Commissioner Of Income-Tax vs Banque Nationale De Paris on 19 March, 1990

[Cites 32, Cited by 5]

Bombay High Court

Commissioner Of Income-Tax vs Banque Nationale De Paris on 19 March, 1990

Equivalent citations: [1992]194ITR167(BOM)

1. The assessee is a non-resident company incorporated abroad. It carries on the business of banking. In the previous year relevant to the assessment year 1967-68, it received interest amounting to Rs. 15,92,135 from various Indian concerns on the loans advanced to them by the assessee. From the interest so received, the assessee deducted a sum of Rs. 13,16,161 consisting of proportionate interest paid on the funds borrowed by the assessee which were used for advancing loans to the Indian concerns, and the proportionate expenditure on earning interest from the Indian concerns. After deducting the total amount of Rs. 13,16,161 from Rs. 15,92,135 it included the balance of Rs. 2,75,974 as income from interest in its total income in the income-tax return filed by it. This was accepted by the Income-tax Officer.

2. For the said year, the assessee also received a sum of Rs. 2,77,717 as interest on taxable Government securities held by it. From this amount, the assessee deducted a sum of Rs. 2,29,579 being the proportionate interest on the funds borrowed by the assessee for purchasing these securities as also proportionate expenses for purchasing these securities as also proportionate expenses in that connection. The balance amount of Rs. 48,138 was also included by the assessee in its income-tax return as a part of its total income. This figure was late revised. The revised amount has been accepted by the Income-tax Officer.

3. In the course of assessment proceedings under the Companies (Profits) Surtax Act, 1964, the assessee contended before the Income-tax Officer that the sum of Rs. 2,75,974 being the net interest received by it from Indian companies as also the net interest received by the assessee from taxable Government securities should be excluded from the total income for the computation of surtax by reason of rule 1(x) of the First Schedule to the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as "the Surtax Act"). The Income-tax Officer excluded from the total income interest received from the Indian concerns under rule 1(x). The Income-tax Officer, however, declined to deduct the net interet received by the assessee on taxable Government securities under the same rule 1(x).

4. In its appeal before the Appellate Assistant Commissioner, the assessee claimed deduction on the gross amount of interest received from Indian concerns and on taxable Government securities. The Appellate Assistant Commissioner held that the net interest on taxable Government securities was liable to be excluded for the purposes of surtax under rule 1(x). The claim of the assessee for exclusion of the gross interest under both these counts was disallowed.

5. In second appeal before the Tribunal, the Revenue objected to the exclusion of the net interest on taxable Government securities from the total income for the purpose of computation of surtax. The assessee, on the other hand, filed cross-objections claiming full deduction in respect of the gross interest received by it from Indian concerns as also on taxable Government securities held by it. The Tribunal held that interest on taxable Government securities is liable to be excluded under rule 1(x) for calculation of surtax. The Tribunal has also held that what is liable to be excluded is the gross interest received from Indian concerns as also on taxable Government securities. It has held that the said figure is not liable to be reduced by deducting from it other allowable deductions.

6. From this order or the Tribunal, the following questions of law have been referred to us under section 256(1) of the Income-tax Act, 1961, as applied to the Surtax Act by virtue of section 18 thereof :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the income by way of interest on securities' derived by the assessee-company from securities of the Central Government constituted income by way of any interest from Government as contemplated under rule 1(x) of the First Schedule to the Companies (Profits) Surtax Act, 1964 ?

(2) If the answer to question No. (1) is in the affirmative, whether the Tribunal was right in holding that the entire amount of Rs. 2,77,717 by way of interest on securities, without reducting the same by proportionate expenses, was deductible in computing the chargeable profits, in terms of rule 1(x) of the First Schedule to the 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 entire amount of Rs. 15,92,135 received by way of interest from Indian concerns, without reducing the sum by any proportionate expenses, was deductible in computing the chargeable profits in terms of rule 1(x) of the First Schedule to the Companies (Profits) Surtax Act, 1964 ?"

7. It is an accepted position that question No. (1) is covered by a decision of this court in the assessee's own case in CIT v. Banque Nationale de Paris [1981] 130 ITR 534, where the court held that rule 1(x) of the First Schedule to the Surtax Act was wide enough to cover income by way of interest received from taxable Government securities. Hence, question No. (1) must be answered in the affirmative and in favour of the assessee.

