Income Tax Appellate Tribunal - Madras
Kalasa Tea And Produce Co. Ltd. vs Inspecting Assistant Commissioner on 14 February, 1994
Equivalent citations: [1994]50ITD170(MAD)
ORDER
S. Kannan, Accountant Member
1. The appeal relating to the assessment year 1983-84, which is a recalled appeal, and the appeal relating to the assessment year 1985-86 were heard together and are disposed of by a common order. Both the appeals give rise to common questions. We will first consider the recalled appeal relating to the assessment year 1983-84. Needless to add the decision thereon will be applicable to the assessment year 1985-86 also.
2. Assessment year : 1983-84 Issue No. 1 - Development allowance reserve Being a company engaged in the business of manufacturing tea, the assessee was entitled to and was granted development allowance under Section 33A of the Income-tax Act, 1961. It is common ground that as stipulated by and under Section 33A(3)(i) of the Act the assessee created a development allowance reserve in a sum of Rs. 73,000. For the purposes of computing the capital base under the Companies (Profits) Surtax Act, the assessee took into account the said sum of Rs. 73,000. In this regard the assessee referred to and relied upon the order of the ITAT Cochin Bench in the case of Peermedu Tea Co. Ltd. [S.T. Appeal Nos. 4 & 5 (Coch.) of 1981, dated 25-3-1985]
3. The Assessing Officer rejected the said contention relying on the order of the ITAT Madras Bench-A in the case of Manjushree Plantations Ltd [ST Appeal No. 34 (Mad.) of 1979 and CO. No. 158 (Mad.) of 1979, dated 31-7-1980].
4. This issue was one of the subject matters of appeal filed by the assessee before the CIT(A). Besides reiterating the arguments that had earlier been advanced, unsuccessfully, before the Assessing Officer, the assessee also advanced before the CIT(A) an alternative contention, namely, that if the reserve in question was not eligible to be included in the capital base of the company, then under Rule 2(ii) of the Second Schedule of the Companies (Profits) Surtax Act, the reserve in question must be deducted from the cost of investment the income from which is excluded from the chargeable profits of the assessee.
5. The CIT(A) rejected both the contentions. According to him, the first contention was to be rejected following the ITAT decision in the case of Manjushree Plantations Ltd. (supra). The latter contention will also have to be rejected, because the reserve in question "cannot be equated with a fund contemplated under Rule 2(ii). This reserve has been set apart for a specific purpose and cannot be utilised by the assessee for a specific period".
6. Shri S.S. Mani, the learned Counsel for the assessee contended that the reserve in question will be covered by Rule 1(ii), of the Second Schedule. In any event, it will be covered by Rule 1 (iii), which talks of "other reserves". Secondly and alternatively, as stipulated under Rule 2(ii) the reserve should go to reduce the cost of investment.
7. On his part, the learned Departmental Representative supported the impugned orders of the lower authorities. He contended particularly that development allowance reserve is not one of the reserves specified in Rule 1(v) and that, therefore, there is no question of treating the said reserve as being covered by the said Rule. If the said reserve is to be treated as one of the "other reserves" referred to in Rule 1(iii), then the amount of development allowance actually allowed must be deducted from the capital base.
8. We have looked into the facts of the case. We have considered the rival submissions.
9. We may clear the decks as it were by considering first Shri Mani's argument that development allowance reserve would qualify for inclusion in the capital base through Rule 1(ii) route. This argument is obviously based on the consideration that development allowance reserve is of the same genre as development rebate reserve and investment allowance reserve. But the difficulty here is that development allowance reserve is not included in Rule 1(ii). True, the said reserve is of the same genre as development rebate reserve and investment allowance reserve. True again, when investment allowance was introduced by the Finance Act, 1976 w.e.f. 1-4-1976, Rule 1(ii) was also amended to include investment allowance reserve in the said Rule. But when development allowance was introduced by the Finance Act, 1965 w.e.f. 1-4-1965, Rule 1(ii) was not correspondingly amended. May be, the omission to amend Rule 1(ii) is an oversight on the part of Parliament. But the fact of the matter is that development allowance reserve is not mentioned in Rule 1(ii), and consequently there is no question of bringing it under the pale of the said Rule.
