Bombay High Court
Commissioner Of Income Tax vs Hindustan Construction Company Ltd. on 12 November, 1992
Equivalent citations: [1995]211ITR535(BOM)
Author: Sujata Manohar
Bench: Sujata V. Manohar
JUDGMENT Smt. Sujata Manohar, J.
1. This IT Reference arises out of a set of 13 reference applications which were filed as between the assessee and the Revenue for the asst. yrs. 1963-64, 1964-65, 1965-66, 1968-69 and 1969-70. As a result, a large number of questions have been referred to us-some at the instance of the Revenue and some at the instance of the assessee. Since most of the questions are now covered by various decisions of the High Court and the Supreme Court, we will only refer to the relevant facts in respect of the questions which require to be considered by us on merit. This we will do when we come to the questions.
2. For the asst. yr. 1963-64, the following three questions have been referred to us at the instance of the assessee.
"(1) Whether, having regard to the different provisions of the Super Profits tax Act, 1963, the assessment made under s. 6(2) of the Act for the asst. yr. 1963-64 on 25th November, 1972, beyond the period of four years from the end of the assessment year in question, is valid in law ?
(2) Whether, on the facts and in the circumstances of the case, it was correct to hold that "surplus" of income did not form part of the capital base of the company ?
(3) Whether, on the facts and in the circumstances of the case, it was correct to hold that full provision for taxation and Foreign Taxation provision did not form part of the capital base of the company ?"
3. Question No. 1 : This question is governed by the decision of this Court in the case of Indian Hume Pipe Co. Ltd. vs. CIT reported in (1991) 189 ITR 683 (Bom). It is, therefore, an accepted position on both sides that this question must be answered in the affirmative and in favour of the Revenue.
4. Question No. 2 : It is an agreed position on both sides that this question is governed by the decision of the Supreme Court in the case of CIT vs. Century Spinning & Manufacturing Co. Ltd. . The question is accordingly answered in the affirmative and in favour of the Revenue.
5. Question No. 3 : It is agreed between the parties that this question is governed by the decision of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. vs. CIT . The question is, therefore, answered in the affirmative and in favour of the Revenue.
6. For the asst. yrs. 1964-65, 1965-66, 1968-69 and 1969-70, the following four questions have been referred to us at the instance of the assessee :
"(1) Whether, having regard to the different provisions of the Companies (Profits) Surtax Act, 1964, the assessments made under s. 6 of the Act for the asst. yrs. 1964-65 and 1965-66 on 26th November, 1971, beyond the period of four years from the end of the assessment year in question, are valid in law ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal rightly held for all the five assessment years that the "surplus" of income did not form part of the capital base of the company ?
"(3) Whether, on the facts and in the circumstances of the case, the Tribunal rightly held for all the five years that full provision for foreign taxation and local taxation did not form part of the capital base of the company ?"
(4) Whether, on the facts and in the circumstances of the case, the Tribunal rightly held for asst. yrs. 1964-65 and 1965-66 that under r. 2, the cost of shares from which dividend was not earned during the relevant two years but which dividend income was otherwise exempt under r. 1(viii) of the First Schedule to the Surtax Act, had to be excluded for the purpose of calculating the capital base ?"
7. Question No. 1 : This question is governed by the decision of this Court in the case of Indian Hume Pipe Co. Ltd. vs. CIT (supra). The question is, therefore, answered in the affirmative and in favour of the Revenue.
8. Question No. 2 : This question, it is agreed, is governed by the decision of the Supreme Court in the case of CIT vs. Century Spinning & Manufacturing Co. Ltd. (supra). The question is, therefore, answered in the affirmative and in favour of the Revenue.
9. Question No. 3 : This question is governed by the decision of the Supreme Court in the case of Vazir Sultan Tabacco Co. Ltd. vs. CIT (supra). The question is, therefore, answered in the affirmative and in favour of the Revenue.
