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Commissioner of Income-tax Vs. Mohan MeakIn Breweries Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtHimachal Pradesh High Court
Decided On
Case NumberIncome-tax Reference No. 1 of 1972
Judge
Reported in[1974]95ITR586(HP)
ActsSuper Profits Tax Act, 1963 - Schedule - Rule 2
AppellantCommissioner of Income-tax
RespondentMohan MeakIn Breweries Ltd.
Appellant Advocate Inder Singh, Adv.
Respondent Advocate K.D. Sud, Adv.
Cases ReferredCape Brandy Syndicate v. Inland Revenue Commissioners.
Excerpt:
- .....on the first day of the previous year. the total was rs. 2,54,91,674. in this amount the paid-up share capital was rs. 28,36,160. during the course of the previous year (on july 31, 1962), the assessee-company issued bonus shares to the amount equivalent to the paid-up capital and thus the said figure was doubled. under rule 2 of the second schedule of the super profits tax act, 1963, the capitalised part of the reserve as a result of the issue of bonus shares was to be proportionately added to the paid-up capital. the increase, was of rs. 18,90,773. the total capital including this increase was to be computed for standard deduction, which was 6% of the total capital. the super profits tax officer did not increase the total capital, as according to him the proportionate increase in.....
Judgment:

D.B. Lal, J.

1. The Commissioner of Income-tax required the Income-tax Appellate Tribunal, Chandigarh, to refer to this High Court a question of law which they have formulated in the following terms :

'Whether, on the facts and in, the circumstances of the case, the Tribunal was correct in its construction of the expression 'paid-up capital' occurring in the Super Profits Tax Act, 1963, so as to include therein even such reserves as had been capitalized, and consequently in reducing the chargeable profits by Rs. 1,13,447 ?'

2. The material facts which have a bearing on the question of law may usefully be stated. The assessee, Messrs. Mohan Meakin Breweries Ltd., Solan, is a public limited company and it is following the financial year of which the assessment year was 1963-64 with the corresponding accounting year ending on 31st March, 1963. The assessee-company was called upon to file the super profits tax return and the assessment order made by the Super Profits Tax Officer indicated that the net chargeable profit was Rs. 37,20,914. The standard deduction admissible to the company was worked out at 6% of Rs. 2,54;91,674 which came to Rs. 15,29,500. As such, the net profits liable to super profits tax were found to be Rs. 21,91,414.

3. While calculating the standard deduction, the Super Profits Tax Officer took into consideration the paid-up capital as well as the reserves according to the figures as these existed on the first day of the previous year. The total was Rs. 2,54,91,674. In this amount the paid-up share capital was Rs. 28,36,160. During the course of the previous year (on July 31, 1962), the assessee-company issued bonus shares to the amount equivalent to the paid-up capital and thus the said figure was doubled. Under Rule 2 of the Second Schedule of the Super Profits Tax Act, 1963, the capitalised part of the reserve as a result of the issue of bonus shares was to be proportionately added to the paid-up capital. The increase, was of Rs. 18,90,773. The total capital including this increase was to be computed for standard deduction, which was 6% of the total capital. The Super Profits Tax Officer did not increase the total capital, as according to him the proportionate increase in paid-up capital led to proportionate decrease in reserve. The failure on the part of the Super Profits Tax Officer to do so led to payment of more tax for which the assessee-company objected.

4. Against the decision of the Super Profits Tax Officer the assessee-company came in appeal before the Appellate Assistant Commissioner of Income-tax. It was pointed out, inter alia, that the Super Profits Tax Officer erred in law, inasmuch as Rule 2 of the aforesaid schedule was not properly interpreted and the capitalised part of the reserve was wrongly withheld from increasing the paid-up capital, resulting in the ultimate reduction in standard deduction and as such more tax was levied. It was stated that the standard deduction reduced from chargeable profits was less than what has been prescribed. As such the net chargeable profit liable to payment of tax was assessed at a higher figure than what was due and hence more tax was payable. The learned Appellate Assistant Commissioner, however, did not agree and dismissed the appeal. He considered that capitalised part of the reserve by issue of bonus shares could not increase the paid-up share capital, which according to him could only be by cash payment. Besides that, the learned Commissioner also held that the reserve was decreased to the extent of its capitalised part and, therefore, what has been deducted from the reserve cannot again be added to it by keeping the figure of reserve as it was on the first day of the previous year. According to him that would lead to double benefit to the assessee which is not permitted under law.

