Rama Jois, J.
1. The Income-tax Appellate Tribunal, Banglore Bench, has referred the following question for the opinion of this court :
'Whether the Tribunal was right in law in holding that tax credits under section 280ZB of the income-tax Act, 1961, issued to the assessee for the assessment year 1966-67 to 1970-71 were in the nature of income requiring reduction of capital by the application of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, for the assessment year 1973-74 ?'
2. The facts and circumstances which have given rise to the above question are :
(i) The ITO computed the capital base of the assessee, a private limited company, for the purpose of making assessment under the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as 'the Surtax act'), for the assessment year 1973-74, the relevant accounting year being the calendar year 1972, at Rs. 1,33,57,818. In terms of s. 4 read with s. 2 (8) of the Surtax Act he gave a statutory deduction of Rs. 13,35,782, being 10% of the capital base as determined by him out of the chargeable profit of Rs. 18,72,280 and determined the net chargeable profit liable to surtax at Rs. 5,36,498 and the surtax payable by the assessee at Rs. 1,34,125, i.e., 25% of the net chargeable profit.
(ii) During the accounting year, the assesses-company had received tax credits under s. 280ZB of the Income-tax Act, 1961 (hereinafter referred to as 'the I. T. Act'), amounting to Rs. 9,35,192. The break-up of this total amount which comprised of the five tax credit certificates issued during the five assessment years were as follows :
Assessment year AmountRs.1966-67 1,95,2631967-68 1,96,1151968-69 1,54,1551969-70 1,33,7041970-71 2,55,995 (iii) Section 10(28) of the I. T. Act, which provides that certain types of income shall not be included in computing the total income of an assessee for a previous year under the Act, reads :
'10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included-...
(28) any amount adjusted or paid in respect of a tax credit certificate under the provision of Chapter XXIIB and scheme made there under.'
In views of the above provision there is no dispute that the amount of tax credits received by the assessee were not to be included in computing its income under the I. T. Act. The ITO had not taken into account the amounts realised through tax credits in computing the capital base of the company also under the Second Schedule to the Surtax Act.
(iv) The Addl. Commissioner, however, was of the view that the amount of tax credits should have been treated as income not chargeable to tax under the I. T. Act, for the purpose of diminishing the capital base of the assessee required for the purpose of making an assessment to surtax, in view of and in the manner provided in r. 4 of the Second Schedule to the Surtax Act, and that not doing so was prejudicial to the revenue. He therefore, proposed to revise and modify the assessment under the Surtax Act in exercise of his powers under s. 16 (1) of the Surtax Act.
(v) In its reply to the notice before the Addl. Commissioner, the assessee raised the following objections :
(1) The amount realised from tax credit certificates was not income.
(2) Even if it was income, as tax credits given for the five assessment years, i.e. 1966-67 to 1970-71, were received by the assessee on dates earlier to the accounting year 1972, and as it accounts were maintained on the mercantile basis, it could not be treated as income relevant to the assessment year 1973-74 on the ground that they were presented for adjustment in the accounting year relevant to the assessment year.
(vi) The Addl. Commissioner repelled both the contentions. He held that in terms of s. 10(28) of the I. T. Act itself, the tax credit certificate amount was income, and as that was as item of income exempted from tax under the I. T. Act, it should have been taken into account for the purpose of diminishing the capital base of the assessee in the manner provided in r. 4 of the Second Schedule to the Surtax act. Rejecting the second submission, he held that the accounting year during which tax credit certificates were presented before the ITO and the amounts were actually adjusted or paid was relevant for assessment, and not the years during which the certificates were issued. Accordingly, he directed the modification of the assessment under the Surtax Act, taking into the account the sum of Rs. 9,35,192, being the realisation from the five tax credit certificates as income for purposes of diminishing the capital base of the assessee as determined under rr. 1to 3 of the Second Schedule to the Surtax Act in terms of r.4 thereof.
(vii) Aggrieved by that order the assessee appealed to the Tribunal. On the same reasoning as given by the Commissioner, the Tribunal confirmed his order. Thereafter, at the instance of the assessee, the question set out earlier has been referred for our opinion.
Sir Sarangan, learned counsel for the assessee, contended that the view taken by the Addl. Commissioner and the Tribunal that the amount of tax credit certificates received under the scheme of s. 280ZB of the I. T. Act was income was patently erroneous and that just because the said amount exempted from tax under the I. T. Act by virtue of s. 10(28), which has been done according to him by way of abundant caution, was no basis to hold that it was income, and consequently, should be taken as such for purposes of r. 4 of the Second Schedule to the Surtax act. Alternatively, he also argued that if it was income it relates to the year during which the tax credit certificate was issued as the assessee was maintaining its account according to the mercantile system and not for the previous year relevant to the assessment year under consideration.
