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Alkali and Chemical Corporation of India Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 132 of 1977
Judge
Reported in[1980]122ITR490(Cal)
ActsCompanies (Profits) Surtax Act, 1964 - Section 13 - Schedule - Rules 1, 2, 3 and 4; ;Income Tax Act, 1961 - Section 80E
AppellantAlkali and Chemical Corporation of India Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateDebi Pal and ;Pranab Pal, Advs.
Respondent AdvocateSuhas Sen and ;Ajit Sengupta, Advs.
Excerpt:
- .....the chargeable profits for the said assessment years were made.further, in the original surtax assessment for the assessment year 1967-68, the ito had included in the assessee's capital a sum of rs. 41,44,658 under rule 3 of the surtax act, as being addition to the company's share capital during the relevant previous year by the issue of bonus shares from out of the assessee's general reserve and also a part of its dividend equalisation reserve. the entire general reserve at the beginning of the accounting year had been capitalised during the year thereby. the ito found that the inclusion of the said amount in the capital base was also a mistake apparent from the records as by the issue of bonus shares out of the general reserve the capital properly computed under the rules.....
Judgment:

Dipak Kumae Sen, J.

1. On an application of the Alkali & Chemical Corporation of India Ltd., Calcutta, the assessee, under Section 18 of Companies (Profits) Surtax Act, 1964, read with Section 256(1) of the I.T. Act, 1961, the Tribunal has drawn up a statement of case and referred the following questions of law for the opinion of this court as arising out of its order dated the 28th August, 1975:

'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that portion of the profits and gains attributable to the assessee company's priority industry, which was deducted under Section 80E of the Income-tax Act, 1961, in computing its total income in the assessments under the said Income-tax Act, could be said to be not includible in its total income within the meaning of Rule 4 of the rules in the Second Schedule to the Companies (Profits) Surtax Act, 1964, and a proportionate reduction was liable to be made from the capital base under the said rule in respect of such portion of the profits and gains of the assessee-company attributable to its priority industry ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the omission to make a proportionate reduction of the capital base under Rule 4 of the Second Schedule to the Companies (Profits) Surtax Act was a mistake apparent from the record in the original assessment proceedings and the Income-tax Officer had jurisdiction to make such proportionate reduction of the capital base by his subsequent order under Section 13 of the said Companies (Profits) Surtax Act, 1964 ?

3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 41,44,658 representing the increase in the share capital of the assessee-company as a result of capitalisation of part of its reserves was not liable to be included in its capital base under Rule 3 of the Second Schedule to the Surtax Act ?

4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the inclusion of the aforementioned sum of Rs. 41,44,658 in the capital base in the original assessment for the assessment year 1967-68 was a mistake apparent from the record and the Income-tax Officer had jurisdiction to rectify that mistake under Section 13 of the Companies (Profits) Surtax Act, 1964, so as to exclude that sum from the capital base '

2. The facts found and/or admitted in these proceedings are shortly as follows: In the assessment of the assessee to surtax under the C.(P.)S.T. Act, 1964, in the assessment years 1966-67 and 1967-68, the ITO while computing the capital base did not make any reduction under Rule 4 of the Rules of the Second Schedule to the Surtax Act in respect of the amounts allowed as deduction under Section 80E of the I.T. Act, 1961, as it stood then. Later, the ITO purported to rectify his order under Section 13 of the Surtax Act on the ground that part of the profits of the assessee attributable to a priority industry and deductible under Section 80E was not includible in the total income of the assessee as computed under the I.T. Act, 1961, and therefore, under Rule 4(a) proportionate reduction should have been made in computing the capital of the assessee for the assessment of surtax. He held that the omission to make such a reduction was a mistake apparent from the records of the assessment and this should be rectified under Section 13 of the Surtax Act. Accordingly, he recomputed the capital, making a proportionate reduction of Rs. 44,45,482 for the assessment year 1966-67, and of Rs. 43,90,861 for the assessment year 1967-68. Consequential orders underSection 13 of the Act recomputing the chargeable profits for the said assessment years were made.Further, in the original surtax assessment for the assessment year 1967-68, the ITO had included in the assessee's capital a sum of Rs. 41,44,658 under Rule 3 of the Surtax Act, as being addition to the company's share capital during the relevant previous year by the issue of bonus shares from out of the assessee's general reserve and also a part of its dividend equalisation reserve. The entire general reserve at the beginning of the accounting year had been capitalised during the year thereby. The ITO found that the inclusion of the said amount in the capital base was also a mistake apparent from the records as by the issue of bonus shares out of the general reserve the capital properly computed under the Rules was not altered in any way; Any increase in the paid up capital was counter-balanced by an equal decrease in the reserve and, therefore, Rule 3 of the Second Schedule to the Act did not come into operation. Accordingly, by another order passed under Section 13 bf the Surtax Act, the ITO rectified the original assessment and excluded the said sum of Rs. 41,44;658 from the capital base.