We, therefore, reject this argument.
10. The question that then arises for consideration is whether development allowance reserve could be brought under the pale of Rule 1 (iii) on the ground that it is subsumed under the term 'Other reserves' occurring in the said Rule. This naturally entails the consideration of the question whether development allowance reserve is a reserve properly so called. Here two aspects are noteworthy. First, as we see it, being of the same genre as development rebate reserve and investment allowance reserve, development allowance reserve also is a reserve simpliciter. It will have to be taken into reckoning for computing the capital base of the assessee.
11. Secondly, the aforesaid reserve also satisfies the tests laid down by the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132ITR 559. In the said case the Supreme Court enunciated the following principles:
Provision Provision is a retention or appropriation of a sum designed to meet depreciation, renewals or diminution in value of assets, or any known liability. Excess provision over the sum actually required is, however, a reserve. This is by operation of law (Clause 7 of Part III of Schedule VI of the Companies Act, 1956).
Reserve The Companies Act, 1956 gives a negative definition of "reserve". If any retention or appropriation of a sum falls within the definition of "provision", it can never be a reserve; but it does not follow that if the retention or appropriation is not a provision, it is automatically a reserve. In such cases, the true nature and character of the sum will have to be decided with reference to the substance of the matter. A mass of undistributed profits cannot automatically become a reserve. Somebody possessing the requisite authority (namely, the Board of Directors) must clearly indicate the portion of the undistributed profits as being earmarked or separated from the general mass of profits with a view to constituting it either a general reserve or a specific reserve. The surrounding circumstances should make it apparent that the amount so earmarked or set apart is in fact a reserve to be utilised in future for a specific purpose and on a specific occasion.
Approach One should first decide whether a retention or appropriation is a 'provision'. If it is not a provision, one should thereafter decide its true nature and character, having regard to a host of factors, such as, intention, surrounding circumstances, etc.
12. Against the backdrop of the above principles, it would at once be clear that development allowance reserve is not a provision. It is a reserve because somebody possessing the requisite authority (namely Board of Directors) clearly earmarked the sum in question as a specific reserve. True, the Board of Directors came to create the reserve not on their own volition but with a view to complying with a statutory requirement. But that is also the case with development rebate reserve and investment allowance reserve. True again, the Income-tax Act stipulates the manner in which the amount credited to development allowance reserve should or should not "be used during the prescribed period. But this too is the case with development rebate reserve and investment allowance reserve.
The significant fact to be noted is that the creation of the reserve entails the retention of the assets as capital of the company for future use.
The situation here is quite the opposite of what happens when dividend is declared and paid. Declaration and payment of dividend, in a sense, involves release of the assets by the company to the shareholders; whereas a reserve has precisely the opposite effect, namely retention of the asset as capital of the company. It may be noted with interest in this regard that Section 33A(3)(W), which stipulates creation of development allowance reserve, goes on to stipulate further that during a period of eight years next following the previous year in which the reserve was created the amount credited to the reserve should not, inter alia, be used for distribution by way of dividend or profits. This statutory stipulation, as we see it, has had its genesis in the aforesaid distinction between creation of a reserve on the one hand, and on the other the declaration and payment of dividend.
It should, therefore, follow that development allowance reserve Is a reserve properly so called and will, on that basis, enter the capital base of the company through Rule 1(iii) route.
13. Shri Raghavan, the learned Departmental Representative, however, contends that if development allowance reserve is brought under the pale of Rule 1(iii), then the capital base will have to be reduced by the amount of development allowance actually allowed for purposes of computing total income of the assessee under the Income-tax Act. We are unable to agree. Under the scheme of the Income-tax Act, development allowance is allowed if the assessee satisfies the stipulated basic conditions. If the assessee-becomes eligible for development allowance by reason of its satisfying the basic conditions, development allowance will be allowed, but subject to the rider, namely that the assessee creates development allowance reserve in a sum equal to 75% of the development allowance to be actually allowed. This would mean that development allowance actually allowed will always be in excess of the development allowance reserve created by the assessee. Clearly, what is allowed as a deduction in income-tax proceedings is not the sum credited to development allowance reserve.