8. Whether, under rule 1(x), gross interest received received by the assessee is liable to be deducted from total income or the net interest is liable to be so deducted is the subject-matter of the next two questions. It is, therefore, necessary to consider the scheme of the Companies (Profits) Surtax Act, 1964, and the provisions of the First Schedule where rule 1(x) finds a place. The Companies (Profits) Surtax Act, 1964, imposes a special tax on the profits of certain companies. Under section 5 of the Act, in the case of every company whose chargeable profits assessable under this Act exceed the amount of statutory deduction, the company is liable to furnish a return of chargeable profits of the company during the previous year for the purpose of levy of surtax.

9. Chargeable profits have been defined in section 2(5) to mean the total income of an assessee computed under the Income-tax Act, 1961, for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule. Therefore, for the purpose of levy of surtax, one has to start with the total income of the assessee as computed under the Income-tax Act, 1961. Certain adjustments have then to be made to it as per the First Schedule. Under the First Schedule, rule 1, a list of items to be excluded from the total income is given. The relevant provisions of the First Schedule are as follows :

"THE FIRST SCHEDULE. (See section 2(5)) - 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 follows :

1. Income, profits and gains and other sums falling within the following clauses shall be excluded from such total income, namely, - ......

(x) In the case of a non-resident company which has not made the prescribed arrangements for the declaration and payment of dividends within India, its income by way of any interest of fees for rendering technical service received from Government or a local authority or any Indian concern....."

10. The question is whether the words "income by way of any interest received from the Government or any Indian concern" cover the gross interest so received without reducing it by any deductions for expenses, etc., permissible under the Income-tax Act, 1961, or whether they refer to the net interest after such deduction. In order to decide this questions, it is necessary to examine the manner in which similar provisions in other taxing statutes for deduction from income or exclusion from tax have been interpreted by the Supreme Court and the High Courts. The provisions so interpreted which have a bearing on the interpretation of rule 1(x) are those dealing with deductions in connection with inter-corporate dividends and interest on Government loans.

11. In the case of CIT v. South Indian Bank Ltd. , the Supreme Court was required to consider a notification under section 60A of the Indian Income-tax Act, 1922, which provided, inter alia, that (at p. 766) :

"no income-tax shall be payable by an assessee on the interest receivable on certain income-tax free loans provided that such interest is received within the territories of the State of Travancore-Cochin and in not brought into any other part of the taxable territories to which the said Act applies. Such interest shall, however, be included in the total income of the assessee for the purposes of section 16 of the Indian Income-tax Act, 1922."

12. The Supreme Court said that the phrase "interest receivable" was an unambiguous expression. It could only mean the gross interest as per the terms of the securities. It could not mean interest receivable minus the amount spent in receiving the same.

13. In the case of CIT v. Industrial Investment Trust Co. Ltd. [1968] 67 ITR 436, this High Court was required to construe a notification which exempted from super tax, "so much of the income of any investment trust company as in derived from dividends paid by any other company which has paid or will pay super tax in respect of the profits out of which such dividends are paid". Our High Court constructed the notification to mean that the entire amount of dividend was to be deducted without deducting from it proportionate business expenses attributable to such income. The court relied upon the earlier decision of the Supreme Court in the case of CIT v. South Indian Bank Ltd. [1966] 59 ITR 763 in arriving at this conclusion. It said that the dividend income which was exempted under the notification would be the gross dividend income received by the assessee and not the said income, less any amounts.

14. The same reasoning was applied by our High Court while construing section 99(1)(iv) of the Income-tax Act which also deals with a similar subject-matter of exemption from super Tax. This was in the case of CIT v. New Great Insurance Co. Ltd. [1973] 90 ITR 348 (Bom). Under section 99(1)(iv), it was provided as follows (at p. 352) :

"99. Income not chargeable to super-tax. - (1) Super-tax shall not be payable by an assessee in respect of the following amounts which are included inn his total income - ...

(iv) if the assessee is a company, any dividend received by it from an Indian company, subject to the provisions contianed in the Fifth Schedule."