3. Aggrieved by the aforesaid orders the assessee preferred appeals therefrom and raised a preliminary objection before the AAC that the said orders passed under Section 13 of the Act were without jurisdiction as there was no mistake apparent from the records in the original assessments. The AAC rejected this preliminary objection and held that the ITO had jurisdiction to initiate proceedings under Section 13. On merits, the AAC held that the income, profits and gains attributable to specified priority industries formed part of the total income of the assessee though such income was. to be deducted under Section 80E and in computing chargeable profits under the First Schedule to the Surtax Act there was no provision in the Act that in computing the capital under Rule 4 the same should be reduced proportionately by the deductions allowable under Section 80E. He held that the ITO was not justified in deducting the said sums by way of proportionate reduction from the capital computed in the surtax assessments for the said assessment years and directed the ITO to recompute the capital without such deduction.

4. In respect of the other order under Section 13 of the Surtax Act in respect of the assessment year 1967-68, the AAC upheld the order of the ITO. He found that though by capitalising the general reserve for issue of bonus shares there was an increase in the paid up share capital there was no net increase in the capital base of the company and Rule 3 of the Second Schedule to the Surtax Act could not be invoked. He held that where there was only a notional increase or decrease in the capital base, the Second Scheduleto the Act would not be attracted. Computation had to be made taking into account the entire provisions of the Schedule.

5. Being aggrieved by the said orders the revenue preferred further appeals before the Income-tax Tribunal and the assessee filed cross-objection against the rejection of the AAC of its preliminary objection. The assessee also preferred an appeal against the decision of the AAC upholding the order of the ITO in the assessment year 1967-68 excluding from its capital base the said sum of Rs. 41,44,658 alleged to be an increase in the paid up capital by the issue of bonus shares.

6. The Tribunal considered Rule 4 of the Second Schedule to the Surtax Act and held that the said rule would come into operation only in respect of that part of the income, profits and gains which would be ' not includible ' in the assessee's total income as computed under the I.T. Act. The Tribunal also considered the scheme of the I.T. Act, 1961, and in particular Section 2(45), Section 4, Section 2(24), Section 5, the heading of Chap. IV, and Section 14 thereof and came to the conclusion that the language of Rule 4 of the Second Schedule to the Surtax Act was quite clear and unambiguous and what was deducted under Section 80E was part of the profits and gains of the assessee and not includible in its total income as computed under the I.T. Act within the meaning of the said rule. The Tribunal also found that the mistake in the original surtax assessment on this point was patent and glaring and thus there was no merit even in the preliminary objections of the assessee.

7. The Tribunal next considered the question whether the ITO was justified in excluding from the assessee-company's capital base the sum represented by the addition to the company's share capital by the issue of bonus shares out of its general reserve during the relevant accounting year. The Tribunal noted the difference between the Second Schedule to the Surtax Act and the Second Schedule of the earlier Act, namely, the Super Profits Tax Act, 1963. The earlier Act provided for inclusion in the capital base of an amount proportionate to the increase in the paid up share capital while the later Act provided for increase in the capital as a whole. The Tribunal held that where a company issued bonus shares from out of its general reserve though the paid up share capital would increase there would be no increase of the capital as a whole inasmuch as in spite of the increase in the share capital, one of the components of the entire capital base, the other component, namely, the general reserve would suffer a corresponding decrease. In other words, capital as a whole would remain stationary. The Tribunal held that Rule 3 of the Second Schedule to the Surtax Act would not apply in such a case. Accordingly, the Tribunal allowed the appeal of the revenue for both the assessment years and dismissed the assessee's cross-objections in the said years and also dismissed the assessee's appeal in the assessment year 1966-67. The present reference followed.

8. At the hearing Mr. Pranab Pal, learned counsel for the assessee, contended before us on questions Nos. 1 and 2 that the question whether an amount allowed as deduction under Section 80E of the I.T. Act, 1961, would form part of the profits and gains of the company within the meaning of Rule 4 of the Second Schedule to the Surtax Act was not a matter free from doubt. There were a number of reported decisions of a number of High Courts which have taken a view contrary to that taken by the Tribunal and in any event it could not be said that there was a glaring or patent mistake of law in the records which could be rectified by the ITO under Section 13 of the Surtax Act. In support of his contentions, Mr. Pal cited several decisions which are considered hereinafter.