10. As far as Question No. 4 is concerned, the relevant facts are that for the purposes of Companies (Profits) Surtax Act, 1964 while computing the capital base under the Second Schedule to the Companies (Profits) Surtax Act, 1964 for the asst. yrs. 1964-65 and 1965-66 the ITO excluded the cost of certain shares, the income from which was not included in the chargeable profits of the assessee-company because these shares had not earned any dividend for the two assessment years in question. The assessee contends that since during the relevant assessment years the assessee had not earned any dividend from those shares, sub-r. (viii) of r. 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964 would not apply to the assessee's case. Therefore, under r. 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 these shares cannot be excluded from the capital base or the assessee-company.
11. In order to appreciate this contention, it is necessary to look at the relevant provisions of the Companies (Profits) Surtax Act, 1964. Surtax is levied under this Act on chargeable profits as reduced by the statutory deduction. The First Schedule to this Act prescribes rules for computing chargeable profits. In computing chargeable profits of a previous year, the total income computed for the year under the IT Act is required to be adjusted as per rr. 1, 2 and 3 of the First Schedule. Under r. 1, income, profits and gains and other sums falling within cls. (i) to (xii) of the rules are required to be excluded from such total income. This includes, inter alia, under cl. (viii) :
"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."
12. The Second Schedule to the Act prescribes rules for computing the capital of a company for the purpose of surtax. Standard deduction of 10 per cent on the capital base is granted from chargeable profits for the purpose of determining surtax. Rule 2 and the other rules in the Second Schedule prescribe various categories of assets which are required to be included or excluded while calculating the capital base of the company. Under r. 2 of the Second Schedule, it is provided as follows :
"Rule 2. Where a company owns any assets the income from which in accordance with cl. (iii) or cl. (vi) or cl. (viii) of r. 1 of the First Schedule is required to be excluded from its total income in computing its chargeable profits, the amount of its capital as computed under r. 1 of this Schedule shall be diminished by the cost to it of the said assets as on the first day of the previous year relevant to the assessment year in so far as such cost exceeds the aggregate of -
(i) any moneys borrowed (other than the debentures referred to in cl. (iv) or moneys referred to in cl. (v) of r. 1) and remaining outstanding as on the first day of the said 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 under r. 1".
A plain reading of r. 2, therefore, indicates that if the company owns any assets whose income is required to be excluded, inter alia, under cl. (viii) of r. 1 of the First Schedule, then the cost of such assets would be deleted from the capital base of the company. Rule 2 prescribes the categories of assets which are so excluded. It is not material whether in a given assessment year, these assets have, in fact, earned any income. If the assets are capable of genering income which would be excluded inter alia under cl. (viii) of r. 1 of the First Schedule, then such assets would be excluded from the capital base under r. 2 of the Second Schedule. This interpretation is borne out by the language of r. 2 which describes assets, the income from which is "required to be excluded" from the total income of the assessee in computing its chargeable profits. The Rule makes no reference to the assets actually earning any income during any year of accounting. It merely describes the type of assets that are to be so excluded.
13. This view, which we are taking, is borne out by the decisions of Karnataka and Calcutta High Court in the case of CIT vs. United Breweries, reported in (1978) 114 ITR 901 (Kar) and Nav Bharat Vanijya Ltd. vs. CIT , respectively. The Karnataka High Court also considered r. 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 r/w cl. (viii) of r. 1 of the First Schedule to the said Act. The Karnataka High Court also emphasized the words in r. 2 as being descriptive of the assets and said that these words have no bearing on the question whether the assets had, during the relevant period, actually earned any profit or not. Therefore, even if the assessee did not receive any dividend from the shares described in cl. (viii) of r. 1 of the First Schedule, the cost of such shares to the assessee would have to be excluded from the capital base.
14. A similar view has been taken by the Calcutta High Court in the case of Nav Bharat Vanijya Ltd. vs. CIT (supra). The Calcutta High Court considered similar provisions of the Super Profits Tax Act, 1963 and said that even when no dividend income had been earned during the assessment year in question, the value of the shares was required to be deducted from the capital base of the company. The Calcutta High Court emphasized the word "includible" which is used in r. 1 of the Second Schedule of the Super Profits Tax Act, 1963 and said that the word "includible" is indicative of the quality or description of the assets which were required to be excluded from the capital base. Although r. 2 of the Second Schedule of the Companies (Profits) Surtax Act is not worded identically, the (words) "required to be excluded" are of similar import and go to show the nature of the assets in question, namely, those assets whose would be required to be excluded from chargeable profits.