15. Our High Court emphasised the words "any dividend received by it" and said that, in the context, it must imply all dividends received by the assessee from an Indian company. The exemption was in respect of gross dividend received by the assessee-company and not divided as assessed, or not on dividend income. In construing the same section, the Calcutta High Court had also taken a similar view in the case of CIT v. Darbhanga Marketing Co. Ltd. .

16. In New Great Insurance Co.'s case [1973] 90 ITR 348, our High Court was also required to consider for some of the assessment years, the provisions of section 85A which had replaced section 99(1)(iv). Section includes any income by way of dividends received by it from an Indian company ... the assessee shall be entitled to a deduction from the income-tax with which it is chargeable on its total income ... of so much of the amount of income-tax calculated at the average rate of income-tax on the income so included ..." Applying the same reasoning, the court said that dividends received from an Indian company, in section 85A, referred to the full amount of divided received and not the dividend income as computed for the purpose of income-tax.

17. Section 99(1)(iv) of the Income-tax Act and section 80M came up for consideration before the Supreme Court in the case of cloth traders (P.) Ltd. v. Addl. CIT . Section 80M provides as follows (at p. 252) :

"80M. Deduction in respect of certain incorporate dividends. - (1) Where the gross total income of an assessee being a company includes any income by way of dividends received by it from a domestic company, there shall, in accordance with and subject to the provision of this section, be allowed in computing the total income of the assessee, a deduction from such income by way of dividends of an amount equal to..."

18. The Supreme Court considered the decision of the Bombay High Court in the case of the CIT v. New General Insurance Company Ltd. [1973] 90 ITR 348, as also the decision of the Calcutta High Court, in the case of CIT v. Darbhanga Marketing Co. Ltd. and a similar view taken by the Madras High Court in the case of CIT v. Madras Motor and General Insurance [1975] 99 ITR 243 as also a later decision of the Madras High Court in the case of Madras Auto Service v. ITO [1975] 101 ITR 589. The Supreme Court approved of the interpretation put upon section 99(1)(iv) by Bombay, Calcutta and Madras High Courts and said (at p. 254) :

"It is clear on a plain natural construction of the language of this provision that it grants exemption from super-tax in respect of any dividend from the Indian company, and those last mentioned words cannot means anything else than the full amount of the dividend derived from an Indian company. They cannot obviously mean dividend from an Indian company minus any expenses incurred in earning it, or less any other deduction allowable under the Act."

19. It also construed section 85A and approved of the view taken by the High Court in construing it.

20. The Supreme Court then considered section 80M. It said that there are close similarities between the opening parts of section 85A and section 80M. There is, however, a difference inasmuch as section 85A provides for calculation of rebate of Income-tax on "Income so included", while section 80M provides for deduction of the whole or part of "such income by way of dividends". It said that the language employed in section 80M was clearer and left no doubt that the deduction had to be calculated with reference to the entire amount of income by way of dividends received from a domestic company.

21. To get over the Supreme Court decision in Cloth traders (Pvt.) Ltd. , section 80AA was introduced by the finance (No. 2) Act, 1980, with retrospective effect from April 1, 1968. It provided that, where any deduction is required to be allowed under section 80M in respect of any income by way of dividends from a domestic company, this deduction shall be computed with the provision of the Income-tax Act and not with reference to the income by way of such dividends as computed in accordance with the provisions of the Income-tax Act and not reference to the gross amounts of such dividends.

22. Section 80AB was also inserted by the same Act but not with the retrospective effect. It provided that, in respect of deduction under any section under chapter VI-A other section 80M, which were to be made in respect of any income of the nature specified which included in gross total income, such deduction was to be computed on the net income of the kind specified which is included in the total income and not on the gross income.