14. In view of the foregoing, therefore, we reject the said contention of Shri Raghavan. We further hold that development allowance reserve (Rs. 73,000) will have to be taken into reckoning in its entirety for purposes of computing the assessee's capital base. We accordingly direct the Assessing Officer to recompute the assessee's capital base taking into reckoning the said sum of Rs. 73,000 credited to development allowance reserve.
15. Issue No. 2 - Application of Rule 2(ii) of the Second Schedule of the Companies (Profits) Sur-tax Act, 1964 - (a) Surplus in the P & L A/c (Rs. 63,549) and (b) Provision for taxation (Rs. 47,72,887).
The aforesaid issue has arisen in the following circumstances. The assessee, it is common ground, earned inter-corporate dividend of Rs. 30,984. It is also common ground that on the computation date, namely 1-4-1982, the cost of shares of the other companies held by the assessee aggregated Rs. 5,78,071. Now under Rule 1(viii) of the First Schedule of the C.P.S.T. Act, which details how the chargeable profits must be computed, inter-corporate dividends will have to be excluded from the assessee's total income computed for the relevant assessment year under the Income-tax Act. It is common ground that the aggregate inter-corporate dividend of Rs. 30,984 was accordingly excluded from the total income of the assessee.
16. Rule 2 of the Second Schedule of the C.P.S.T. Act contemplates reduction of the capital base in the stipulated manner. It is, inter alia, provided that in cases where inter-corporate dividends are excluded from the total income by virtue of the provisions of Rule 1(viii) of the First Schedule, the cost to the assessee of the shares as exceeds aggregate of:
(i) any moneys borrowed and remaining outstanding on the first date of the previous year; and
(ii) the amount of any fund, any surplus and any such reserve as is not to be taken into account in computing the capital base of the company under Rule 1 of the Second Schedule shall be deducted from the capital base as computed under Rule 1.
17. The assessee's case was first that the surplus in the P& L A/c (Rs. 63,549) must be deducted from the cost of the shares because of the clear provisions of Rule 2(ii).
Secondly, provision for taxation (Rs. 47,72,887) too must be deducted the cost of the shares in question, because provision for taxation answers the description of "any fund" occurring in Rule 2(ii). Reliance was placed in this regard on the Calcutta case of Duncan Brothers & Co. Ltd. v. CIT [1978] 111 ITR 885.
Since the cost to the assessee of the shares in question (Rs. 5,78,071) was much less than the sum total of (a) surplus in P&L A/c (Rs. 63,549), and (b) provision for taxation (Rs. 47,72,887), the question of reducing the capital base in the manner stipulated by and under Rule 2 of the Second Schedule did not arise.
18. The Assessing Officer rejected in toto the aforesaid contentions, purporting to rely on the Full Bench decision of the Madras High Court in the case of Madras Motor & General Insurance Co. Ltd. v. CIT [1979] 117 ITR 534. According to the Assessing Officer the observations contained at page 537 of the Report negatived the assessee's contention that provision for taxation could be regarded as "any fund" within the meaning of Rule 2(ii). According to him, again, the said case also was sufficient to negative the assessee's claim relating to surplus in P&L A/c.
19. The CIT(A) declined to interfere in this matter. The reasons which weighed with him in this regard were those which had earlier weighed with the Assessing Officer.
20. It is in these circumstances that the assessee is now before us.
21. Dealing first with the assessee's claim for adjustment under Rule 2(u) in relation to surplus in the P & L A/c, Shri Mani, the learned Counsel for the assessee, contended that the claim is in consonance with the clear provisions of the said Rule. Hence the assessee is entitled to succeed on this count.
22. Dealing next with the assessee's claim under the said Rule in relation to provision for taxation, Shri Mani contended that the question here is not whether provision for taxation is a reserve. Indeed, it is not the case of the assessee that provision for taxation is a reserve. The question here is whether provision for taxation could be regarded as "any fund" within the meaning of Rule 2(H). And according to Shri Mani, provision for taxation answers the description of "any fund" occurring in Rule 2(ii). In this regard he referred to and relied upon the Calcutta case of Duncan Brothers & Co. Ltd. [supra). He, therefore, urged that the assessee is entitled to succeed on this count too.