In order to appreciate the contention urged and the points arising for consideration, it is necessary to understand, in the first instance, the scheme of the Surtax act.
(i) The Companies (Profits) Surtax, as it is title indicates, is special law applicable to companies.
(ii) Section 4 is the charging section. It provides for the levy of a tax called surtax on the chargeable profits of a company during the relevant year as exceeds the statutory deduction provided at the rates in the Third Schedule.
(iii) 'Chargeable profits' of a company is required to be ascertained in accordance with the rules set out in the First Schedule to the Surtax act. The discussion of the details of the rules are unnecessary for this case, as there is no dispute on this account.
(iv) As stated earlier, under s. 4 of the Surtax Act, Surtax is leviable on the chargeable profits minus the 'statutory deduction'. This expression is defined in s. 2 (8) of the Surtax Act, the relevant portion of which reads :
'Statutory deduction' means an amount equal to ten percent of the capital of the company as computed in accordance with the provisions of the second Schedule, or an amount of two hundred thousand rupees, whichever is greater :....' (rest left out as necessary)
3. In order to allow the statutory deduction, in the first instance, the capital of a company has to be ascertained. For the purpose of ascertainment of capital, rules are prescribed in the Second Schedule. It has four rules. There is no dispute about the capital of the company computed in terms of rr. 1 to 3. The controversy centers around r. 4 of the Second Schedule to the Surtax act. It reads :
4. 'Where a part of the income, profits and gains of a company is not includible in its total income as computed under the Income-tax Act, its capital shall be the sum ascertained in accordance with rules 1,2 and 3, diminished by any amount which bears to that sum the same proportion as the amount of the aforesaid income, profits and gains bears to the total amount of its income, profits and gains.'
4. In view of this rule though a party of any specified income of profits and gains earned by a company, is not liable to be taxed under the I. T. Act having regard to any provision in that Act, for the purpose of determining the capital base of the company under the Second Schedule of the Surtax Act, such income has to be taken into account in the manner provided in r. 4 thereof, i.e., the capital sum ascertained in accordance with rr. 1,2 and 3 should be diminished by an amount which bears to that sum the same proportion as the amount of the aforesaid income, profits and gains (not liable to be taxed under the I. T. Act) bears to the total amount of its income, profits and gains.
5. In this case, there is no dispute that the assessee had received in all a sum of Rs. 9,35,192 during the relevant accounting year by presenting the five tax credit granted under s. 280ZB of the I. T. Act. It is also not in dispute that the above amount is exempted from tax under the I. T. Act as such exemption is specifically provided for under s. 10(28) of the act. The ITO did not take this amount as an income not chargeable to tax under the I.T. Act, for the per pose of diminishing the capital base of the assessee in terms of r.4 of the Second Schedule to the Surtax Act. But on suo motu revision the Addl. Commissioner held that the amount of tax credits must be taken into account as income not chargeable to tax under the I. T. Act for diminished should from the base in terms of r. 4 and the capital base so diminished should from the basis for allowing statutory deduction and computation of net chargeable profit liable to surtax and the amount of tax payable under the Surtax Act. The Tribunal has confirmed that order in appeal. The assessee contends that the amount of tax credits received by it under s. 280ZB of the I. T. Act was not of its income and the view taken by the Addl. Commissioner and the Tribunal is erroneous.
6. The contention urged for the assessee necessitates the ascertainment of the true nature of the tax credits and for that purpose it is necessary to analyse the scheme of Chap. XXII-B and in particular of s. 280ZB of the I. T. ACT.
(i) Chapter XXII-B comprising ss. 280Y to 280ZB under the heading 'Tax Credit Certificates' (hereinafter referred to as 'TCC') was incorporated in the I. T. Act by the finance Act of 1965. These provisions were designed to give tax concessions in the from of granting TCC at the rates specified in the relevant sections and schemes prepared under the chapter subject to the terms and conditions specified in the relevant sections. The object of extending these concessions are discernible from the relevant sections. They are :
(a) For encouraging the shifting of industries from urban areas, i.e., for the purpose of avoiding concentration of industries only in urban areas and encouraging establishment of industries in, and industrial development of, areas other than urban areas (vide s. 280ZA);
(b) for encouraging manufacture of specified articles (vide s. 280B);
(c) for promoting export (vide s. 280ZC); and
(d) for manufacturing specified goods (vide s. 280ZD).