(a) Second ITO v. Stumpp, Schuele and Somappa Pvt. Ltd. : [1977]106ITR399(KAR) . In this case, it was held by the Karnataka High Court in an appeal from an application under Article 226 of the Constitution that the expression ' not includible ' in Rule 4 of the Second Schedule of the Surtax Act should be understood and interpreted in the light of the provisions in the I.T. Act arid that the relief granted under Sections 80-I and 80J of the I.T. Act, 1961, could not be said to be income; profits or gains not includible in the total income of a company. The expression ' part of income, profits and gains not includible in the total income ' in the said rule cannot thus be considered or understood as referring to deductions, allowances, etc., pro- -vided in the I.T. Act for the purpose of computation of total income.

(b) Addl. CIT v. Bimetal Bearings Ltd. : [1977]110ITR131(Mad) . In this case, the Madras High Court considered Rule 4 of the Second Schedule to the Surtax Act and held that the amount of income which was eligible to be considered for relief under Chap. VI-A of the I.T. Act, 1961, would form part of or would be included in the total income. The deductions under the said Chapter were allowed only as the said amounts were origii nally included in the total income. In making the computation for applying Chap. VI-A, the amounts which were entitled to relief were included in the total income and, therefore, could not be treated as profits or gains not includible in the total income. The High Court noted the heading of Chap. VI-A, namely, ' deduction from total income ' and observed that the position was not free from doubt, and the ambiguity, if any, had to be resolved in favour of the assessee.

9. Mr. Suhas Sen, learned counsel for the revenue, did not seriously contest the position that two views were possible on the question whether Rule 4 of the Second Schedule to the Act would apply where deductions were ' allowed under Chap. VI-A of the I.T. Act and in particular Section 80E but submitted that we should refrain from deciding the question on merits as it was not necessary for us to do so.

10. On questions Nos. 3 and 4 Mr. Pranab Pal contended that whatever be the interpretation of Rule 3 of the Second Schedule to the Act, in the instant case, there was no apparent mistake in the records, so as to attract Section 13. Mistakes to be corrected under the section were those which were patent, appeared ex facie and did not require any detailed consideration, He submitted with emphasis that if in detecting a mistake it became neces sary to consider the scope and effect of a particular statutory provision or to interpret the same, it would not be a mistake apparent from the record. In support of his contentions, Mr. Pal cited several decisions which are considered hereinafter:

(a) T. S. Balaram, ITO v. Volkart Brothers : [1971]82ITR50(SC) . Thisdecision was cited for the following, observations of the Supreme Court(p. 53) :

' A mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long drawn process of reasoning on points on which there may conceivably be two opinions. As seen earlier the High Court of Bombay opined that the original assessments were in accordance with law though in our opinion the High Court was not justified in going into that question......A decision on a debatable point of law is not a mistake apparent from the record. ' (b) Harbans Lal Malhotra & Sons P. Ltd. v. ITO : [1972]83ITR848(Cal) . This decision was cited for the following observation of this court (p. 853); '...the mistake, if any, in this case is one which cannot be called either obvious or glaring or self-evident. 'It is a mistake which appears from the record, but it is not apparent. , It is a mistake which has to be discovered after interpretation of a certain section and investigation of certain facts. In the premises, there cannot be any jurisdiction for the Income-tax Officer to take proceedings under Section 154 in view of the facts disclosed. '

(c) ITO v. India Foils Ltd. : [1973]91ITR72(Cal) . This decision was cited for the following' observations of a Division Bench of this court (p. 77): ' When the valuation was accepted not only by one Income-tax Officer but by three Income-tax Officers, it cannot be said that it was a mistake apparent from the face of the records. A mistake must be apparent on the face of the records. It must be an obvious, clear and patent mistake. One which is not so apparent and which requires a long and elaborate reasoning and arguments on points on which there may be conceivably two or more opinions (sic). Clearly, a decision on a debatable point of law is not a mistake apparent on the face of the records. '

11. Mr. Suhas Sen, learned counsel for the revenue, contended on the other hand that the mistake in the instant case was an arithmetical one and thus an obvious and patent mistake which could be rectified under Section 13 of the Surtax Act. He drew our attention to the scheme of the Second Schedule to the Surtax Act, Rule 1 whereof provided that the capital of a company would be the aggregate of certain amounts in existence on the first day of the previous year relevant to the assessment year. The said amounts consisted, inter alia, of-

(a) its paid up share capital,

(b) its reserve,

(c) its debentures issued to public, and

(d) any money borrowed from the Government or Government corporation or any other financial institution notified by the Government or any banking institution.

