M/S. Sundaram
Clayton Ltd. Vs. Commissioner of Income Tax [1996] INSC 650 (2 May 1996)
Ray,
G.N. (J) Ray, G.N. (J) Hansaria B.L. (J) G.N. Ray, J.
CITATION:
JT 1996 (5) 348 1996 SCALE (4)246
ACT:
HEAD NOTE:
(With
Civil Appeal No. 1705/88)
Civil
Appeal Nos. 1360-61 of 1981 are directed against judgment dated October 21, 1981 passed by the Division Bench of
Madras High Court in Tax Case Nos. 743-744 of 1977 arising out of Reference
Nos. 495-496 of 1977. Civil Appeal No. 1705 of 1980 is directed against judgment
dated November 12, 1986 passed by the Division Bench of
Madras High Court in Tax Case Petition No. 367 of 1986. It may be stated here
that the Tax Case Petition No. 367 of 1986 was disposed of by the High Court
following its judgment passed by the Madras High Court in the said Tax Case
Nos. 743-744 of 1977.
It
will, therefore, be appropriate to refer to the relevant facts relating to Tax
Case Nos. 743-744 of 1977 which were disposed of by the Madras High court on October 21, 1981.
Tax
Case Nos. 743-744 of 1977 arose out of the reference made under Section 286 (1)
of the Income Tax Act, 1961. The reference before the High Court raised a short
question about the computation of capital under Rule 3 of the Schedule II of
the Companies (Profits) Surtax Act, 1964.
The
origin of the Companies (Profits) Surtax Act, 1964 may be traced back to the
Surtax Act, 1940, which was enacted for the purpose of moping up unreasonable
and extra profits earned in the business during the second world war. Later on,
Super Profits Tax Act, 1963, and the Companies (Profits) Surtax Act, 1964, were
enacted for similar purpose. The rationale behind these Acts is that any profit
over and above the reasonable profit expected in the commercial and productive
activities would be taxed at a special rate.
It
will be appropriate to note the relevant facts for the purpose of appreciating
the rival contention made before the Madras High Court and also at the hearing
of the appeals. In the assessment year 1971-72, corresponding to previous year
beginning from August
1, 1996 and ending on July 31, 1970, the appellant-Company, M/s. Sundaram
Clayton Ltd., issued 20400 bonus shares of the face value of Rs.100/- each.
This bonus issue was brought about by capitalizing part of the Company a
general reserves.
Accordingly,
a sum of Rs.20,40,000/- was converted into bonus shares. The assessee-Company
claimed that the said amount of Rs.20,40,000/- which represented the bonus
issue as on February 23, 1970 became the basis for increase n the capital
determined at Rs. 1,43,462/- as on the first day of the previous year i.e.
August 1, 1969. It was claimed by the Company that the bonus shares were in
addition to the paid up capital of the Company. Since any "increase"
in the paid up capital of the Company was to be properly reckoned for the
purpose of computation of capital under Rule 3 of Schedule II of the Companies
(Profits) Surtax Act, 1964 (hereinafter referred to as Surtax Act, 1964), it
was claimed that the proportionate amount, worked out to Rs.8,84,237/-, must be
added to the capital as on August 1, 1969 for the purpose of capital
computation.
The
Income Tax Officer rejected the said contention of the assessee-Company, out
the Income Tax Appellate Tribunal accepted the assessee a case. A reference was
made by the taxing department under Section 256(1) of the Income Tax Act, 1961
before the Madras High Court for answering, inter alia, the following question
:- "Whether on the facts and in the circumstances of the case and having
regard to Rule 3 of Schedule II of the Companies (Profits) Surtax Act, 1964 the
share capital of the Company should be increased proportionately on account of
the issue of bonus shares for the purpose of computation of capital under the
Companies (Profits) Surtax Act, 1964?" The Madras High Court held that
when bonus shares were issued, the paid up capital of the Company increased,
but so far as the column of liabilities in the balance sheet of the Company was
concerned, a sum equivalent to the value of the bonus shares was curved out
from the amount of reserves and placed in the column of paid up capital of the
Company on the side of liabilities in the balance sheet. The High Court held
that the process of conversion of reserves into bonus shares did neither reduce
the overall capital of the Company nor increase it. The overall capital of the
Company remained the same as in the beginning of the financial year. It was
held by the High Court that what Rule 3 of Schedule II of the Surtax Act, 1964
contemplated was that the capital, a on the first day of the previous year, get
increased by way of an addition to any part of the capital so computed, whether
the increase be t the paid up capital or to the reserves or to any other items
figuring on the liabilities side of the balance sheet. In order to attract Rule
3 of Schedule II of the Surtax Act, 1964.