15. A contrary view however, has been taken by the Madras High Court in the case of Addl. CIT vs. Madras Motor General Ins. Co. Ltd. reported in (1979) 117 ITR 354 (Mad). Unfortunately, the earlier Karnataka decision does not appear to have been referred to in the Madras High Court judgment; nor has Calcutta High Court referred to the conflicting decisions of the Madras and Karnataka High Courts in deciding the case of Nav Bharat Vanijya Ltd. (supra). The Madras High Court in the above case also considered the very same provisions of the Companies (Profits) Surtax Act, 1964. The Madras High Court, however, held that under r. 2 only those assets can be excluded from the capital base of the company whose income was actually excluded from chargeable profits for that year. The Madras High Court seems to have placed an emphasis on Form No. 1 in the Appendix of the Companies (Profits) Surtax Rules 1964. Column 8(2)(a) in Part III of this form which deals, with computing statutory deduction, refers to the amount of the cost of assets, if any, the income from which is not included in the chargeable profits in accordance with cl. (iii) or cl. (vi) or cl. (viii) of r. 1 of the First Schedule. Hence, the Madras High Court said that one has to look to the fact whether any income from these assets had been actually excluded in the given year. The Madras High Court has, however, overlooked Note 6 at the foot of this form which relates to this entry. Note 6 describes the income which is "not includible in the chargeable profits of company" under this entry. Therefore, the form and the entry in that form do not necessarily support the conclusion arrived at by the Madras High Court. In any event, the language of the statute cannot be overridden by a form prescribed under the Rules framed under the Act.
16. The Madras High Court has, on equitable considerations held that when the company does not get any reduction in its chargeable profits because the shares do not earn any dividend, the value of the share should not be reduced from the capital base of the company. We fail to read any such "equity" in the provision in question. If this interpretation were to be accepted, the same assets would be included in the capital base of the company for one assessment year and excluded in another assessment year, depending upon whether the assets had or had not earned any dividend during the relevant year. We respectfully agree with the view taken by the Calcutta and Karnataka High Courts and respectfully differ from the view taken by the Madras High Court. Question No. 4 is, therefore, answered in the affirmative and in favour of the Revenue.
17. At the instance of the Revenue, the following five questions are referred to us for the asst. yr. 1963-64 ?
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the forfeited dividends, reserve for doubtful debts and contingency reserve are in the nature of 'Reserve' and should be included in the capital computation for the purpose of Super Profits tax ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the excess provision for foreign taxation and the excess provision for taxation (local) should be treated as 'reserve' for the purpose of capital computation under the Super Profits Tax Act, 1963 ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the proposed dividend, the surplus in the Profit and Loss account, the amount of provision for foreign taxation and the amount of provision for taxation (local) to the extent not treated as reserve according to r. 1 should be reduced from the cost of the assets to be excluded in view of r. 1(ii) of the Second Schedule of the Super Profits Tax Act, 1963 ?
(4) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that "Proposed Dividend" Should be included in the capital computation under the Super Profits Tax Act ?
(5) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the paid-up share capital should be increased proportionately under r. 2 of the Second Schedule to Super Profits Tax Act in respect of the bonus shares issued out of general reserve ?
18. Question No. 1 : It is an accepted position that in view of the decision in the case of CIT vs. Saran Engineering Co. Ltd. reported in (1986) 161 ITR 741 (SC), forfeited dividends are required to be excluded from the capital base of the company while reserve for doubtful debts and contingency reserve, to the extent that they are not set up for any specific liability, are required to be included in the capital base of the company. The question is answered accordingly.
19. Question No. 2 : In view of the decision in the case of Vazir Sultan Tobacco Ltd. vs. CIT (supra), question No. 2 is answered in the affirmative and in favour of the assessee.
20. Question No. 3 : In view of the judgment of the Division Bench of this Court (Smt. Sujata Manohar & Srikrishna, JJ.) decided on 19th of October, 1992 in IT Ref. No. 174 of 1977, [Hindustan Construction Ltd. vs. CIT], this question is required to be answered in the affirmative and in favour of the assessee.
