1. This is an appeal against the order of the Commissioner (Appeals) arising out of the Companies (Profits) Surtax Act, 1964 ('the Act').
2. The assessee is a company. The assessment year is 1975-76 and the relevant previous year ended on 31-12-1974.
3. On 30-12-1975, the assessee filed its return under the Act, declaring chargeable profit at nil, in the following manner : capital c/f to Part I 13,30,765Notes :Net chargeable profit Deficit 2,10,229Hence surtax payable is Rs. nil.
5. As there being deficit in working out chargeable profit, proportionate increase in capital on account of issue of bonus shares has not been made. However, assessee claims that its computation of capital should be made taking into proportionate increase in capital on account of issue of bonus shares during the year.
4. On 24-7-1978, the STO framed the assessment under Section 6(2) of the Act on a net chargeable profits of Rs. 4,96,941 with the following observations : 2. It is contended by the assessee that while computing the capital employed, the provision for gratuity and taxation should be treated as 'reserve'. The assessee's claim is not acceptable as the provisions for gratuity and taxation are provisions made for ascertained liabilities or expenses. The company has itself shown these, in the balance sheet under the head 'Current liability and provision'. In this connection reliance is placed on the decisions of the various High Courts in Nagammal Mills Ltd. v. CIT [1974] 94 ITR 387 (Mad.), Sri Ganapathy Mills Co. Ltd. v. CIT [1974] 94 ITR 429 (Mad.), Vazir Sultan Tobacco Co. Ltd. v. CIT [1974] 96 ITR 248 (AP) and United Nilgiri Tea Estates Co. Ltd. v. CIT [1974] 96 ITR 734 (Mad.) and ITAT, Bench 'A' Ahmedabad's order dated 15-9-1975 in SPTA No. 1 (Ahd.) of 1974-75 in the case of Nagri Mills Co. Ltd. 3. While computing the capital the general reserve of Rs. 32,55,210 is reduced by Rs. 5,42,370 being the proposed dividend, in view of Rule 1A in the Second Schedule inserted by the Finance Act, 1978.
4. It is further claimed that while computing net chargeable profits, surtax payable, if any, should be deducted from the business income. The surtax payable is not a business expenditure and, hence, cannot be deducted from the business profits. Further, there is no provision in the Surtax Act for such deduction.
The STO worked out the net chargeable profit of Rs. 4,96,941 in the following manner:4. Income-tax 19,76,495 20,08,223 14,17,4474. Increase of paid-up capital 2,22,222 9,20,500 Net chargeable profits 4,96,941 5. Thereafter, on 5-5-1979, the STO initiated proceedings under Section 8(b) of the Act, and issued show-cause notice on the assessee, which reads as under : In consequence of information received I have reason to believe that the income assessable to tax has escaped assessment inasmuch as the capital employed has been wrongly calculated, 2. While computing the statutory deduction the sum of Rs. 2,22,222 has been included as increased paid up capital. It is noticed that there is no change in the capital computed as the increase in the paid up share capital is offset by the similar decrease in the general reserve. Hence the addition of Rs. 2,22,222 has been wrongly made to the capital resulting in underassessment.
3. As per Rule 1(iii) of the Second Schedule, other reserves (including general reserve) have to be reduced by the amounts credited to such reserve as have been allowed as a deduction in computing the total income. The assessee-company is creating development rebate reserve at 75 per cent while the development rebate is fully allowed. Hence to the extent of the excess of the development rebate allowed over the development rebate reserve, it can be said that the general reserve is more and hence the general reserve should have been reduced by such an excess. The excess of development rebate allowed over the reserve approximately works out to Rs. 8,46,000. This amount needs to be reduced from the general reserve.
4. I therefore propose to reopen the assessment for the year 1975-76 under the provisions of Section 8(6) of the Surtax Act. Necessary notice is enclosed herewith.
6. It may be mentioned that the STO had reopened the assessment on the basis of a note prepared by the internal audit, which reads as under: (i) the sum of Rs. 2,22,222 has been included as increased paid up capital. It is noticed that there is no change in the capital computed as the increase in the paid up share capital is offset by similar decrease in the general reserve. Hence the addition of Rs. 2,22,222 has been wrongly made to the capital resulting in underassessment of surtax payable.