23. On his part Shri Raghavan strongly supported the impugned orders of the lower authorities on this issue.
24. We may, at the outset, consider the general scheme of the Companies (Profits) Surtax Act, 1964. The Income-tax Act imposes a charge on the total income of the assessee. On its part, the Companies (Profits) Surtax Act, 1964, levies an additional tax on the total income of a company in the manner stipulated by the Act. Surtax is levied basically on the excess of the chargeable profits over the statutory deduction.
25. The First Schedule to the Act contains the Rules for computing the chargeable profits. Briefly stated, chargeable profits are computed by taking as the starting point the total income computed under the Income-tax Act and by adjusting it in the manner stipulated in the Schedule. Of relevance to the issue on hand is Rule 1(vii), which, in terms, stipulates that for purposes of computing the chargeable profits, inter-corporate dividends shall be excluded from the assessee's total income as computed under the Income-tax Act for the assessment year in question.
26. The Second Schedule contains Rules for computing the capital base of the company. Broadly stated, under the said Schedule, the capital base is more or less equal to what in corporate accounting phraseology is known as "shareholders' funds", subject to the stipulated adjustments.
27. Once the capital base is computed, the determination of 'statutory deduction' is merely an arithmetical exercise, because, by definition [see Section 2(8) of the Act], it is a sum equal to 15% of the capital base.
28. Thereafter, surtax is levied on the excess of chargeable profits over statutory deductions.
29. We may now notice rather closely the scheme of the Second Schedule of the Companies (Profits) Surtax Act, insofar as it relates to the issue on hand. First, under Rule 1 of the Schedule, the aggregate of the following three items will have to be computed:
(i) Paid-up share capital of the company;
(ii) Development rebate reserve and/or investment allowance reserve; and
(iii) Other reserves as reduced by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for income-tax purposes.
30. Then we have the clarificatory Explanation to Rule 1, which clearly stipulates that the following items shall not be taken into account for purposes of computing the capital base of the assessee:
A. Items figuring under the heading "Reserves and Surplus" in Part-I- Form of Balance Sheet of Schedule VI of the Companies Act, 1956
(i) Item No. (5) ibid - Surplus, that is balance in the P&L A/c after providing for proposed allocations, namely, dividend, bonus or reserves.
(ii) Item No. (6) ibid - Proposed additions to reserves.
(iii) Item No. (7) ibid - Sinking Funds.
B. Items occurring under the head 'Current Liabilities and Provisions' in the column relating to "liabilities' in the Form of Balance-sheet given in Part-I of Schedule VI of the Companies Act, 1956 None of the items figuring under the said column will enter into the computation of capital base.
De hors the Explanation, there is one other item which does not enter the capital base. After the 1976 amendment to Rule 1, no part of borrowed capital is to be taken into account for computing the capital base.
31. We then have Rule 2, which contemplates a downward revision in the capital base (as computed under Rule 1) in certain circumstances.
32. The First Schedule of the Companies (Profits) Surtax Act (which contains the rules for computing the chargeable profits of the company), excluding certain items of incomes from the total income of the company as determined for income-tax purposes. Rule 2 of the Second Schedule focusses its attention on three of such excluded items of income, namely :
(i) profits and gains of any business of life insurance;
(ii) (a) interest derived from any security of the Central Government issued or declared to be tax-free;
(b) interest derived from any security of a State Government issued income-tax free, the income-tax wherein is payable by the State Government; and
(iii) inter-corporate dividends.
Since the aforesaid items of income are left out of reckoning for the purposes of computing chargeable profits of the company, and since the capital base of the company is a function of various factors, including the income earned by the company, Parliament has stipulated that the capital base as computed under Rule 1 of the Second Schedule shall be correspondingly reduced by the cost to the assessee of the assets which yield the aforesaid three items of excluded income. It would at once be clear that the reduction in the size of the capital base entails a pro tanto increase in the surtax payable by the company.
33. Parliament has not allowed the matter to rest there. It has introduced a further sophistication in Rule 2. As already pointed out, (a) borrowed capital in its entirety and (b) three specified items viz. Item Nos. (5), (6) & (7) figuring under the heading 'Reserves and Surplus' are excluded from capital computation. In the circumstances, Parliament thought that it would be only fair that, for the purposes of reducing the capital base under Rule 2, the aggregate cost to the assessee of the assets which yield the excluded items of income referred to above is not taken into account in its entirety; but is first attributed to the aggregate of borrowed capital and the aforesaid three items occurring under the heading 'Reserves and Surplus', and the balance, if any, alone is taken into account for reducing the capital base.