21. Question No. 4 : In view of the decision in the case of Vazir Sultan Tabacco Co. Ltd. vs. CIT (supra), question No. 4 is required to be answered in the negative and in favour of the Revenue.
22. Question No. 5 : In view of the decision in the case of CIT vs. Century Spinning & Manufacturing Co. Ltd., reported in (1978) 111 ITR 6 Bom), this question is required to be answered in the negative and in favour of the Revenue.
23. For the asst. yrs. 1964-65, 1965-66, 1968-69 and 1969-70, the following nine questions have been referred to us :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding for all the four assessment years that forfeited dividends and "contingency reserve" were in the nature of "reserve" and should be included in capital computation for the purpose of the Surtax Act ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding for asst. yrs. 1964-65 and 1965-66 that Reserve for Doubtful debts was in the nature of a Reserve and should be included in capital computation for the purpose of the Surtax Act ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding for all the four assessment years that excess provision for foreign taxation and excess provision in local taxation should be treated as 'reserves' for the purpose of capital computation under the Surtax Act ?
(4) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding for all the four assessment years that the surplus in the P&L account, the amount of provision for foreign taxation and the amount of provision for local taxation to the extent not treated as 'reserves' according to r. 1 should be reduced from the cost of the assets to be excluded in view of r. 2(ii) of the Second Schedule to the Surtax Act, 1964 ?
(5) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding for asst. yr. 1964-65 that "Proposed Dividend" should be included in capital computation under r. 1 r/w Expln. thereto to the Second Schedule to the Surtax Act, 1964 ?
(6) Whether, on the circumstances of the case, the Tribunal was right in holding for asst. yr. 1965-66 that "Dividend Equalisation Reserve" should be included in the computation of capital under r. 1 r/w Expln. thereto of the Second Schedule to the Surtax Act, 1964 ?
(7) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding for asst. yrs. 1968-69 and 1969-70 that the General Reserve should not be reduced by the amount of dividend, while computing the capital under the Surtax Act, 1964 ?
(8) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding for asst. yrs. 1968-69 and 1969-70 that the Exchange Difference Reserve should be treated as "reserves" for the purpose of capital computation under the Surtax Act, 1964 ?
(9) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding for asst. yrs. 1968-69 and 1969-70 that the amount standing in general reserve No. 2 account should be considered as part of capital for the purpose of the Surtax Act, 1964 ?
24. Question No. 1 : It is accepted position that in view of the decision in the case of CIT vs. Saran Engg. Co. Ltd. (supra), forfeited dividends are required to be excluded from the capital base of the company while contingency reserves are required to be included in the capital base of the company.
25. Question No. 2 : In view of the decision in the case of CIT vs. Saran Engg. Co. Ltd. (supra), this question is required to be answered in the affirmative and in favour of the assessee to the extent that this reserve is not set up for any specific liability.
26. Question No. 3 : In view of the decision in the case of Vazir Sultan Tobacco Ltd. vs. CIT (supra), this question is required to be answered in the affirmative and in favour of the assessee.
27. Question No. 4 : In view of our judgment (Smt. Sujata Manohar & Srikrishna, JJ.) decided on 19th of October, 1992 in IT Ref. No. 174 of 1977 [since reported as Hindustan Co. Ltd. vs. CIT (supra)], this question must be answered in the affirmative and in favour of the assessee.
28. Question No. 5 : In view of the decision in the case of Vazir Sultan Tobacco Co. Ltd. vs. CIT (supra) this question must be answered in the negative and in favour of the Revenue.
29. Question No. 6 : In view of the decision in the case of Vazir Sultan Tobacco Co. Ltd. vs. CIT (supra), this question must be answered in the negative and in favour of the Revenue.
30. Question No. 7 : In view of the decision in the case of Vazir Sultan Tobacco Co. Ltd. vs. CIT (supra), this question must be answered in the negative and in favour of the Revenue.
31. Question No. 8 : In view of the decision in the case of CIT s. Saran Engg. Co. Ltd. (supra), this question must be answered in the affirmative and in favour of the assessee.
32. The questions are answered accordingly.
33. Question No. 9 : This question does not arise from the finding given by the Tribunal. Therefore, we decline to answer Question No. 9.
34. In the circumstances, there will be no order as to costs.