23. The constitutional validity of section 80AA was challenged before the bench of the Supreme Court consisting of the five judges in the case of Distributors (Baroda) Pvt. Ltd. v. Union of India [1985] 155 ITR 120. It contented before the Supreme Court that the retrospective operation of amended section 80AA would enhance the tax burden of the assessee and, therefore, it would infringe the fundamental rights of the assessee under article 19(1)(g) of the Constitution of India. The Supreme Court examined section 80M in order to decide whether there was such retrospective enhancement of the tax burden or whether section 80AA merely brought out more clearly what was already contained in section 80M. Once again the Supreme Court considered the decisions of the Bombay, Calcutta and Madras High Courts dealing with the interpretation of the section 99(1)(iv) of the Income-tax Act referred to above. The Supreme Court did not, however, make any observations on the finding given by the three High Courts relating to the interpretation of section 99(1)(iv). The Supreme Court next considered section 85A as interpreted in some of the decisions and expressed some doubts about the interpretation. It, however, said that it was not concerned with the said interpretation of section 85A.

24. The court then went on to the construe section 80M of the Income-tax Act. The Supreme Court said that section 80M was worded differently from the previous sections. It was required to be construed on its own language and its own context. The interpretation given to the earlier sections 85A and 99(1)(iv) was not relevant for construing section 80M. The Supreme Court overruled its earlier decision in Cloth traders' case on this point. In doing so, the court considered the object behind the grant of relief under section 80M. It said (at p. 134) :

"It was common ground between the parties that the main object of the relief under section 80M is to avoid taxation once again in the hands of the receiving company of the amount which has already borne full tax in the hands of the paying company."

25. The court referred to the opening words, "where the gross total income of an assessee... includes any income by way of dividends from a domestic company." The first condition which must be fulfilled to attract section 80M is, the gross total income of the assessee must include income by way of dividends from a domestic company. Gross total income is defined in section 80B(5) to mean the "total income computed in accordance with the provisions of the Act before making any deduction under this chapter (Chapter VI-A) or under section 280-O. "Income by way of dividends from a domestic company included in the gross total income of the assessee obviously must be income computed in accordance with the provisions of the Act, that is to say, the net dividend after deduction interest on moneys borrowed for earning such income. The Supreme Court emphasized the word "such income" and held that "such income" refered not only to the category of income included in the gross total income but also to the quantum of income so included. It said, "it is obvious, as a matter of plain grammar, that the words 'such income by way of dividends' must have reference to the income by way of dividends mentioned earlier and that would be income by way of dividends from a domestic company which is included in the gross total income". The Supreme Court overruled its earlier interpretation of section 80M in the case of Cloth traders' (Pvt.) Ltd. , and held that section 80M granted a deduction only in respect of the net dividend forming part of total income.

26. In the case of Distributors (Baroda) Pvt. Ltd. . therefore the Supreme Court has taken the view that a provision of Income-tax Act which grants any deduction either in respect of inter-corporate dividend or in respect of interest on securities will have to be considered on its own language and its own context. The interpretation put upon previous similar sections by courts need not be automatically applied to similar provision which may have either replaced them or which may be inserted subsequently.

27. It is, however, argued by Mr. Dastur, learned counsel for the assessee, that Distributors (Baroda) Pvt. Ltd.'s case [1985] 155 ITR 120 has over ruled the case of Cloth Traders' Pvt. Ltd. [1979] 118 ITR 243, only regarding interpretation of section 80Mc. He submits that the case of Cloth Traders' Pvt. Ltd. is still good law for other sections. He has drawn our attention to a decision of the Calcutta High Court in the case of Pilani Investment Corporation Ltd. v. CIT , where the Calcutta High Court has held that the decision of the Supreme Court in the case of Distributors (Baroda) Pvt. Ltd. has to be applied only to the Interpretation of section 80M of the Income tax Act and would have no application to the Interpretation of section 85A. The Calcutta High Court, in this case, chose to follow its earlier own decision on the Interpretation of section 85A on the ground that this decision had not been set aside by the Supreme Court. The Madras High Court has also taken a similar view relating to the Interpretation of section 80K in the case of CIT v. Madras Motor and General Insurance Co. Ltd. [1975] 99 ITR 243 and CIT v. K. S. Narayanan [1986] 159 ITR 618 (Mad).