34. The attribution of moneys invested in the aforesaid assets to borrowed capital does not present any difficulty. Their attribution to the other three items occurring under the heading "Reserves and Surplus", however, presents some difficulty, particularly in view of the phraseology of Rule 2(fl). As pointed out earlier, conceptually speaking, if the aforesaid, three items under the heading "Reserves and Surplus" are excluded from capital base, it should logically follow that only these three items are available for purposes of attribution. Given this rationale, Rule 2(ff) should have referred only to the amounts excluded in computing the capital under Rule 1, namely, (a) surplus in the P&L A/c, (b) proposed additions to reserves and (c) sinking funds occurring in that order as item Nos. (5), (6) and (7) under the heading "Reserves and Surplus" in the form of balance-sheet in Part I of Schedule-VI of the Companies Act, 1956. For a fact, in paragraph 1-15.18 of its final Report the Direct Tax Laws Committee (the Chokshi Committee) had made a specific recommendation on these lines.
35. As it stands today, however, Rule 2(ii) reads as follows :
(ii) the amount of any fund, any surplus and any such reserve as is not to be taken into account in computing the capital under Rule 1.
And, it is argued that the attributive "such" occurring in the said Rule governs only the term "reserve" and not the terms "fund" and "surplus", and that, consequently, for ascertaining the meaning of the term "fund" especially, one is not obligated to hark back to the clarificatory Explanation to Rule 1 of the Second Schedule, and that one is free to give the term its ordinary meaning as understood in common parlance and according to its dictionary meaning. So viewed, provision for taxation is very much a fund.
The point that is sought to be made here on behalf of the assessee is that provision for taxation being a provision simpliciter and not a reserve will not enter the computation of capital base under Rule 1. Even so, in its character as a fund, it will be available under Rule 2 for set off against the cost to the assessee of the assets which yield income which are excluded from the chargeable profits under Rule 1 of the First Schedule to the Companies (Profits) Surtax Act.
36. We are unable to accept the said arguments.
37. Ex visceribus actus is one of the well-known rules of construction. The rationale behind this rule is that it is the most natural and genuine exposition of a statute to construct one part of a statute by another part of the same statute "for that best expresseth the meaning of the makers.... That is to say, the Act has to be read as a whole. As observed by the Gujarat High Court in CIT v. R.M. Amin [1971] 82 ITR 194 :
When the court is called upon to construe the terms any provision found in a statute, the court should not confine its attention only to the particular provision which falls for consideration but the court should also consider other parts of the statute which throw light on the intention of the Legislature and serve to show that the particular provisions ought not to be construed as if it stood alone and apart from the rest of the statute. Every clause of a statute, should be construed with reference to the context and other clauses of the statutes so as, as far as possible, to make a consistent enactment of the whole statute.
Another warning was sounded by the Court of law and that was in the context of the discovery of the intention of the Legislature from the language used. In the case of CIT v. J.H. Gotla [1985] 156 ITR 323 (SC) recalling to memory the warning administered by Judge Learned Hand, Sabyasachi Mukharji, J. observed :
Where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the Legislature, the Court might modify the language used by the Legislature so as to achieve the intention of the Legislature and produce a rational construction. The task of interpretation of a statutory provision is an attempt to discover the intention of the Legislature from the language used. It is necessary to remember that language is at best an imperfect instrument for the expression of human intention. It is well to remember the warning administered by Judge Learned Hand that one should not make a fortress out of the dictionary but remember that statutes always have some purpose or object to accomplish and sympathetic and imaginative discovery is the surest guide to their meaning.
For a fact, certain observations of the Supreme Court in the case of CGT v. N.S. Getti Chettiar [1971] 82 ITR 599 elucidate what is exactly meant by "making a fortress out of the dictionary". At page 605 of the Report the Court observed:
The dictionary gives various meanings for those words but those meanings do not help us. We have to understand the meaning of those words in the context in which they are used. Words in the section of a statute are not to be interpreted by having those words in one hand and the dictionary in the other. In spelling out the meaning of the words in a section, one must take into consideration the setting in which those terms are used and the purpose that they are intended to serve.
