Andhra HC (Pre-Telangana)
Commissioner Of Income-Tax vs Andhra Bank Ltd. on 17 February, 1988
Equivalent citations: [1990]186ITR192(AP)
JUDGMENT Y.V. Anjaneyulu, J.
1. This is a consolidated reference under the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as "the Act"), for the assessment years 1974-75, 1975-76 and 1977-78. The reference is at the instance of the Commissioner of Income-tax and the Tribunal referred as many as six questions. Out of these six questions, three questions are common for the assessment years 1974-75, 1975-76 and 1977-78. Two questions are common for the assessment years 1975-76 and 1977-78 and one question pertains to the assessment year 1975-76. We deal with these questions in that order.
2. Taking up the three questions which are common for the assessment years 1974-75, 1975-76 and 1977-78, learned standing counsel for the Revenue fairly represented that all these three questions are covered by a decision of this court in Referred Case No. 18 of 1980 dated November 7, 1984 (See (supra)). The first question, it is said, is covered against the Revenue (sic) ; the second question, it appears, is covered against the assessee (sic) ; and the third question, it is said, is covered against the Revenue. Having regard to this representation, we answer questions Nos. 1 and 3 in favour of the assessee and against the Revenue (sic) and question No. 2 in favour of the Revenue and against the assessee (sic).
3. We then take up the two questions for the assessment years 1975-76 and 1977-78. The questions run as follows :
"For assessment year 1975-76 : Whether, on the facts and in the circumstances of the case, the sum of Rs. 29,76,000 set apart for bad and doubtful debts could form part of capital by being treated as a reserve ?
For assessment year 1977-78 : Whether, on the facts and in the circumstances of the case, the sum of Rs. 37,00,000 set apart for bad and doubtful debts could form part of capital by being treated as a reserve ?"
4. We find that the first question concerning bad and doubtful debts reserve is common to the assessment years 1975-76 as well as 1977-78. The assessee claims that the sums of Rs. 29,76,000 and Rs. 37,00,000 set apart from out of profits towards bad and doubtful debts reserve should be included in the capital under the Second Schedule to the Act. It is represented that to the extent debts had become bad they were straightaway debited to the profit and loss account. At the same time, the board of directors felt it expedient to make a reserve to cover debts becoming bad or doubtful of recovery at a future date. It was pursuant to the above view that the board of directors authorised the setting apart of sums of Rs. 29,76,000 and Rs. 37,00,000 to meet the future contingencies of bad and doubtful debts for the two assessment years 1975-76 and 1977-78. It is stated that these amounts are not set apart against any known or existing liability but they represent ad hoc reserve created for the purpose of meeting the future requirements. Learned counsel for the assessee, Mr. M J. Swamy, therefore, contended that the sums in question should be regarded as "other reserves" for the purpose of the Second Schedule to the Act. Learned standing counsel submits that these were in the nature of provisions and should not, therefore, be regarded as "other reserves".
5. If the assessee had separately ascertained the debts which had actually become bad and debited the same to the profit and loss account, we do not see how the sums set apart to meet future contingencies could be regarded as provisions. The Revenue has not been able to show that these two sums were set apart against known and existing liabilities in order that they can be treated as provisions under the Act. The sums having been set apart in an ad hoc fashion in our opinion come under "other reserves" under the Second Schedule to the Act. We, therefore, answer the first question for the assessment year 1975-76 and the only question for the assessment year 1977-78 in the affirmative, that is to say, in favour of the assessee and against the Revenue.
6. This leaves only one more question for the assessment year 1975-76 and this may be extracted below :
"Whether, on the facts and in the circumstances of the case, in computing the chargeable profits, the entire gross dividends of Rs. 88,025 is deductible without restricting it to net dividends of Rs. 34,010 included in the total income ?"