(iii) As per Rule 1(ii) of the Second Schedule other reserves (including general reserve) have to be reduced by the amounts credited to such reserve as have been allowed as a reduction in computing the total income. The assessee-company is creating development rebate reserve at 75 per cent while development rebate is fully allowed. Hence, to the extent of the excess of the development rebate allowed over the development reserve, it can be said that the general reserve is more and hence the general reserve should have been reduced by such an excess. The excess of development rebate allowed over the reserve amounts to Rs. 2,87,540 as worked out below. This amount needs to be reduced from the general reserve.
7. The assessee resisted the action of the STO on the ground that according to it, the assessment is attempted to be reopened on mere change of opinion, since all the relevant material was placed before the STO at the time of the original assessment and the STO after scrutinising the same, had framed the assessment on 24-7-1978. It was, therefore, urged that the proceedings initiated under Section 8(b) should be dropped. The STO, however, rejected the assessee's contention and framed the assessment under Section 6(2) read with Section 8(5) on 16-12-1981 whereby, he determined the net chargeable profits of the assessee at Rs. 5,47,917. With a view to complete our order, we reproduce below the relevant portion of the order of the STO framed under Section 16(2) read with Section 8(b) : 5. The contention of the assessee that no new information has come before the ITO on the basis of which the assessment was reopened is incorrect.
In this respect attention is invited to the case of CIT v. Zenith Steel Pipes Ltd. [1978] 112 ITR 215 (Bom.). According to this decision Rule 1(iii) of the Second Schedule, other reserves including general reserve have to be reduced by the amounts credited to such reserve as have been allowed as a deduction in computing the total income.
In the case of assessee it had created the development rebate reserve to the extent of 100 per cent instead of the development rebate admissible and as such it can be said that the balance of profit and loss account is transferred to the general reserve is more and hence the general reserve should have been reduced by such excess. Failure to do so has resulted into underassessment of Rs. 2,87,549. The High Court decision was received after passing the assessment order and the same was brought to the notice of the ITO by the internal audit. This tantamounts to receipt of the information by the ITO and as such the assessment has been correctly reopened under Section (2) read with Section 8(b) of the Companies (Profits) Surtax Act.
6. Regarding working of excess statutory reserve, i.e., 75 per cent of development rebate, the figures are as under : Rs. Therefore, a sum of Rs. 2,87,540 is required to be deducted from general reserve as per Rule 1(iii) of the Second Schedule.
Assessee's representative also objected to the deduction of capital by the amount of development reserve made in excess of statutory requirement.
As per Rule 1(iii) of the Second Schedule, other reserves (including general reserve) have to be reduced by amounts credited to such reserves as have been allowed as a deduction in computing the total income. It is seen from the records, the assessee-company is creating development rebate reserve at 100 per cent. The development rebate is fully allowed in assessment. Hence, the general reserve requires to be reduced by the excess of statutory requirement, i.e., 75 per cent of the development rebate.
Regarding computation of statutory deduction it is seen that a sum of Rs. 2,22,222 has been included as increased paid up capital in working of the capital base. In this respect it is argued by the assessee's representative that as per provisions of Rule 1(iii) of the Second Schedule after the first day of the previous year the company increased its paid up capital and accordingly proportionate increase was made in its paid up share capital and nowhere in the provisions of the Second Schedule to the Companies (Profits) Surtax Act which has been prescribed to reduce the general reserve of the company. Accordingly, the proportionate deduction was not made in the general reserve.
The assessee's argument is not acceptable because it is noticed that there is no change in the capital computed as the increase in the paid up share capital is offset by similar decrease in the general reserve. Hence the addition of Rs. 2,22,222 has been wrongly made to the capital resulting in underassessment of surtax payable. Under the circumstances, the assessee's argument is rejected.
8. Against the aforesaid order of the STO, the assessee preferred an appeal before the Commissioner (Appeals) and challenged the order of the STO both on legality of initiating proceedings under Section 8(b) as well as on the merits of the computation of capital base for the purpose of granting statutory deduction as contemplated under Section 2(8) of the Act. The Commissioner (Appeals), in his order dated 29-9-1983, accepted the assessee's contentions regarding computation of capital base. In this view of the matter, he did not deem it fit to give his decision on the validity of initiating the proceedings under Section 8(b).