The purposive approach to statutory interpretation which was adopted and advocated by Lord Diplock in preference to the purely literal interpretation of the statutory provisions seeks "to promote general legislative purpose" by breaking the stranglehold of the dictionary. Re-emphasising the importance of purposive approach, Lord Diplock in Reg. v. Nat. Ins. Commi: [1972] AC 944 observed:
Meticulous linguistic analysis of words and phrases used in different contexts in particular sections of the Act should be subordinate to this purposive approach. It should not distract your Lordships from it.
38. As we seek it, if the provisions of Rule 2(£Q are interpreted in accordance with the aforesaid canons of construction, the terms "any surplus", "any fund" and "any such reserve" occurring therein can only refer to the three items, namely item Nos. (5), (6) and (7) under the heading "Reserves and Surplus" in the form of Balance-sheet in Part I of Schedule VI of the Companies Act, 1956, which have been specifically excluded from the capital base by the clarificatory Explanation to Rule 1.
39. Any other mode of construction of Rule 2(ii) would result in consequences not contemplated by Parliament. Provision for taxation is excluded from the capital base. If the arguments of the assessee on this issue are accepted, the result would be that provision for taxation which is denied entry into the capital base of the company through the main door, would nevertheless gain entry into the capital base through the back door as it were. In other words, while the Rule 1 route is barred, provision for taxation will take Rule 2(ii) route to gain entry into the capital base.
40. The aforesaid situation can be illustrated with the help of the figures relating to the surtax assessment for the assessment year 1983-84 in the assessee's own case.
The previous year relevant to the surtax assessment year 1983-84 is the year of account ending on 31-3-1983. The computation date for purposes of calculating the assessee's capital base is the first day of the said previous year, namely 1-4-1982. This would mean that the assessee's balance-sheet as on 31-3-1982 will be the starting point. Under Rule 1 the capital base would be as follows :
Paid up capital Rs. 20,00,000
General Reserve Rs. 38,68,654
Development Rebate Reserve Rs. 8,100
Investment Allowance Reserve Rs. 2,28,000
Development Allowance Reserve Rs. 73,000
Capital Reserve Rs. 56,246
______________
Rs. 62,34,000
______________
For the purposes of the said calculation, provision for taxation (Rs. 47,72,887) is not taken into account.
The cost to the assessee of the shares which yielded inter-corporate dividend is Rs. 5,78.071. Therefore, according to the interpretation which has found favour with us, the capital base would have to be reduced by the said sum of Rs. 5,78,071. The net capital base would then be Rs. 56,55,929.
It is, however, the assessee's case that there is a provision for taxation in a sum of Rs. 47,72,887; that it is a "fund" within the meaning of Rule 2(tf); that, therefore, the cost of shares, namely, Rs. 5,78,071 must be adjusted against the said provision; and that, consequently, no part of the said sum of Rs. 5,78,071 would go to reduce the capital base. According to the assessee, the capital base will remain Rs. 62,34,000. In other words, to the extent of Rs. 5,78,071. provision for taxation enters the capital base through the back door as it were.
A slight alteration in the cost of the shares will give us a typical illustration. Suppose the cost of the shares was Rs. 50,78,071. Then, according to our interpretation, the net capital base would be Rs. 11,55,929 (Rs. 62,34,000 minus Rs. 50,78,071). Such a heavy reduction in the capital base will naturally entail a pro tanto increase in the surtax payable by the assessee.
If the assessee's contentions were to be accepted, the cost of the shares, namely Rs. 50,78,071 (as assumed by us), will have to be first reduced by provision for taxation of Rs. 47,72,887 leaving a balance of Rs. 3,05,184, which alone would go to reduce the capital base. In that event the net capital base of the assessee would be Rs. 59,28,816.