The
High Court indicated that the mere act of capitalizing a part of the reserve
and issuing bonus shares did not mean that there was any influx of additional
capital into the Company over the above what figured as the opening capital in
the liabilities side of the balance sheet, consisting of the paid up capital
and the reserves, among other things. The High Court, therefore, held that on a
commonsense understanding of the said rule and on a proper reading of the
various entries in the Company's balance sheet, the contention but forward by
the assessee must be rejected as untenable. The High Court placed reliance on a
decision of the Bombay High Court in Commissioner of Income ITR 6). The High Court
also noted the decision of the Delhi Ltd. (129 ITR 731) which held that similar
view. The Delhi High Court in the said decision also referred to the decision
of the Bombay High Court in Century Spinning Mill's case (supra).
On
behalf of the assessee, however, reliance was placed on a decision of the Himachal
Pradesh High Court in (95 ITR 556). In the said case interpretation of Rule 2
of Schedule II of Super Profits Act, 1963 came up for consideration. It was
held in the said decision that an increase in the paid up capital by the simple
process of capitalizing a part of the existing reserves, would entitle the
assessed to claim for an increase in the computation of the capital under Rule
2 of Schedule II of the Super Profits Tax Act, 1963. The Madras High Court in
the impugned decision did not agree with the view taken by the Himachal Pradesh
High Court. The Madras High Court also indicated that the decision of the Himachal
Pradesh High Court was rendered on a construction and application of Rule 2 of Schedule
II of a different statute, namely, the Super Profits Tax Act, 1963. The Madras
High Court indicated that eh language of Rule 2 of Super Profits Tax Act, 1963
and Rule 3 of the Surtax Act, 1964 was not pari materia. The High Court also
indicated that the Bombay High Court in Century Spinning Mill's case (supra)
noted that there was a distinction between Rule 2 and Rule 3 of the said Acts,
and such difference had a bearing on the computation of capital.
It may
be stated here that two other questions were also referred to before the High
Court in Tax case Nos. 743- 744 of 1977, and the same were answered by
indicating that these stood answered by the decisions of that Court in Bimetal
Bearings Ltd. (110 ITR 131). For the purpose of disposal of the appeals these
questions answered by the High Court are not required to be considered and
hence we are not doing so.
The
question as to the computation of the income on account of the issue of bonus
shares was answered by the High Court in favour of revenue and against the assessee-
Company by holding that the finding made by the Income Tax Appellate Tribunal
that by issue of bonus shares in the assessment year in question had resulted
in increase in capital asset of the Company within the meaning of Rule 3 of Schedule
II of the Surtax Act, 1964 was erroneous and could not be sustained on a
correct interpretation of the said Rule. In these appeals such decision of the
Madras High Courts is under challenge.
Mrs. Janki
Ramachandran, the learned counsel appearing for the appellant-Company, has
referred to Rule 2 of Schedule II of the Super Profits Tax Act, 1963 and Rule 3
of the Surtax Act, 1964 and contended that both the rule being essentially
similar have same legal incidence and the High Court erred in proceeding on the
footing that the incidence of Rule 2 of Super Profits Act, 1963 and Rule 3 of
Schedule II of Surtax Act, 1964 was different by placing reliance on the said
decisions of Bombay and Delhi High Courts. It will be appropriate at this stage
to refer to Rule 2 of Schedule II of Super Profits Tax Act, 1963 and Rule 3 of
the Schedule II of the Surtax Act, 1964.
Rule 2
of Second Schedule of Super Profits Tax Act, 1963 Where after the first day of
the previous year relevant to the assessment year, the paid up capital of a
company is increased or reduced by any amount during the previous year, the
capital computed in accordance with rule I shall be increased or decreased, as
the case may be, by a portion of that amount which is proportional to the
portion of the previous year during which the increase or the reductio of the
paid up share capital remained effective.
Rule 3
of the Second Schedule of the Companies (Profits) Surtax Act, 1964 Where after
the first day of the previous year relevant to the assessment year the capital
of a company as computed in accordance with the foregoing rules of this
Schedule is increased by any amount during the previous year on account of
increase of paid up share capital or issue of debentures or borrowing of any
moneys referred to in clause (v) of rule 1 or is reduced by any amount on
account of reduction of paid up share capital or redemption of any debentures
or repayment of such moneys, such capital shall be increased by any amount
during the previous year on account of increase of paid up share capital or
issue of debentures or borrowing of any moneys referred to in clause (v) of
rule 1 or is reduced by any amount on account of reduction of any debentures or
repayment of such moneys, such capital shall be increased or reduced, as the
case may be, by a sum which bears to that amount the same production as the
number of days of the previous year during which the increase or the reduction
remained effective bears to the total number of days in that previous year.