9. Against the order of the Commissioner (Appeals), the revenue came up in appeal before the Tribunal with the following ground : On the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) ought to have upheld the deduction of Its. 2,22,222 from general reserve in view of Rule 3 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.
The assessee had also filed cross-objections wherein it had urged that the Commissioner (Appeals) ought to have given his decision on the validity of the reopening of the assessment under Section 8(b). After considering the rival submissions of the parties, vide its consolidated order dated 11-10-1984, the Tribunal restored the matter back to the Commissioner (Appeals), with the following observations : 5. We have considered the submissions and material placed before us.
In our opinion, the proper course followed by the Commissioner of Income-tax (Appeals) was to decide first the issue regarding the challenge to the reopening of the assessment and, therefore, as stated in the Court and agreed to by both the parties the order of the Commissioner of Income-tax (Appeals) is set aside on this point and the case is restored back to him for his decision on the ground taken by the assessee in respect of reopening of the assessment.
Since we are setting aside the order, we also set aside the order on the aspect of merits with the direction that the Commissioner of Income-tax (Appeals) should consider the decision of the Bombay High Court in the case of CIT v. Century Spg. & Mfg. Co. Ltd. [1978] 111 ITR 6 and after giving an opportunity to both the parties pass the orders appropriately in accordance with law.
10. It appears that the Commissioner (Appeals) took his own time in passing a fresh order. In the meanwhile on 15-11-1984, the STO passed the following order giving effect to the order of the Tribunal : The ITAT, Ahmedabad Bench 'A' has passed an appellate order on 11-10-1984 setting aside the Commissioner of Income-tax-V, Ahmedabad's Appellate order dated 29-9-1983. Thus, the ITO's order passed under Section 6(2), read with Section 8(b) of the Companies (Profits) Surtax Act passed on 16-12-1981 is restored.
2. Net chargeable profit worked out as per ITO's order dated 16-12-1981 remains to be unchanged at Rs. 5,47,917. The surtax payable is worked out as under : Based on the aforesaid, the STO issued a fresh notice of demand dated 17-11-1984 which was served on the assessee on 19-11-1984.
11. Against the order of the STO dated 15-11-1984, the assessee once again filed an appeal before the Commissioner (Appeals) wherein, the grounds taken up read as under : Your appellant being dissatisfied with the order passed by the learned Income-tax Officer, Ahmedabad, presents this appeal against the same on the following amongst other grounds : (1) The learned Income-tax Officer erred in passing order giving effect to Appellate Tribunal order and determining chargeable profit at Rs. 5,47,917. Your appellant submits that the Appellate Tribunal has set aside the entire order of the Commissioner of Income-tax (Appeals), only for limited purposes, having for his decision as regards challenge to the re-opening of the assessment and to consider whether the assessee's case falls within the ratio laid down in the case of CIT v. Century Spg. & Mfg. Co. Ltd. [1978] 111 ITR 6 (Bom.). Your appellant, therefore, submits that the Income-tax Officer has exceeded his jurisdiction while passing the above order.
It is submitted that it be so held now and the order passed by the Income-tax Officer be cancelled now.
12. Thereafter, on 1-10-1985, the Commissioner (Appeals) passed his order under appeal. In the title of the order in column 5- section under which order appealed against was passed-'Set aside by IT AT' is mentioned. However, at the top of the order it is mentioned that the appeal is against the order of the STO dated 15-11-1984. In other words, the Commissioner (Appeals) has combined in his order under appeal both the directions given by the Tribunal in its order dated 11-10-1984 as well as the appeal preferred by the assessee against the order of the STO dated 15-11-1984. We may mention that the Commissioner (Appeals) in his impugned order has not discussed anything regarding the ground taken up by the assessee against the order dated 15-11-1984.
It appears to us that the Commissioner (Appeals) was not clear as to what he should do with the appeal preferred by the assessee against the order of the STO dated 15-11-1984. Therefore, in column 5 of the title of the order, he has directed his office to type 'Set aside by the ITAT". However, this does not invalidate his order under appeal inasmuch as he has carried out the directions of the Tribunal contained in its order dated 11-10-1984 We have narrated this fact to show that this awkward situation could have been avoided by the Commissioner (Appeals), if he had immediately passed his order after receiving a copy of the order of the Tribunal dated 11-10-1984.