5. The assessee-company came in further appeal before the Income-tax Appellate Tribunal. It was held, that upon a plain reading of Rule 2 of the Second Schedule it was incumbent upon the revenue to increase the paid-up capital by Rs. 18,90,773 due to the issue of bonus shares. As such there was proportionate increase in the total capital. The standard deduction was made at 6% of the total capital. The super profits for tax liability were held to decrease by Rs. 1,13,447, It was stated that paid-up share capital does not mean merely the capital paid in cash but also includes capitalised part of the reserve. The Tribunal, however, considered that there Was a lacuna in the provision and on principles of strict interpretation to be given to the language, of the statute, the advantage has to go to the assessee. They adopted the phraseology of Viscount Simonds and stated that the legislature has 'plainly missed fire'. Accordingly the appeal was allowed.

6. As already pointed out, the Commissioner of Income-tax moved an application before the Tribunal to formulate the aforesaid question of law and refer it to the High Court for its opinion.

7. The rules of interpretation applicable to a taxing statute are well founded. The cardinal rule of interpretation of statutes is to construe its provisions literally and grammatically giving the words their ordinary and natural meaning. It is only when such a construction leads to an obvious absurdity which the legislature cannot be supposed to have intended that the court in intepreting the rule may introduce words to give effect to what it conceives to be the true intention of the legislature. It is not any and every inconvenience that justifies adoption of this extreme rule of construction (see Nanalal Zaver v. Bombay Life Assurance Co. Ltd., [1950] 20 Comp. Cas. 179; [1950] S.C.R. 391 ; A.I.R. 1950 S.C. 172) To the same effect is the following observation of Chagta C.J., in Elphinstone Spinning and Weaving Mills Co. Ltd. v. Commissioner of Income-tax, (1955) 28 I.T.R. 811, 816 (Bom.):

'The Advocate-General says we should avoid giving, a construction which would lead to absurd results. That canon is applicable where the language of a statute is capable of bearing a construction which would avoid absurd results. But where the language is clear and not capable of any other construction, then however illogical the position, however absurd the result, however much the construction put may defeat the object of the legislature, the statute must be construed according to the plain language used by the legislature and the more so if that plain language supports the subject against the taxing department.'

8. The above noted case went to the Supreme Court and their Lordshipsapproved the dicta regarding interpretation of a taxing statute. Theydescribed in axiomatic language that if the words of a taxing statute fail,then so must the tax. The courts cannot, except rarely and in clear cases,help the draftsmen by a favourable construction (see Commissioner o)'Income-tax v. Elphinstone Spinning and Weaving Mills Co. Ltd., [1960] 40 I.T.R. 142; [1960] 3 S.C.R. 953 (S.C.)). In CentralIndia Spinning Weaving and . v. Municipal Committee,Wardha, A.I.R. 1958 S.C. 341 their Lordships were considering a taxing statute. It was pointedout by them that the construction to be placed on the statute should bethe one that favours the taxpayer in accordance with the principle of construction of taxing statutes, which must be strictly construed and in caseof doubt must be construed against the taxing authorities and doubtresolved in favour of the taxpayer. The last case in the series which needbe referred is Commissioner of Income-tax v. Shahzada Nand and Sons, [1966] 60 I.T.R. 392, 399, 400 ; [1966] 3 S.C.R. 379 (S.C.). Thedicta of the Supreme Court is in the following terms :

' In a taxing Act one has to look merely at what is clearly stated, and in a case of reasonable doubt the construction most beneficial to the subject is to be adopted. But even so, the fundamental rule of construction is the same for all statutes, whether fiscal or otherwise. The underlying principle is that the meaning and intention, of a statute must be collected from the plain and unambiguous expression used therein rather than from any notions which may be entertained by the court as to what is just or expedient. The expressed intention must guide the court,'

9. Their Lordships in that case also referred to Cape Brandy Syndicate v. Inland Revenue Commissioners, [1921] 1 K.B. 64 ; [1920] 12 T.C. 358 (K.B.) and relied upon the classic statement of Rowlatt J.:

' In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.'

10. To this may be added a rider : in a case of reasonable doubt, the construction most beneficial to the subject is to be adopted.

It is, therefore, manifest, that the provisions of the Super Profits Tax Act, 1963, need be interpreted keeping regard to the above noted principles which are more or less settled. The scheme of the Act including its schedules, broadly speaking, lays down that the chargeable profits, are to be deduced after adjustment in the total income of the assessee computed under the Income-tax Act, 1961, in accordance with the provisions of the First Schedule. Standard deduction is to be made in accordance with the provisions of the Second Schedule. The balance would give the net profits liable to tax. In Schedule III, the percentage of the tax is prescribed. The phrase 'chargeable profits' has thus been defined in the Act:

' (5) ' chargeable profits ' means the total income of an assessee computed under the Income-tax Act, 1961 (43 of 1961), for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule.' The phrase 'standard deduction' is also defined in the following manner :

' (9) ' standard deduction ' means an amount equal to six per cent of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of fifty thousand rupees, whichever is greater:

Provided that where the previous year is longer or shorter than a period of twelve months, the aforesaid amount of six per cent. or, as the case may be, of fifty thousand rupees shall be increased or decreased proportionately :

Provided further that where a company has different previous years in respect of its income, profits and gains, the aforesaid increase or decrease, as the case may be, shall be calculated with reference to the length of the previous year of the longest duration.'