28. In the present case, however, we are not concerned with the Interpretation of any of the sections referred to in these two Supreme Court judgements. Neither judgement, therefore, applies directly. We have to interpret rule 1 (x) of the First Schedule to the Surtax in the light of the reasoning of the Supreme Court in the case of Distributors (Baroda) Pvt. Ltd. . We must construe the provision of the Companies (Profits) Surtax Act 1964, on the basis of the language used and in the Context of that Act. As set out earlier, rule 1 is the First Schedule is framed for the purpose of making adjustments in the total income computed for that year under the Income tax Act to determine chargeable profits. The starting point, therefore, for the application of the First Schedule is the total income as computed under the Income tax Act. To this income, certain adjustments are required by required to be made. For the purpose of making such adjustments, certain income, profits and gains and other sum specified by rule 1 are required to be excluded from such total income. The phrase "such total income", therefore, directly refers to the total income computed for that year under the Income tax Act. The total income may contain various different kinds of income some of which are to be excluded for the purpose of computing chargeable profits under the Companies (Profits) Surtax Act 1964, One such exclusion under rule 1 (x) is in respect of income by way of the interest received from the Government or any India concern in the case of the non-resident company which has not made the prescribed arrangements for the declaration and the payment of dividends with in India. The exclusion, therefore, of income by way of the interest received from the Government or any Indian concern can only be that of (by way of the interest received from the Government or any Indian concern) Which forms part of the total income computed for that year under the Income tax Act. Such income from interest, therefore, must necessarily be the net income which forms part of the total income, after making permissible deduction. Exclusion has to be of that which originally formed a part of the total income.

29. Mr. Dastur learned counsel for the assessee, emphasized the words "interest received" in rule 1 (x) and said that these words would indicate gross interest received as in the Cloth Traders Pvt. Ltd. case and in the earlier decisions of the Bombay, Calcutta and Madras High Courts referred to the above relating to the Interpretations of sections 99(1)(iv) and 85A. In our view, such a phrase cannot be construed in isolation. As Distributors (Baroda) Pvt. Ltd. , the entire rule has to be construed as a whole in context in which it occurs. The operative words which cover all exclusions under rule 1 are that such exclusions have to be from the total income computed under the Income tax Act. Moreover, this computation is for the purposes of determining the chargeable profits of the previous year for the purpose of surtax. Under the scheme of the companies (Profits) Surtax Act 1964, surtax is levied only what is commercially known as "business income". Hence, from the total income computed under the Income tax Act, certain amounts of income which do not strictly fall within this category of business income are taken out, so as to ascertain what are commercially known as profits from business. These are designated as chargeable profits. On these chargeable profits after statutory deductions as provided in the Surtax Act, surtax is levied. The intention is clearly eliminate from the total income computed under the Income tax Act certain amounts of income which form part of it and levy surtax only on the remaining part. In context, in our view, rule 1 (x) cannot be considered as referring to gross income by way of interest. It must refer to income by way of interest which is excluded in the total income. The ratio of Distributors (Baroda) Pvt. Ltd. is, therefore, attracted rather than that of Cloth Traders Pvt. Ltd.'s case , assuming that both cases still hold the field as submitted by Mr. Dastur.

30. Does the assessee's own case, however, referred to earlier, in CIT v. Banque National de Paris [1981] 130 ITR 534 (Bom) make any difference to this position ? In that case the relevant case dealt with a dispute as to what should be taken from the gross interest for the purposes of determining the net interest income to be excluded from chargeable profits under rule 1 (x) of the First Schedule to the Super Profits tax Act, 1963 (in pari material with our rule 1 (x)). The court was not required to consider whether the gross interest income was to be deducted or the net interest income. In fact, the court said that the question whether the assessee should be permitted to deduct the gross interest income was not agitated by the assessee before the Tribunal. Hence, the Tribunal has refrained from indicating its view on this question. The Tribunal had merely opined that the deductions of the amounts of interest made by the Appellate Assistant Commissioner appeared to be fair and did not require any interference. The High Court, therefore, was not required to pronounce upon this question. The High Court did, however, observe as follows (at p. 540) :

"Clause (x) does not expressly provide for any scaling down of the interest earned. In CIT v. Jupiter General Insurance Co. [1975] 101 ITR 370, a Division Bench of this court considered clause (viii) of rule 1 of the First Schedule to the Super Profits Tax Act, 1963, where income by way of dividends from an Indian company is, inter alia, to be excluded for the purposes of computation of chargeable profits for the purposes of super profits tax.