(ii) Section 280ZE empowers the Central Govt. to frame one or more Schemes regulating the grant of tax credit certificate.
(iii) Relevant part of s. 280ZB under which tax credit certificates were issued to the assessee, reads :
'280ZB. Tax credit certificate to certain manufacturing companies in certain cases. - (1) Where any company engaged in the manufacture or production of any of the articles mentioned in the First Schedule to the industries (Development and Regulation) Act, 1951 (65 of 1951), is, in respect of its profits and gains to such manufacture or production, -
(i) liable to pay any tax for the assessment year commencing on the 1st day of April, 1965 (hereinafter referred to as the base year), and for any one or more of the five assessment years next following that year; or
(ii) not liable to pay any tax for the base year but becomes so liable for any succeeding year (hereinafter referred to as the succeeding base year) and also for any one or more of the assessment years following that year, not being an assessment year commencing on the 1st day of April, 1971, or any subsequent assessment year.
and the tax for any such succeeding year exceeds -
(a) in the case referred to in causes (i), the tax payable for the year,
(b) in the case referred to in clause (ii), the tax payable for the succeeding base year,
then the company shall be granted a tax credit certificate for an amount equal to twenty percent. of such excess :
Provided that the amount of the tax credit certificate shall not for any assessment year exceed ten per cent. of such tax payable by the company for that year.
7. The amount shown on tax credit certificate granted to any company under this section shall, on the certificate being produced before the Income-tax Officer, be adjusted against any liability of the company under the Indian Income-tax Act, 1922 (11 of 1922), or this act, existing on the date on which the certificate was produced before the Income-tax Officer and where the amount of such liability, the excess or the whole of such amount, as the case may be, shall, notwithstanding anything contained in Chapter XIX, be deemed., on the said date, to be refund due to such company under that Chapter and the provisions of this Act shall apply accordingly :
Provided that the adjustment or refund, as the case may be, under this subsection shall be only for such amount, not exceeding the amount of the certificate, as is used within such period as may be specified in the scheme -
(i) for repayment of loans taken by the company from any of the financial institutions notified in this behalf by the Central Government, or
(ii) for redemption of its debentures, or
(iii) for the acquisition of any capital asset in India, including the construction of any building for the purposes of the business of the company.
Explanation 1. - In this section, `tax' means income - tax payable under this Act and surtax, if any payable under the Companies (Profits) Surtax Act, 1964 (7 of 1964)...' (rest left out as necessary).
(iv) An analysis of the above section indicates the nature and extent of the receipts through tax credit certificates as also the terms and conditions for adjustment or payment of the amount specified in the tax credit certificates. They are :
(a) The provisions is applicable to companies engaged in the manufacture of any of the articles described in sub-s. (1).
(b) The profits and gains must be attributable to such manufacture or production.
(c) Such manufacturer or producer must be one liable to pay tax for the assessment year commencing from 1st April, 1965, (called the base year) and for one or more of the five subsequent assessment year or though not liable to pay tax in the base year becomes liable to pay tax for any succeeding year (called succeeding base year) and also for the subsequent on or more assessment year but not after April 1, 1971, or thereafter.
(d) Tax credit certificate has to be given for an amount equal to twenty percent. of the amount by which the tax payable for succeeding year and exceeds that tax payable for the base year or succeeding base year, as the case any be, subject however to ceiling at 10 percent of the tax payable by the assessee for that year.
(e) On production of such certificates before the ITO, after adjusting income tax due, if any, from the concerned assessee, the excess or the whole amount, as the case may be, has to be refunded to the assessee.
(f) The proviso to sub-s. (2) incorporates condition to the effect that adjustment or refund is to be permitted if only the amount had been used for the three purposes specified therein and within such period as specified in the scheme.
8. The Central Govt. has framed the Tax Credit Certificates (Corporation Tax) Scheme, 1966 Required for the purpose of giving effect to s. 280ZB. It is not necessary to refer to the provision of the scheme. Suffice to say that under s. 280ZB read with the scheme referred to above, five TCC were issued to the company for the assessment year 1966-67 to 1970-71, particulars of which have been set out earlier, in all amounting to Rs. 9,35,,192 and these certificates were presented to the assessment year 1973-74, and the said amount was received by the assessee.