That, in the said process the provision for taxation has entered the capital base through the backdoor as it were, can be demonstrated by the following working :
Capital base under Rule 1 : Rs. 62,34,000
Add : Provision for taxation : Rs. 47,72,887
_____________
Rs. 110,06,887
Ded : Cost of shares : Rs. 50,78,071
______________
Net capital base Rs. 59,28,816
______________
As we see it, the arguments advanced on behalf of the assessee destroys the very basic scheme of the Surtax Act. We have, therefore, no hesitation in rejecting them as unsound.
41. There is yet another point which is noteworthy. And that is that, if the assessee's arguments are accepted, the result would be a case of invidious distinction between the companies like the assessee before us, which have investments income from which go to reduce the capital base in terms of Rule 2, and those which do not have such investments. In the former case, the assessee will get the benefit of attribution of the cost of those investments against the provision for taxation, while the latter will not be able to do so. Such a happenstance-based distinction cannot be regarded as a distinction based on any intelligible criterion. This is yet another reason why we reject the assessee's arguments insofar as they relate to the treatment to be given to provision for taxation in terms of Rule 2 of the Second Schedule of the C.P.S.T. Act.
42. The assessee's counsel, it may be recalled, relied on the Calcutta case of Duncan Brothers & Co. Ltd. (supra). We have carefully perused the Report in the said case. We find first that the issue was decided almost exclusively on the connotation of the word "fund". It is, ex facie, clear from that part of the Report dealing with this issue that no arguments were advanced on the basis of the rationale behind Rule 2(ii) in the context of Rule 1, and particularly the clarificatory Explanation thereto. It was, therefore, that the High Court did not have an occasion to examine this aspect of the matter at all. In the preceding paragraphs we have shown on first principles how the term "any fund" occurring in Rule 2(ii) cannot be given an extended meaning and that the term should be restricted to sinking funds which by virtue of the clarificatory Explanation to Rule 1 are excluded from the capital base. With respect, therefore, we are unable to follow the said Calcutta case.
43. In this connection the Calcutta case of CIT v. Bird & Co. (P.) Ltd. [1982] 133ITR 40 may be noticed with interest. There the assessee-company had made an appropriation in a sum of Rs. 11,55,908 towards proposed dividends. The assessee-company's case was that the said sum should not be deducted from the capital base as it constituted a surplus fund within the meaning of Rule 2 of Schedule 2 of the C.P.S.T. Act.
The ITO negatived this claim without stating any reason therefore. The AAC allowed the assessee's claim because a similar claim had been allowed in relation to the immediately preceding assessment year 1964-65. Thereafter, the Department moved the Tribunal, which, agreeing with the assessee's counsel, held that the proposed dividend was a surplus and had to be deducted from the cost of investment in shares and it was only the balance which was to be deducted from the capital computation as laid down under Rule 2(v) of the C.P.S.T. Act.
Thereupon, the matter reached the High Court by way of reference, which held as follows :
The ordinary meaning of the expression 'surplus' is what remains after meeting the requirements. If, therefore, one goes by the ordinary meaning of the expression 'surplus', then in the context of the reality of a situation, where a dividend has already been proposed by the directors, the amount proposed as dividend cannot be considered to remain as a surplus with the company for any length of time to be taken into consideration. This view is corroborated by the form of the balance-sheet in Sch. VI to the Companies Act, 1956, which under the head 'Reserves and Surplus' states as follows :
(5) Surplus, Le., balance in profit and loss account after providing for proposed allocation, namely, dividend, bonus or reserves.' Therefore, the surplus is after providing for the proposed allocations, inter alia, for dividend according to the form of the balance-sheet given under the Companies Act. Looked at from that point of view, in our opinion, in this case the proposed dividend cannot also be considered to be a surplus.
A plain reading of the Report will indicate that the above observations cannot be understood except against the backdrop of the provisions of Rule 1 and particularly whose of the clarificatory Explanation to the said Rule, which in terms refers to item (5) 'Surplus' occurring under the heading "Reserves and Surplus'.
44. Referring to the earlier decision in the case of Duncan Brothers & Co. Ltd. (supra) the Court further observed :
...Provision for taxation may be a fund, because it would be payable upon quantification.
(Emphasis supplied) Two points may here be made. First, the Court considered it necessary to be cautious enough to say that provision for taxation may be a fund.
When there is an earlier decision of a Division Bench of the same Court, we should have expected another Division Bench of the same Court to say unequivocally that the earlier Bench had decided the issue in a particular fashion.