11. So far as the ascertainment of ' chargeable profits ' is concerned, there is no dispute between the revenue and the assessee. Out of the total income assessed under the Income-tax Act, 1961, the permissible deductions were made and net chargeable profits were Rs. 37,20,914. This, was done in accordance with the provisions of the First Schedule. Therefore, there is no dispute as to, that. The standard deduction was the amount equal to six per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule. For that, the difficulty arose. Under Rule 2, the revenue authorities did not increase the paid-up share capital of the company by the proportional amount for which the reserve of the company was capitalised by issue of bonus shares. According to the assessee, this was to be done in accordance with the plain language of Rule 2 of the Second Schedule. The revenue authorities said otherwise.

12. It may be desirable at this stage to give below rules 1 and 2 of the Second Schedule:

' Rule 1. Subject to the other provisions contained in this Schedule, the capital of a company shall be the sum of the amounts, as on the first day of the previous year relevant to the assessment year, of its paid-up share capital and of its reserve, if any, created under the proviso (b) to Clause (vib) of Sub-section (2) of Section 10 of the Indian Income-tax Act, 1922 (11 of 1922), or under Sub-section (3) of Section 34 of the Income-tax Act, 1961 (43 of 1961), and of its other reserves in so far as the amounts credited to such other reserves have not been allowed in computing its profits for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or the Income-tax Act, 1961 (43 of 1961), diminished by the amount by which the cost to it of the assets the income from which in accordance with Clause (iii) or Clause (vi) or Clause (viii) of Rule 1 of the First Schedule is not includible in its chargeable profits, exceeds the aggregate of-

(i) any money borrowed by it which remains outstanding; and

(ii) the amount of any fund, any surplus and any such reserveas is not to be taken into account in computing the capital under thisrule.

Explanation 1.--A paid-up share capital or reserve brought into existence by creating or increasing (by revaluation or otherwise) any book asset is not capital for computing the capital of a company for the purposes of this Act.

Explanation 2.--Any premium received in cash by the company on the issue of its shares standing to the credit of the share premium account shall be regarded as forming part of its paid-up share capital.

Explanation 3.--Where a company has different previous years in respect of its income, profits and gains, the computation of capital under Rule 1 and Rule 2 of this Schedule shall be made with reference to the previous year which commenced first.' ' Rule 2. Where after the first day of the previous year relevant to the assessment year, the paid-up share capital of a company is increased or reduced by any amount during that previous year, the capital computed in accordance with Rule 1 shall be increased or decreased, as the case may be, by a portion of that amount which is proportional to the portion of the previous year during which the increase or the reduction of the paid-up share capital remained effective.'

13. Under the aforesaid Rule 1, the capital of the company was computed at Rs. 2,54,91,674 and to that extent again there is no dispute between the parties. Rule 2 in its plain meaning and grammatical construction contains the following :

(a) that first day of the previous year relevant to the assessment year was a crucial date for computation of paid-up capital and the reserve,

(b) that the said paid-up capital is to be increased or decreased with reference to the previous year,

(c) that the capital computed in accordance with Rule 1 was to be increased or decreased, and

(d) that this increase or decrease was proportionate in accordance with the duration for which the increase or decrease remained effective during the previous year.

14. It is, therefore, evident as stated under condition (c) above that the capital computed in accordance with Rule 1 and nothing short of it was to be increased. The revenue authorities intended to reduce the reserve to the extent of the amount of bonus share which according to them was the amount added to paid-up share capital. In our opinion, they could not do so under the plain language used in Rule 2. It is the 'capital computed in accordance with Rule 1 ' which is to be increased and nothing less than that. That capital would necessarily mean the sum total of the paid-up capital as well as the reserve, and that figure in this case is Rs. 2,54,91,674. To this figure shall be added the proportionate increase in the paid-up share capital which according to the admitted figure is Rs. 18,90,773. From this enhanced capital, 'standard deduction' has to be made which is equal to six per cent. of the total capital of the company.