9. Having analysed the provision of the Surtax Act and s. 280ZB the I.T. Act,we shall now proceed to consider the question of law arising for consideration. The question is :
'Is the amount of tax credit received by the assessee under section 280ZB of the I. T. Act, constituted the income of the assessee but not liable to tax under the I. T. Act, only in view of section 10(28) thereof, and, therefore, should be taken into account for diminishing capital base in the manner provided in rule 4 of the Second Schedule to the Surtax Act ?' The word 'income' is defined in s. of the I. T. Act. It reads 'income' includes -
(i) profits and gains;
(ii) dividend;
(iia) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes, not being contributions made with a specific direction that they shall form a part of the corpus of the trust or institution.
Explanation. - For the purpose of this sub-clause, 'trust' includes any other legal obligation;
(iii) the value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of section 17;
(iv) the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid;
(v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or section 41 or section 59;
(va) the value of any benefit or perquisite taxable under clause (iv) of section 28;
(vi) any capital gains chargeable under section 45,
(vii) the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society, computed in accordance with section 44 or any surplus taken to be such profits and gains by virtue of provisions contained in the First Schedule;
(viii) any annuity due, or commuted values of any annuity paid, under the provisions of section 280D;
(ix) any winnings from lotteries, crosswordspuzzles, races including horse races, card games and other games of any sort or from gambling or beting of any form or nature whatsoever,'
10. Being an inclusive definition the meaning of the word 'income'is undoubtedly every wide. Still there can be no doubt in order that any receipt to be liable to tax under the I. T. act, must be income except such of the types though not income in the real sense of the term, are specifically included in the definition. Tax credits are not specifically mentioned in the definition. Therefore, whether tax credits are not specifically mentioned in the definition. Therefore, whether tax credit fall within the expression 'income' or not calls for determination in this reference. It is difficult nay impossible to define or specify exhaustively as to the types of receipts which would be 'income' or not calls for determination in this reference. It is difficult, any impossible to define or specify exhaustively as to the types of receipts which would be income for the purpose of the I. T. Act. Whether a particular type of receipt is income or not, would therefore, have to be decided having due regard to the nature of the receipt by applying the relevant tests. In the case of Maharajkumar Gopal Saran Narain Singh v. CIT [1935] 3 ITR 237 the Privy Council observed :
'The word 'income is not limited by the words 'profits'and 'gains'. Anything which can properly be described as income is taxable under the Act unless expressly exempted.'
11. In the case of Rani Amrit Kunwar v. CIT : [1946]14ITR561(All) , a Full Bench of the Allahabad High Court made a further elucidation of the aforesaid dictum of the Privy Council.
'I believe that true test to be applied under the Income-tax Act, is that which has been prescribed by Lord Russel of Killowen in Gopal Saran Narain Singh v. CIT [1935] 3 ITR 237, in which he says that anything can properly be described as income is taxable under the Indian Income-tax Act, unless expressly exempted.... Under Indian law, therefore, we come back in my opinion, to the relatively simple test whether in the ordinary parlance of language what the assessee receives is 'income' or not. I should not dream of suggesting that every payment made by one person to another is necessarily the recipient's income since it may, as Viscount Dunedin has said, be merely a casual payment or as Sir George Lowands has suggested, a mere windfall. Such a sweeping proposition would be absurd. Many things have to be considered. In the case of a payment by a parent to a child or by a husband to a wife or by one relation obvious questions arise whether in the particular circumstances of each case the payments rate made in such a way as to constitute what is paid the money of the recipient at all or whether the payments themselves are not merely a series of casual payments or windfalls. But there seems to me to be another class of cases altogether in which in particular circumstances payments may be made by one person to another which can only be explained on the ground that the giver intends to give, and the recipient expects to receive, with regularity or expected regularity and from a source the nature of which is to produce such a payment, an income which is in the income - tax sense his own... The conclusion therefore, I have reached is that in construing the word income in the Indian Income-tax Act, one has to ask oneself whether having regard to all the circumstances surrounding the particular payments and receipts in question, what is received is of the character of income according to the ordinary meaning of that word in the English language or whether it is merely a casual receipt or mere windfall.'
12. Applying the above test, with which we respectfully agree, we shall now proceed to consider as to whether tax credits granted under s. 280ZB of the I. T. Act and received by the assessee were its income.
