I.T. Act, while computing the total income of an assessee, various concepts are being utilised. Certain types of income cannot be included in the total income of the assessee concerned (vide provisions of Chap. III of the I.T. Act, 1961). There are, on the other hand, allowances, reliefs, rebates and deductions under the different provisions of the I. T. Act. In cases of allowances, reliefs, rebates, and deductions, etc., the income is capable of being included in the total income of the assessee but by specific provisions of the I.T. Act, that income or part of that income of the assessee is specifically taken out or excluded while computing the total income of that assessee. Therefore, so far as the I.T. Act is concerned, apart from what has been indicated by s. 5 there are certain sections in the I.T. Act itself, which indicate what types of income are not capable of being included in the total income of the assessee while computing the total income in accordance with the provisions of the I.T. Act. Incomes which are not capable of being included by the very provisions of the I.T. Act are indicated in Chap. III.Barring Chap. III, the concept of 'income not capable of being included in the total income' does not find any place anywhere in the I.T. Act. The rest of the provisions of the I.T. Act, which deal with one aspect or another of the computation of the total income, all deal with allowances, deductions, rebates, or reliefs, of income which, though capable of being included in the total income, is excluded or in fact not included in the total income of the assessee. As we emphasized in the earlier part of this judgment, r. 4 of the Surtax Rules refers to income which is not includible as distinguished from income which is not included in the total income in accordance with the provisions of the I.T. Act.

16. The provisions of the Surtax Act are in pari materia with the provisions of the I.T. Act, and therefore, when r. 4 speaks of income which is not includible, the words 'not includible' must be read in the light of the provisions of the I.T. Act. The dictionary meaning indicates that 'not includible' means not capable of being included. It is true that in computing total income for the purposes of the I.T. Act, certain items are specifically taken out and are excluded but it is because of the special provisions relating to such deductions, rebates, reliefs, etc., that they are taken out, not because of the inherent nature of the income. If by the very nature of the income read in light of the provisions of the I.T. Act, a part of the income, profits and gains is not capable of being included in the total income of the assessee, it is only the portion of the income which can be processed under r. 4 for determining the proportionate capital attributable to that part of the income, profits or gains which is not includible in the total income for the purposes of the I.T. Act.

17. In our opinion, this is the best way to approach, the problem, and read in this way no doubt, no difficulty or no complication will arise as a pure process of interpretation. It is not necessary for us to go into the scheme of the rules or the object of the Legislature or the intention of the Legislature in enacting r. 4 because, we find that the words used in r. 4 are clear and unambiguous and when read in light of the I.T. Act, on a prima facie reading, have yielded a complete meaning without creating any complications or creating any doubt. Under these circumstances, it is not necessary for us to refer to the presumed intention or the assumed intention of the Legislature in using the words'income not capable of being included in the total income as computed under the Income-tax Act' occurring in r. 4

18. We may point out that Chap III deals with incomes do not form part of the total income. section 10 provides for incomes not included in total income and it says : 'In computing the total income of a previous year of any person any income falling within any of the following classes shall not be included.'

19. Similarly, s. 11 which occurs in Chap. III also deals with income which shall not be included in the total income of the previous year in respect of the person in receipt of that income, but s. 11 deals with income from property held for charitable or religious purposes. Section 12 deals with the income of trusts or institutions from contributions and a deeming fiction is created by s. 12 so that certain types of income referred to in s. 12 shall, for the purposes of s. 11, be deemed to be income derived from property held under trust wholly for charitable or religious purposes. Section 13 provides that s. 11 shall not apply in certain cases. Therefore, ss. 11, 12, and 13 all deal with income from property held for charitable or religious purposes. It is obvious that so far as companies which are governed by the provisions of the Surtax Act are concerned, they will ordinarily not be governed by the provisions of ss. 11 and 12, and, therefore, it is not only in the light of s. 10 that the question will have to be decided whether a particular part of the income is includible or not in the total income of the assessee. Therefore, ultimately, so far as r. 4 is concerned, it is only the income of the assessee falling within s. 10 and that part of income which is outside the sweep of ss. 4 and 5 of the I.T. Act, that can be said to be income not includible in the total income as computed under the provisions of the I.T. Act. Barring these two categories, one dealing with the sweep of ss. 4 and 5 of the I.T. Act, and the other covered by the different clauses of s. 10, all other income is capable of being included in the total income as computed under the provisions of the I.T. Act, but by reason of one or the other section of the I.T. Act, though capable of being included, in fact it is excluded, that is, not included in, the total income as computed under the provisions of the I.T. Act.