15. The learned Appellate Assistant Commissioner was of the opinion that paid-up share capital only means capital subscribed by payment and does not include capitalised value of reserve. This proposition does not appear to be correct. The issue of bonus shares necessarily leads to the addition in the paid-up share capital. Shri Inder Singh referred to Shree Gopal Paper Mills Ltd. v. Commissioner of Income-tax, [1967] 64 I.T.R. 233 (Cal.). The point at issue in that case before the learned judges was not this, that the bonus share leading to capitalisation of a part of reserve does or does not lead to addition in the paid-up capital. But the point at issue was that, assuming that it does lead to the addition in paid-up capital, whether a mere resolution issuing bonus shares without the shares being actually issued to the shareholders does or does not lead to that addition in the share capital. It was held that a mere resolution will not be sufficient and actual issue of such shares to the shareholders would be necessary. As the bonus shares were not held to be issued within the meaning of the taxing statute, the paid-up share capital was not considered as increased to that extent. Therefore, this authority rather supports the contention of the assessee, inasmuch as there is indication that capitalisation of reserve by issue of bonus shares leads to the increase in the share capital. Another case relied upon by the learned counsel is Commissioner of Income-tax v. Kunji Lal Gupta, [1971] 81 I.T.R. 474 (S.C.). That was a case of an assesses doing the business of selling and purchasing shares and the sale proceeds of the bonus shares were received as part of his stock-in-trade. The income from such sale was considered taxable under the Indian Income-tax Act, 1922. Therefore, the facts of the case are different and no assistance can be taken by the learned counsel.

16. It is then argued with much insistence by Shri Inder Singh, who appeared on behalf of the revenue authorities, that double benefit would be given to the assessee if Rule 2 is interpreted in its plain language. For this, the reply is as Rowlatt J, indicated in Cape Brandy Syndicate v. Inland Revenue Commissioners.

'..... In a taxing Act one has to look merely at what is clearly said. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.'

17. As we have pointed out, the language used in Rule 2 is explicit and thecapital computed in accordance with Rule 1 has to be increased by theproportionate increase in the paid-up share capital. This capital necessarilyincludes the reserve as it stood on the first day of the previous year. Inother words, we cannot reduce the reserve to the extent of its capitalisationand if we compute the reserve as it was on the first day of the previousyear, the proportionate increase has to be made in the share capital leading to a benefit which according to the revenue authorities is undue andwhich they preferred to submit as 'double benefit'. In the referenceorder drawn up by the Tribunal, the revenue authorities seem to haverelied upon Clause 3 of the Second Schedule of the Companies (Profits)Surtax Act, 1964, which was a successor provision to the present one. Thesaid Clause 3 of the Second Schedule of the successor Act is quoted in the reference order. It is manifest that the provision is different and no assistancecould be taken from it in order to interpret Rule 2 of the Second Scheduleof the Super Profits Tax Act, 1963. Where the language is clear and themeaning is easy to deduce, no amount of help can be taken from thesucceeding statute. The learned counsel for the assessee even argued thatthe so-called double benefit was actually intended to be given to boost theshare capital leading to other fiscal benefits. A tax relief was intended tobe given by this conversion of capitalised reserve and with some definedobject the provision was made. We, therefore, do not subscribe to theview expressed by the Tribunal that the legislature has misfired or thatthere was a lacuna in the statute. Rather we consider that there hasbeen a meaningful fire and taxing relief was intended. The capitalisedpart of reserve was to be added to the share capital, while reserve was not to be reduced to that extent. By increasing the base capital the percentage of standard deduction was enhanced. This gave relief to the taxpayer.

18. The learned counsel referred to The Law and Practice of Super Profits Tax by S. V. Ghatalia (1964 edition),' which appears to be a valuable treatise on this subject. At page 59 of this book, any example is given and the capital base for 'standard deduction' has been computed by adding up paid-up capital on the first day of the previous year, the company's reserve as on the first day of the previous year and the increase in the paid-up capital on account of the issue of bonus shares. The company's reserve was maintained as it existed on the first day of the previous year and was not reduced to the extent of the capitalised reserve. This is exactly what the assessee has demanded in this case. In our opinion, following the strict rule of interpretation and especially when the language is plain and is amenable to only one meaning, the reserve could not be reduced to the extent of its capitalised value and the paid-up capital was to be boosted up so as to increase the capital base. Nothing can be read within the statute which is not apparently within its ambit and even if an apparent double benefit is being given, the inference is that such double benefit was intended to give the taking relief.

19. We would, therefore, answer the question referred to us by the Tribunal in the affirmative and hold that the expression ' paid-up capital ' occurring in the Super Profits Tax Act, 1963, does include therein even such reserve as has been capitalised without corresponding decrease in the reserve as computed with reference to the first day of the previous year and consequential reducing of the chargeable profits, in the present case by Rs. 1,13,447.

20. However, we leave the parties to bear their own costs.


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