13. The assessee once again challenged before the Commissioner (Appeals) that the STO was not justified in reopening the assessment under Section 8(6) as according to the assessee, the STO had no new information in his possession to come to the conclusion that chargeable profits had escaped the assessment. Relying on the decision of the Hon'ble Supreme Court in the case of Indian & Eastern Newspaper Society v. CIT [1979] 119 ITR 996, it was urged on behalf of the assessee that the audit report inviting the attention of the STO to the proper interpretation of the statute is not an information for reopening the assessment under Section 8(6). It was, therefore, urged that since the STO could not have reopened the assessment under Section 8(6) the order passed by him on 16-12-1981 should be quashed. On the merits of the case it was urged on behalf of the assessee that there was no infirmity in the original order of the STO wherein, he had considered Rs. 2,22,222 as part of the capital base in order to grant statutory deduction as contemplated under Section 2(8). As regards inclusion of the excess development rebate reserve of Rs. 2,87,540 in the capital base reliance was placed on a circular issued by the CBDT viz. No. 53 (P. No. 7/2/68-TPL), dated 11-1-1971. It was, therefore, urged that even on the merits of the case, the STO was not justified in reducing the capital base by the amounts of Rs. 2,22,222 and Rs. 2,87,540.
14. Relying on certain reported decisions mentioned in his order under appeal, the Commissioner (Appeals) held that the reopening of the assessment was valid and that the STO was fully justified in reducing the capital base by the aforesaid two amounts. In other words, the Commissioner (Appeals) dismissed the appeal preferred by the assessee.
15. Being aggrieved by the order of the Commissioner (Appeals), the assessee has again come up in appeal, before the Tribunal.
16. The learned counsel for the assessee strongly argued that the STO was not justified in reopening the assessment under Section 8(b) on mere change of opinion on the material which were already considered by him in the assessment originally framed. In this connection, he further submitted that the Commissioner (Appeals) was not justified in supporting the action of the STO by relying on the decision of the Madras High Court in the case of CIT v. Sundaram Clayton Ltd. [1983] 140 ITR 235, which was rendered on 21-10-1981, i.e., much after the STO issued notice under Section 8(6) on 5-5-1979. In other words, he wanted to impress upon us that even assuming for the sake of argument, the internal audit can draw attention of the STO to the decision of a High Court, the decision which was rendered on 21-10-1981 would not have come to the notice of the internal audit when it raised certain audit objections. He further submitted that both the surtax authorities as well as the internal audit have failed to appreciate that in the case of CIT v. Zenith Steel Pipes Ltd. [1978] 112 ITR 215, the Hon'ble Bombay High Court was concerned with the excess reserve of depreciation and not the development rebate reserve. On the contrary, the Circular No. 53 [F. No. 7/2/68-TPL] dated 11-1-1971 was specifically issued in respect of reserve created for development rebate in excess of the statutory requirement as contemplated under Section 33 of the Income-tax Act, 1961. Since the said circular is binding on all the surtax authorities, the internal audit objection in this regard cannot be considered as 'information' as contemplated under Section 8(b).
Inviting our attention to the annual report and accounts of the assessee for the year 1974, the learned counsel for the assessee highlighted the fact that since the issuance of bonus shares was decided as per the resolution passed in the annual general meeting held on 26-4-1974, i.e., much after the first day of the relevant previous year, viz., 1-1-1974, there was no question of reduction of the general reserve even assuming for the sake of argument that the general reserve were to be reduced by the amount of the bonus shares issued by the company. For this proposition, he relied on the decision of the Hon'ble Bombay High Court in the case of CIT v. New Swadeshi Sugar Mills Ltd. [1985] 151 ITR 220. As regards the treatment to be accorded to the excess of the development rebate reserve, the learned counsel for the assessee, strongly relied on the aforesaid circular issued by the CBDT and submitted that in the assessment originally framed the said excess reserve was rightly considered in determining the capital base for the purpose of granting statutory deduction as contemplated under Section 2(8). He, therefore, submitted that since both in respect of the initiation of the proceedings under Section 8(b) and determination of the capital base for the purpose of granting statutory deduction under Section 2(8) the order of the STO passed on 16-12-1981 was bad in law, the Commissioner (Appeals) ought to have set aside the same instead of confirming it in the manner he did.