[Emphasis
supplied] The learned counsel for the appellant has contended that in the
Schedules under Super Profits Tax Act, 1963 and Surtax Act, 1964 provisions
have been made for calculating capital invested and the profits. The capital
gains, though subject to normal income tax, was not taken into consideration
for arriving at chargeable income for the purpose for Super Profits Tax Act,
1963 and the Surtax Act, 1964. Mrs. Ramachandran has submitted that from the
chargeable profits as arrived in accordance with the provisions of the First
Schedule, a specified percentage (six per cent in the case of the Super Profits
Tax Act and ten per cent in the case of the Surtax Act) of the capital as
computed in accordance with the provisions in the Second Schedule was to be
deducted. This is known, as the standard deduction or statutory deduction. This
deduction is considered to be a fair or reasonable return on the capital
invested in the business. Any balance remaining was to be subjected to surtax.
She had contended that any method of which
(1) the
chargeable profits could be reduced and/or
(2) the
capital base could be increased will work out to he advantage of the taxpayer.
She
had urged that on a plain reading of the rule of the Second Schedule, the
amount represented by the bonus shares issued by the appellant- company will
straightaway quality for proportionate inclusion in the capital base. There is
nothing said anywhere either in the Schedules or in the main body of the Act
that the increase in the share capital must be accompanied by a corresponding
inflow of cash. She has submitted that in a taxing statute, clear words are
necessary to tax the subject. In interpreting a taxing statute, one is to look
simply at what is clearly said.
There
is no room for intendment; there is no equity about a tax. There is no
presumption as to a tax; nothing should be read into the Act: nothing should be
implied; one should fairly look at what is said and what is clearly said. In
support of this contention, Mrs. Ramachandran has referred to a decision of the
English Court in Cape Brandy Syndicate 64). She
had submitted that this Court has also followed the view taken in Cape Brandy's
case (supra) in the case reported in 60 ITR 392 by deserving to the following
effect:- "In a taking Act one has to look merely at what is clearly
stated, and in a case of reasonable doubt the construction most beneficial to
the subject is to be adopted. But even so, the fundamental rule of construction
is the same for all the statutes, whether fiscal or otherwise. The underlying
principle is that the meaning and intention of a statute must be collected from
the planing and unambiguous expression used therein rather than any notions as
to what is just or expedient. The expressed intention must guide the
Court." Mrs.Ramachandram has submitted that the Bombay High Court in
Century Spinning Mill's case (supra) did not spell out as to why Rule 2 of
Super Profits Tax Act, 1963 and Rule 3 of Surtax Act, 1964 was different. The
Delhi High Court in Food Specialities case (supra) also did not state now the
said rules were different. The learned counsel has submitted that it was only
by a process of reasoning that the decision was arrived at by the Delhi High
Court by attributing motives to the legislature which are not borne out by the
plain woros of the stature. Hence, the Madras High Court should not have placed
reliance on the decisions of the Bombay and Delhi High Courts. The interpretation of Rule 3 of Schedule II of
the Surtax Act. 1964 as made by the Madras High Court is erroneous and against
plain reading of the provisions of Rule 3. She has therefore, submitted that
the appeal should be allowed by accepting the view taken by the Income Tax
appellate Tribunal in favour of the assessee.
Mr.
G.C. Sharma, the learned Senior advocate appearing for the respondent, disputed
the contentions of Mrs. Ramchandran. He has submitted that Rule 2 of Schedule
II of Super Profits Tax Act, 1963 and Rule 3 of surtax Act, 1964 are not
similarly worded . In this connection, he has referred to the decision of the
Gujarat High Court in ITR 619) which has explained the legal incidence of both
the said Rules clearly by indicating cogent reasons. It has been held by the
Gujarat High Court in that case that the expression "reserves" has not
been defined in the Super Profits Tax Act, 1963 or the Companies (profits)
Surtax Act. 1964. The dictionaries do not make any distinction between the two
concepts "reserve" and "provision" while giving their
primary meanings, whereas in the context of those Acts, a clear distinction
between the two is implied.
Though
he expression "reserve" is not defined, since it occurs in a taxing
statue applicable to companies only and to no other assessable entities, the
expression has to be understood in its popular sense, namely, the sense or
meaning that is attributed to it by men of business, trade and commerce and by
persons dealing with companies.