12. The Explanation to Rule 2 provided that paid up share capital or reserves brought into existence by creating or by increasing (by revaluation or otherwise) any book asset was not capital for computation under this Act. Rule 3 provided that where after the first day of the previous year relevant to the assessment year, the capital of a company computed in accordance with the foregoing rules, was increased by any amount during that previous year on account of increase of paid up share capital, or is reduced by any amount on account of reduction of paid up share capital such capital should be increased or reduced by a sum which bore to that amount the same proportion as the number of days of the previous year during which there was increase or decrease in accordance with the prescribed proportion.

13. Analysing the Rules, Mr. Sen submitted that what had to be computed under Rule 3 is ultimately the increase of a capital of the company as computed in accordance with the Rules in the said Schedule. He submitted that in the instant case what had been done originally was to accept the increase in the paid up share capital by taking into account the bonus shares issued by capitalising the reserve. What was lost sight of was that by reason of the issue of the said shares the capital had been altered inasmuch as the reserves were reduced by being diverted simultaneously to the same extent for the issue of the bonus share. This mistake was in the nature of an arithmetical mistake which could be properly corrected by an order under Section 13 of the Act. In support of his contentions, Mr. Sen submitted that such apparent and obvious mistakes were meant to be corrected by way of rectification both in the I.T. Act as also in the Surtax Act. In support of his contentions, Mr. Sen stated the following decisions :

(a) Maharana Mills (Pvt.) Ltd. v. ITO, Porbandar [1959] 9 ITR 350, where the Supreme Court observed as follows (p. 359):

' If, for instance, the Income-tax Officer had found that in the assessment year 1952-53, there was an apparent arithmetical mistake in the account of the written down value of the properties which resulted in a corresponding mistake in the assessment of the year in controversy could he not take the corrected figure for the purposes of the assessment and could it be said that the mistake was not apparent from the record. A fortiori, if he discovered that the very basis of the different assessments was erroneous because of an initial mistake in determining the written down value could it be said that this would not be a mistake, apparent from the record. And if in order to determine the correct written down value the Income-tax Officer makes correct calculations, can it be said that that is not rectifying a mistake apparent from the records but is de hors it. ' (b) ITO v. Raleigh Investment Co, Ltd. : [1976]102ITR616(Cal) . This decision was cited for the observations of a Division Bench of this court as follows (p. 621): ' In a case where two views are not possible, if by misreading the section or miscalculation of the rate provided in the section a mistake is committed such a mistake would come within the purview of Section 154 of the Income-tax Act, 1961.'

14. On a consideration of the Rules of the Second Schedule to the Surtax Act, it appears to us that if Rule 3 is read in isolation from the other Rules it would be possible to take two views in the matter as was possibly done in the instant case. Rule 3 if read by itself may suggest that any increase or decrease in the paid up share capital by itself would lead to an increase or decrease of the capital. There is no indication in this rule that there has to be a further enquiry as to the depletion of the capital on the other items. But if Rule 3 is read along with Rules 1 and 2 the controversy in our view becomes an arithmetical controversy. What is ultimately to be computed under the Second Schedule to the Surtax Act is the amount of capital and in the computation of the amount of capital the amount of reserve is a necessary item. While taking note of the increase in the share capital by the issue of bonus share the corresponding decrease in the amount of reserves cannot be overlooked. It may be possible to take two views of the matter but it appears to us that an alternative view can only be taken by misreading the Rules, For the reasons aforesaid, we are of the opinion that the rectification of the capital base on this count under Section 13 of the Surtax Act for the assessment year 1967-68 is sustainable.

15. For the reasons above, we answer the questions as follows:

Question No. 2 is answered in the negative and in favour of the assessee. By reason of our answer to question No. 2, we do not feel it necessary to answer question No. 1. The section, as it stood at the time of the relevant assessment, has since been amended, and an answer would, in any event, be more or less academic. Question No. 4 is answered in the affirmative and in favour of the revenue. Question No. 3 is also answered in the affirmative and in favour of the revenue.

16. In the facts and circumstances of the case, thorn will be no order as tocosts.

Bimal Chandra Basak, J.

17. I agree.


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