20. We are, therefore, of the opinion that any income falling under Chap. VI-A of the I.T. Act-since that Chapter deals with deductions-is includible, that is, is capable of being included in the total income but by virtue of the special provisions relating to deductions in Chap. VI-A, is taken out and excluded from the total income computed in accordance with the provisions of the I.T. Act.

21. We may mention that several other High Courts in India have arrived at the same conclusions, though the reasons which have appealed to those different High Court are slightly different from the reasons which have appealed to us. It may be pointed out that there is not a single decision of the Supreme Court dealing with the interpretation of the words 'part of the income, profits and gains not includible in the total income as computed under the Income-tax Act, 1961' occurring in r. 4 of the Surtax Rules.

22. In Stumpp, Schuele & Somappa Pvt. Ltd. v. Second ITO : [1976]102ITR320(KAR) , a single judge of the Karnataka High Court, on a writ petition, held that r. 4 of the Surtax Rules, inasmuch as it uses the words 'Income, profits and gains of a company not includible in its total income under the Income-tax Act' refers only to those sums which are not includible in the total income by the provisions of Chap. III of the I.T. Act and does not refer to any of the deductions claimable under Chap. VI-A of the I.T. Act. According to our conclusion, apart from the provisions of Chap. III of the I.T. Act, the phrase 'income not includible' would cover also income which is beyond the sweep of the provisions of ss. 4 and 5 of the I.T. Act, 1961. This decision of the learned single judge of the Karnataka High Court was confirmed by a Division Bench of the same High Court in Second ITO v. Stumpp, Schuele & Somappa P. Ltd. : [1977]106ITR399(KAR) .

23. In Addl. CIT v. Bimetal Bearings Ltd. : [1977]110ITR131(Mad) , a Division Bench of the Madras High Court referred to the decision of the Karnataka High Court in : [1977]106ITR399(KAR) and, according to the Madras High Court, so far as deductions made under Chap. VI-A of the I.T. Act are concerned, the position is that up to the stage when we reach the computation for the purposes of Chap VI-A, the amount which is eligible to be considered under Chap VI-A forms part of or is included in the total income and the deductions is given only because of the inclusion. In such a case, the provisions of r. 4 do not have any scope for operation because it cannot be stated that the said profits were not at all includible in the total income of the company computed under the I.T. Act. The Madras High Court in that case held that in making the computation for the purpose of applying Chap. VI-A the amount which is the subject to relief is included in the total income and, therefore, it cannot be treated to be a case of profits and gains of a company not being includible in the total income. At p. 135 of the report, Sethuraman J., speaking for the Division Bench, observed :

'We may point out that the position is not free from doubt as the heading of Chapter VI-A states that it is a `deduction from total income'. However, any ambiguity has to be resolved in favour of the subject.'

24. With great respect to the learned judges of the Madras High Court, once the problem is approached from the angle from which we have looked at this problem, there is no scope for doubt while interpreting the provisions of r. 4 of the Surtax Rules. Otherwise, as we have seen, the ultimate conclusion of the Division Bench of the Madras High Court is the same at which we have arrived at for the reasons which have appealed to us.

25. In CIT v. Century Spg. and Mfg.Co. Ltd. : [1978]111ITR6(Bom) , a Division Bench of the Bombay High Court has also come to the same conclusion as we have arrived at. At p. 17 of the report it has been pointed out that question No. 5 which was the relevant question relating to the interpretation of r. 4 was deleted, and at p. 18 it has been pointed out :

'The provisions of rule 4 will be attracted only if a part of the income, profits and gains of a company is includible in its total income... Rule 4 only applies when a part of the income is not includible in the total income under the Income-tax Act. If a part of the income was includible in the total income under the Income-tax Act, then the provisions of rule 4 will not be attracted. Rule 4 will only apply in respect of items of income which are referred to in Chapter III, but rule 4 will not include any item of income which is included in Chapter VII which deals with incomes forming part of total income on which no income-tax is payable.'