It was held by the Division Bench that the Tribunal had rightly taken the view in the said matter that it was the gross dividend received by the assessee-company that was required to be excluded and not the net dividend arrive at by excluding proportionate management expenses."

31. These observations are obiter dicta. Secondly, these observations are in the light of an earlier decision of this court in Jupiter General Insurance Co.'s case [1975] 101 ITR 370. In that case, the court has merely followed the Interpretation given to the section 80M and other similar sections of the Income-tax Act by the Bombay High Court in case of Industrial Investment Trust Co. Ltd. [1968] 67 ITR 436. But, this approach, in our view, can no longer be adopted automatically in view of the decision of the Supreme Court now given in the case of Distributors (Baroda) Pvt. Ltd. , where the Supreme Court has said that each such section has to be consider independently on it own context and on its own language. In this circumstances, in our view, these observations of our High Court in the case of CIT v. Banque Nationale de Paris [1981] 130 ITR 534 do not conclude the question before us.

32. It was lastly submitted by the assessee that by the Finance Act 1981, an Explanation has been added to rule 1 of the First Schedule to the companies (Profits) Surtax Act. It is as follows :

"Explanation. - Notwithstanding anything contained in any clause of this rule, the amount of any income or profits and gains which is required to be excluded from the total income under that clause shall be only the amount of such income or profits and gains as computed in accordance with the provisions of the Income-tax Act (except Chapter VI-A thereof), and in a case where any deduction is required to be allowed in respect of any such income or profits and gains under the said Chapter VI-A, the amount of such deduction."

33. It is submitted that rule 1(x) can be interpreted as referring to the net income only after the insertion of the Explanation and not prior to it. This submission, in our view, must be rejected. An Explanation may be appended to a section to explain the meaning of the words used in the section. There is no presumption that an Explanation which is inserted subsequently introduce something new which was not present in the section before. Ordinarily, an Explanation is inserted to clear up any ambiguity in the section and it should be so read as to harmonies it with the section and to clear up any ambiguity in the main section.

34. In this connection, it is interesting to note the background in which this Explanation was inserted. This is set out in the memorandum explaining the provisions of the Finance Bill, 1981, which, inter alia, inserted this Explanation. The relevant note states (see [1981] 128 ITR (St.) 111) :

"In the case of Cloth Traders P. Ltd. v. Addl. CIT [1979] 118 ITR 243, the Supreme Court held that, in computing the taxable income for the purposes of the Income-tax Act, the deduction in respect of intercorporate dividends should be allowed on the gross amount of such dividends received by the company and not with reference to the net amount... Since this decision ran counter to the legislative intent to grant such deduction with reference to the net income by way of dividends only, the Finance (No. 2) Act, 1980, inserted a new section 80AA in the Income-tax Act clarifying the intention with retrospective effect from April 1, 1968. In several cases, High Courts have held that, even for the purposes of determining chargeable profits under the Companies (Profits) Surtax Act, the gross amount of dividends should be excluded from the total income... and, accordingly, the High Court rulings have resulted in giving an unintended benefit to companies in respect of dividends received by them from domestic companies."

35. Hence, the Explanation was added to rule 1 of Schedule I. The insertion of the Explanation, therefore, does not help the assessee in any way.

36. It was also submitted by Mr. Dastur that if one examines the various exclusions granted under rule 1, clause (i) to (xii), some clauses such as clauses (i), (ii) and (iii) deal with the net income while some others deal with other sums which cannot be considered as income at all. The rest of the clauses including clause (x) should be construed as dealing with gross income. In our view, this is not a correct way of interpreting clause (x) of rule 1. As stated earlier, rule 1 specifies such items as are to be excluded from the computation of the total income under the Income-tax Act for the purpose of arriving at the income chargeable to surtax. Rule 1(x), in our view, refer to exclusion of only the net interest from the total income for arriving at the chargeable profits, that is to say, such interest covered by the rule 1 (x) as would form the part of the total income computed under the Income-tax Act.

37. In the premises, the question referred to us are answered as follows :

Question No. (1) is answered in the affirmative and in favour of the assessee.

Question No. (2) is answered in the negative and in favour of the Revenue.

Question No. (3) is answered in the negative and in the favour of the Revenue.

38. There will be no order as to costs.

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