7. The First Schedule to the Act sets out rules for computing the chargeable profits. It is provided that in computing the chargeable profits of a previous year, the total income computed for that year under the Income-tax Act shall be adjusted as specified therein. Clause (viii) provides that income by way of dividends from an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends within India shall be excluded from the total income for the purpose of ascertaining chargeable profits. The assessee claimed that during the previous year relevant to the assessment year 1977-78, the assessee-company received dividends from other companies (which are popularly called inter-corporate dividends) to the extent of Rs. 88,025. While computing the income under the Income-tax Act, the deductions specified in Chapter VI-A were allowed. On account of the inter-corporate dividends, the deduction allowed was Rs. 51,015 so that in the total income computed for the income-tax purposes, the portion of the inter-corporate dividends included was only Rs. 34,010. For the purpose of computation of chargeable profits under the Surtax Act, the assessee claimed that from out of the total income computed under the Income-tax Act, the gross dividends of Rs. 88,025 received should be excluded, notwithstanding the fact that Rs. 51,015 out of it was allowed as deduction under Chapter VI-A of the Income-tax Act. In other words, it is entirely immaterial that a part of the inter-corporate dividends was allowed as deduction under Chapter VI-A of the Income-tax Act. Since the gross amount of dividends entered the computation of total income formally prior to the amount of deduction under Chapter VI-A, it is only logical that the dividend income which formed part of the gross total income should be excluded, while computing the chargeable profits under the First Schedule to the Act. The Income-tax Officer declined to accept the claim and excluded from the total income only the net income of Rs. 34,010 which formed part of the total income and was subjected to tax. On appeal, the Commissioner of Income-tax (Appeals) accepted the assessee's claim and directed that the entire gross dividends of Rs. 88,025 should be excluded from the total income for the purpose of computing the chargeable profits. The Revenue filed an appeal to the Tribunal and the Tribunal upheld the order of the Appellate Assistant Commissioner and that is how the Commissioner sought reference of the above question for the consideration of this court.
8. The question relating to the deduction under Chapter VI-A of the Income-tax Act falling under Section 80M of the Income-tax Act, which is intimately connected with the point arising for consideration in the present case regarding computation of profits under the Surtax Act, has a chequered history. Under the Income-tax Act, the initial contention that gross dividend should be excluded for the purpose of determining the total income was accepted notwithstanding the fact that only a portion of the dividend was subjected to tax. The Supreme Court upheld the above position in Cloth Traders (P.) Ltd. v. Addl. CIT . As soon as the Supreme Court decided the matter, an Ordinance was passed and Section 80A of the Income-tax Act, 1961, was introduced to the effect that what could be deducted under Chapter VI-A of the Income-tax Act is only the net income which ultimately suffered tax and not the gross dividend. That Ordinance was given retrospective effect with effect from April 1, 1968. The Ordinance was challenged, inter alia, on the ground that the retrospective operation was invalid. The Supreme Court, while disposing of the writ petitions challenging the Ordinance, reversed its earlier stand in Cloth Traders (P.) Ltd. and held that only the net dividend which was actually subjected to tax fell to be deducted under Chapter VI-A and not the gross dividend as was earlier decided. Dealing specifically with the contention regarding retrospective operation, the Supreme Court held that the question need not be considered because, in its opinion, the amendment brought about was merely declaratory of the law as it always stood since April 1, 1968, and no complaint could validly be made against it. Thus, in real substance, the Supreme Court held that although the position in law prior to the amendment by the Ordinance in the year 1980 was not categorical, still the amendment made retrospectively with effect from April 1, 1968, was always the position and the amendment was merely declaratory of the pre-existing law.
9. We have to make a reference to the amendment brought about in the Surtax Act itself by incorporating an Explanation with effect from April 1, 1981. The purpose of inserting the Explanation is to bring the law in line with income-tax law so that what has to be excluded from the total income in accordance with Rule 1 of the First Schedule is not the gross dividend but the net dividend. Mr. M. J. Swamy raises the plea that this amendment inserted the Explanation came into force only on April 1, 1981, and will be operative from the assessment year 1981-82 onwards and it cannot be applied for the earlier assessment years. He relied upon a decision of the Calcutta High Court in CIT v. Jiyajeerao Cotton Mills Ltd. , which is directly on the point. The Calcutta High Court had taken note of the fact that the Explanation added by the Finance Act, 1981, cannot be construed as clarifying the legislative intent. The High Court observed that it declares the legislative intent to exempt from surtax the amount of dividends which has actually been included in the total income from the assessment year 1981-82. We would have had no difficulty in respectfully agreeing with the judgment of the Calcutta High Court had it not been for the fact that in Distributors (Baroda) P. Ltd. , the Supreme Court held the amendment to Section 80AA as merely declaratory of the law as it always stood from April 1, 1968. The Calcutta High Court did not obviously have the advantage of noting the above observations of the Supreme Court as the decision of the Calcutta High Court was rendered on January 14, 1985, while the decision of the Supreme Court in Distributors (Baroda) P. Ltd. was on July 1, 1985. If the amendment retrospectively made under the Income-tax Act through Section 80AA could be considered as declaratory of the existing law, we do not see why the law as set out after the insertion of the Explanation in the Surtax Act could likewise be not considered as declaratory of the existing law. We would, therefore, hold that although on the face of it the Explanation appears to have come into force only from 1981-82 assessment, it is declaratory of the law already existing and, consequently, it will be effective for the assessment year 1975-76 too. In that view of the matter, we uphold the Revenue's claim that only the net dividend shall be excluded and not the gross dividend. The question is answered in the negative, that is to say, in favour of the Revenue and against the assessee.
10. No costs.