In this case the Division Bench dealing with the case of Bird & Co. (P.) Ltd. (supra) should have said clearly that it had already been held by another division Bench that provision for tax is a fund and then proceeded to distinguish that case. Interestingly, the division Bench dealing with the case of Bird & Co. (P.) Ltd. (supra) did not do so. It said "...provision for taxation may be a fund...." As we see it, this can be explained only on the hypothesis that the division Bench was having some reservations about the decision on this issue taken by the earlier Bench.
45. Secondly, the Division Bench state that provision for taxation may be a fund because it was payable upon quantification. But the fact of the matter is that while deciding the case of Duncan Brothers & Co. Ltd. (supra) the court held that provision for taxation is a fund by focussing its attention on the extended definition of the term "fund". It did say that provision for taxation is a fund because it was payable upon quantification.
The point that we are making is that when faced with an attempt on the part of the assessee to apply to proposed dividends the extended meaning of the word "fund", the court found it necessary to be cautious enough to distinguish the earlier case on the lines indicated above.
46. In view of the foregoing, therefore, with respect, we are unable to follow the Calcutta case of Duncan Brothers & Co. Ltd. (supra).
Accordingly, we hold that provision for taxation cannot be deducted from the cost of investment under Rule 2(ii).
47. That leaves for consideration whether surplus, that is balance in the Profit & Loss account, after providing for proposed allocations, namely, dividend, bonus or reserves, is available for being set off against the cost of the shares in question. Here, as pointed out earlier, the term "any surplus" occurring in Rule 2(ii) can only refer to item No. (5) under the heading 'Reserves and Surplus' of the form of balance-sheet given in Schedule VI of the Companies Act, 1956, which has in terms been excluded from the capital computation by the clarificatory Explanation to Rule 1. We, therefore, hold that the assessee is entitled to have the sum of Rs. 63,549 being the surplus in P & L account set off against the cost of shares in question Rs. 5,78,071. The balance of the cost, namely Rs. 5,14,612 (Rs. 5,78,071 minus Rs. 63,459) would go to reduce the capital base of the assessee-company as computed under Rule 1. We hold accordingly.
48. Before taking leave of this matter, we may examine the view taken by the lower authorities to the effect that the Madras case of Madras Motor & General Insurance Co. Ltd. (supra) concluded the matter against the assessee, as respects its claim in relation to both 'Surplus' and 'provision for taxation'. It may be recalled that both the Assessing Officer and the CIT (A) have referred to page 537 of the Report in this regard. We have carefully perused the Report. We do not find anything on page 537 or any other page of the Report to show that the Madras High Court had decided that provision for taxation cannot be treated as a fund within the meaning of Rule 2(ii) of the Second Schedule. All that the Madras High Court had observed was: "provision for taxation cannot be a reserve for the simple reason that the tax had already accrued due, and a specific liability towards this had arisen. This matter is covered by the decision of the Supreme Court, and, hence, we negative the contention that the sum of Rs. 24,36,239 should be excluded...." Clearly, the Madras High Court had negatived the assessee's contention on the footing that provision for taxation cannot be regarded as a reserve. On this issue at least, there is nothing to indicate in the Report that it was the assessee's case that provision for taxation was a fund.
For a fact, only in respect of "premium deposits", it would appear, it was contended on behalf of the assessee that the said deposit constituted a fund for purposes of Rule 2(ii). And, as it is ex facie clear from the head-note, the said question was left open.
49. In view of the foregoing, therefore, we hold that the lower authorities were not justified in proceeding on the basis that the said Madras case could be invoked to negative the assessee's claim in relation to both "provision for taxation and surplus". As we have demonstrated supra, provision for taxation cannot be regarded as a fund for purposes of Rule 2(ii), while surplus in the Profit & Loss account is squarely covered by the provisions of the said Rule.
50. Issue No. 3 - Levy of interest under Section 7 of the Act This matter is really consequential one and hence, the related grounds dismissed.
51. Assessment year 1985-86 The findings given by us in relation to the assessment year 1983-84 will hold good here also. We order accordingly.
52. In the result, the two appeals filed by the assessee are allowed in part.