17. The learned representative for the department, on the other hand, strongly relied on the orders of the surtax authorities and justified their action. According to him, in view of the aforesaid decision of the Hon'ble Supreme Court in the case of Indian & Eastern Newspaper Society Ltd. (supra) the STO was fully justified in reopening the assessment under Section 8(6), on the basis of the internal audit report. He further submitted that even though the aforesaid decision of the Hon'ble Madras High Court in the case of Sundaram Clayton Ltd. (supra) was rendered on 21-10-1981, i.e., after the STO initiated the proceedings under Section 8(b), the same clearly supports the action of the STO in reopening the assessment under Section 8(b). He further submitted that the aforesaid decision in the case of New Swadeshi Sugar Mills Ltd. (supra) has no bearing in deciding the point involved in the present appeal, as, according to him, the facts and circumstances considered by the Hon'ble High Court in that case were distinguishable from the one obtaining in the present case. He, however, strongly relied on the decision of the Hon'ble Bombay High Court in the case of CIT v. Century Spg. & Mfg. Co. Ltd. [1978] 111 ITR 6, which, according to him, clearly supports the stand taken on behalf of the revenue. As regards the aforesaid circular issued by the CBDT, he submitted that since the Hon'ble High Court in the case of Zenith Steel Pipes Ltd. (supra) has given opinion in respect of excess reserve created by the assessee, the said circular should not be followed even though it may be benevolent circular. He, therefore, urged that we should uphold the order of the Commissioner (Appeals).
18. We have carefully considered the rival submissions of the parties as well as the material already brought on record and are of the view that the assessee should succeed both in respect of the validity of initiation of the proceedings under Section 8(b), as well as on merits.
It is pertinent to note that at the time of the original assessment proceedings, the assessee had brought all the relevant material on record and after considering the assessee's stand thereon, the STO had framed the assessment. It would appear from the relevant extract of the order of the STO framed under Section 6(2) read with Section 8(b) of the Act (reproduced above) that the internal audit had drawn the attention of the STO to the decision in the case of Zenith Steel Pipes Ltd. (supra). It is pertinent to note that that decision deals with excess reserve created in respect of depreciation and not in respect of the development rebate reserve. Therefore, we are of the view that the pointing out of that decision to the STO could not be said to be 'information' as contemplated under Section 8(b) of the Act. If the STO had brought to the notice of the internal audit the aforesaid circular of the CBDT issued specifically in respect of the excess development rebate reserve created by the assessee, perhaps the matter would have ended there. In this connection, it is pertinent to note that in the earlier round of appeal before the Tribunal, the revenue had not taken up any ground regarding the decision of the Commissioner (Appeals) on this point. As noted above, on earlier occasion, the revenue had come up in appeal before the Tribunal in respect of Rs. 2,22,222 concerning issuance of bonus shares. Again, we are of the view that the initiation of the proceedings under Section 8(b) cannot be supported on the basis of the aforesaid decision of the Hon'ble Madras High Court in the case of Sundaram Clayton Ltd. (supra) as the same was rendered much after the internal audit had raised objections. In this view of the matter, we hold that the STO was not justified in reopening the assessment under Section 8(b).
19. As regards the merits of the case, there is nothing much to write except to say that the aforesaid decision of the Hon'ble Bombay High Court in the case of New Swadeshi Sugar Mills Ltd. (supra) clearly supports the assessee's case regarding issuance of bonus shares.
Further, the aforesaid circular issued by the CBDT which is binding on the STO clearly says that the development rebate reserve in excess of statutory requirement as contemplated in Section 33 of the Income-tax Act, 1961, has to be treated as 'other reserve' for the purpose of computation of capital base in determining the statutory deduction as contemplated under Section 2(8). In other words, we have no hesitation in accepting the assessee's submissions in respect of the merits of the case also. In this view of the matter, we would set aside the orders of the surtax authorities in the present proceedings.