13. It was not, and it could not be, disputed by the learned counsel for the revenue that during the base year as well as the succeeding year, the entire taxable income of the assessee had been taxed under the I. T. Act. TTCs, during every assessment year in which it was issued was in respect of the 10 percent. of the amount by which the tax payable for the succeeding year exceeded the tax payable for the base year in terms of s, 280ZB of the I. T. Act. Thus, the amounts comprised in each case of the five TCC were in the nature of refund granted to the assessee, of a portion of the tax payable by it on its income assessed to tax, as an incentive for the manufacture or production of articles for the promotion of which s. 280ZB has been inserted in the I. T. Act. In the nature of things, at common parlance, one would not regard such receipt as income. These conditions imposed in the proviso to sub-s (2) of s. 280ZB of the I. T. act, to the effect that even after the issue of a TCC adjustment or refund shall only be to the extent of its use for the three purposes specified therein also strengthens the view that the amount of a TCC could not be regarded as 'income' for, it was the income of the assessee, it would have been free to expend the amount for whatever purpose it intended,. Therefore, tax credits have no taint of 'income'. No one conversant with the notions income would regard such a receipt as income in the real sense of that term. Having due regard to the above aspects, in our view, the amount of tax credits cannot be considered as falling within the natural meaning of the word 'income'. Therefore, it appeals to us that the tax credits could not have been taken into account for purposes of diminishing the capital base under r. 4 of the Second Schedule of the Surtax Act for purposes of determining the statutory deduction and the amount leviable under the Surtax Act.
14. We see no force in the reasoning of the Addl. Commissioner and the Tribunal that because the TCC amount is specified as an item of income exempt from income-tax under s. 10(28) of the I. T. act, it is income and should be taken into account for diminishing the capital base in terms of r. 4 of the Second Schedule to the Surtax Act.
(i) The fact that a specified receipt is shown as an item of income exempt from tax under s. 10 of the I. T. Act. may prima facie indicate that it is income, but it is not conclusive. For instance, interest is earned on national savings certificates is exempt from tax, vide s. 10(15) of the Act. The assessee had received a sum of Rs. 763 as interest on national savings certificates during the relevant accounting years. The ITO had omitted to take this into account for diminishing the capital base in terms of r. 4 of the Second Schedule to the Surtax Act. The Addl. Commissioner held that it should have been taken into account and the Tribunal has also confirmed his view. The assessee has not questioned the correctness of that decision. An interest earned on an investment and, in the present case, in the form of national savings certificate, is certainly income and it does not cease to be income just because it is exempted from tax. But the position regarding tax credit is different. As held earlier, it is not income having regard to the true import of that word. It does not become income just because it is exempted from the income-tax.
(ii) As observed by the Privy Council in CIT v. Shaw Wallace & Co. , just because an amount was exempted from tax under s. 4 (3) of the Indian I. T. Act, 1922, it was not to be treated as income when such an amount could not be regarded as income under any scheme of taxation and such exemptions only indicated the over-anxiety of the draftsmen to place the matter beyond any possible controversy. (See also the Full Bench judgment of the Allahabad High court in Rani Amrit Kunwar v. CIT : [1946]14ITR561(All) .
(iii) On the above reasoning, with which we respectfully agree, receipt, which is income, does not cease to be income even if exempted from income-tax and a receipt, which is not income does not become income just because it is included as one of the items exempted from income-tax. Therefore, in our view, the Commissioner and the Tribunal were not right in holding that the amount received by the assessee by way of refund of a portion of the tax payable in terms of s. 280ZB of the I. T. Act in the form of TCC and subject to the conditions specified in that section, which cannot be regarded as income at all as indicated by us earlier, was income, just because it is specified as an item of income from tax under the I. T. Act under s. 10(28) thereof. It appears to us, as submitted by the learned counsel for the assessee, that the said exemption provision has been inserted only by way of abundant caution as in our view, even without such a provision, the amount could not have treated as income liable to tax under the I. T. Act.
15. We see considerable force also in the second contention urged for the assessee that even if the TCC receipts are constructed as income as the certificates had been received in respect of the assessment year 1966-67 to 1970-71, much earlier to the accounting year relevant to the assessment year 1973-74 as the assessee has been maintaining its accounts on the mercantile system, it was not income during the previous year relevant to the assessment year 1973-74. However, in view of our acceptance of the first contention for the assessee, it is unnecessary to decide the second condition.
16. In the result we answer the question referred for the opinion of this court in the negative, i.e., in favour of the assessee, as follows :
17. The Tribunal was not right in law in holding that tax credits under s. 280ZB of the I. T. Act, 1961, issued to the assessee for the assessment years 1966-67 to 1970-71 were in the nature of income requiring reduction of capital by the application of r. 4 of the Second Schedule to the C. (P.) S. T. Act, 1964 for the assessment years 1973-74.