Therefore.
the meaning attached to the words " reserve" and provision" in
the Companies Act, 1956, dealing with the preparation of the balance sheet and
the profit and loss account would govern their construction for the purposes of
the two enactments. The broad distinction between the two is that whereas a
"provision" is a charge against the profits to be taken into account
against grass receipts in the profit and loss account, a "reserve" is
an appropriation of profits, the asset or assets by which it is represented
being retained to form part of the capital employed in the business, if any
retention or appropriation of a sum is not a "provision", i. e. it is
not designed to meed depreciation, renewals or diminution in the value of
assets or any know liability, the same is not necessarily a
"reserve". The question whether the concerned amounts constitute
"reserve" or not will have to be decided by having regard to the true
nature and character of the sums to be appropriated depending on the
surrounding circumstances, particularly the intention with which, and the
purpose for which, such appropriations had been made.
The
true nature and character of the appropriation must be determined with
reference to the substance of the matter.
Mr.
Sharma has further submitted that a mere look at Rule 3 of Schedule II of the
Super Profits Tax Act, 1963 as contrasted with Rule 3 of Schedule II of the
Surtax Act, 1964 will show that Rule 2 of Super Profits Tax Act, 1963
visualized mere increase in the paid up share capital, without reference to any
increase in capital base, enough for computation of capital; but before Rule 3
of Schedule II of Surtax Act, 1964 may apply, an increase in the capital base
as computed under rule 1 has to be shown to have taken place counsel has
submitted that the Gujarat High Court in New India Industries case (supra) has
very correctly indicated that Rule 3 will apply if (1) capital of the company
as computed in accordance with rule 1 of Schedule II of the Surtax Act. 1964
has increased by any amount during that previous Year; and (2) such increase
should be on account of increase of paid up share capital or issue of depentures
referred to in clause (iv) or borrowing of any moneys referred to in clause (v)
of rule 1. If these conditions are satisfied, then and then and then only,
there will be an occasion for the company to get the benefit has contemplated
by the second part of rule 3 to the effect that such capital, computed as per
rule 1, will be permitted to be increased by sum which bears to the amount of
such increase of paid up share capital, or issue of debentures or borrowings,
the same proportion as the number of days of the previous year during which the
increase in the paid up share capital, or issue of debentures or borrowings of
any money, as the case may be bears to the total number of days in that
previous year. It has been also submitted that under Rule 3 of Schedule II of
Surtax Act, 1964 before banefit under the rule can be pressed into service by
the assessee company, as on the first day of the previous year relevant to the
assessment year as per rule 1 has in fact undergone a hike.
If the
said basic condition is not satisfied, Rule 3 is not attracted at all Such
interpretation of Rule 3 being clearly discernible, no other interpretation
should be accepted an the Madras, Bombay and Gujarat High Courts had no
difficulty in taking same vies in interpreting Rule 3 of Schedule II of Surtax
Act, 1964. He has submitted that in the aforesaid facts no interference by this
Court is called for and the appeals should be dismissed with cost.
After
giving our careful consideration of the facts and circumstances of the case and
the contentions made by the respective counsel for the parties it appears to us
that by issuing the bonus shares in the assessment year in question there had
only be a conversion of the reserves into fully paid bonus shares, which
conversion did not add up to the capital or reserve base which was not there on
the first day of the previous year. The Gujarat High Court in New India
Industries case (supra) has very succinctly explained the difference in
incidence of Rule 2 of Schedule II of Super Profits Tax Act, 1963 and Rule of
the Surtax Act, 1964. We feel no hesitation in approving the view taken therein
that before Rule 3 of surtax Act 1964 can be made applicable, an increase in
the capital base as computed under rule 1 has to be shown to have taken place. In
order that Rule 3 could apply the capital base of the company, as computed in
accordance with rule 1 of Schedule II of Surtax Act, 1964.
must
have increased during the previous year and such increase should be on account
of increase of paid up share capital or issue of depentures referred to in
clause (i) or borrowing of any moneys referred to in clause (v) of rule 1.
Unless
these conditions are satisfied there would be no occasion for the assessee-company
to get benefit contemplated by the second part of rule 3 of Schedule II of
surtax Act, 1964.
The
Bombay, Madras and Delhi High Court have also taken the same view without,
however, elaborating the implication of implication of Rule 3 of Schedule II of
Surtax Act, 1964 as has been done by the Gujarat High Court, The incidence of
Rule 2 of Schedule II of super profits Tax Act, 1963 being different, the
interpretation of the said rule by the Himachal Pradesh High Court is not
germane for interpreting rule 3 of Schedule II of Surtax Act, 1964, The aforesaid
interpretation is quite reasonable and is clearly discernible in Rule 3 The
decision cited by Mrs, Ramchandran relating to the principle of interpretation
of taxing statute do not call for any change in the view we have taken on the
language of the Rule.
We,
therefore, find no reason to interfere with the impugned decisions of the
madras High Court and all the appeals are dismissed, without any order as to
costs.
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