26. In that case, the Bombay High Court was dealing with the section as to relief granted under s. 84 of the Act as it stood prior to the amendment of the I.T. Act in 1967.

27. In Commr. of Surtax v. Ballarpur Industries Ltd. : [1979]116ITR528(Bom) , interpreting r. 4 of the Surtax Rules in the Second Schedule which had come up for consideration, a Division Bench of the Bombay High Court held that the words 'not includible' in r. 4 mean not capable of being included. It cannot refer to an amount which already forms a part of the gross total income and which would be latter on deducted for purposes of determining the tax liability under Chap. VI-A, and they pointed out that it is significant that the expression 'shall not be included' which is found in ss. 10 and 11 which are found in Chap III is not used in any of the provisions contained in Chap. VI-A. Similarly, the expression 'not includible' is not used in Chap. IV of the I.T. Act which provides for the method of computing income under which the assessee is allowed deduction by way of expenses, rebates, allowances, etc. Both in Chaps. IV and VI-A, Parliament has consistently used the words 'deduction shall be allowed' and not the expression 'shall not be included'. Thus the reasoning which has appealed to the Bombay High Court is somewhat akin to the reasoning which has appealed to us.

28. Mr. Raval, learned counsel for the revenue, drew our attention to three other decisions, one of the Karnataka High Court, the other of the Madras High Court and the third of the Calcutta High Court. As regards the decision of the Karnataka High Court in CIT v. United Breweries Ltd. : [1978]114ITR901(KAR) , the case dealt with the provisions of r. 2 of Sch II and is not helpful to us for the purposes of this judgment. Similarly, in the decision of the Madras High Court in Addl. CIT v. Madras Motor and General Insurance Co. Ltd. : [1979]117ITR354(Mad) , the scheme of the C.(P.) S. T. Act, 1964, and the rules thereunder have been referred to but the provisions of r. 4 which are material for the purposes of our judgment have not been interpreted and, as we have indicated, there is no occasion to go to the scheme of the Act for the purpose of interpreting the provisions of r. 4 of the Second Schedule to the Surtax Act.

29. In Nav Bharat Vavijya Ltd v. CIT : [1980]123ITR865(Cal) , a Division Bench of the Calcutta High Court consisting of Sankar Prasad Mitra C.J., and S.C.Deb J., has held that the word 'includible' in r. 1 of the Sch. II to the Super Profits Tax Act, 1963, is indicative of the quality or description of the assets, the cost of which is to be excluded from the capital base. The word 'includible' means capable of being included. The words 'is not included',therefore, mean 'is not capable of being included'. They cannot mean 'has not been included'. The words 'in accordance with' mean being in agreement or harmony with or in conformity to These words do not alter the meaning of the word 'includible'. The Division Bench held that regardless of whether dividends are earned, the cost acquiring investment in shares has to be decducted in computing the capital of the company for purposes of standard deduction to be deducted from the chargeable profits for the charge of super profits tax.

30. These are all the decisions which have been brought to our notice and we find that the Karnataka High court, the Madras High Court and the Bombay High Court have taken the same view ultimately, as we have done, though the reasoning which appealed to these different High Courts is somewhat different from the reasoning which has appealed to us.

31. In the view of the above discussion, we answer the question referred to us in the negative, in the sense that the deductions allowed to the assessee, under Chap. VI-A of the I.T. Act, amount to deductions from the total income or are income, profits and gains and are not income, profits and gains not includible in the total income as contemplated in r. 4 of Sch. II of the C. (P.) S. T. Act. The question is, therefore, answered in favour of the assessee-company and against the revenue. The Commissioner will pay the costs of this reference to the assessee.


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