1. Out of these nine appeals, five have been filed by the department, while the remaining four have been filed by the assessee. The departmental appeals relate to the assessment years 1975-76 to 1979-80, while the appeals filed by the assessee relate to the assessment years 1975-76 to 1977-78 and 1979-80.
2. We shall first deal with the appeals filed by the department. The first ground raised is that the learned Commissioner (Appeals) had erred in holding that the amounts of dividends and royalty which are required to be excluded in terms of Rules 1(viii) and 1(ix) of the First Schedule to the Companies (Profits) Surtax Act, 1964 ('the Act') are the gross amounts and not the net amounts of dividends and royalty.
This ground is common to all the five assessment years. The amounts involved are mentioned in the orders of the authorities below and need not be mentioned in this order. The learned representative for the assessee has relied on the decisions in CIT v. Jupiter General Insurance Co. [1975] 101 ITR 370 (Bom.), A.V. Thomas & Co. v. CIT [1977] 110 ITR 515 (Ker.), CIT v. Sundaram Industries (P.) Ltd. [1985] 151 ITR 769 (Mad.) and CIT v. Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. [1984] 146 ITR 178 (MP). He has also relied on the decisions of the Tribunal for the assessment years 1973-74 and 1974-75. All these decisions are based on the principle laid down by the Supreme Court in Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243. In that decision, the Supreme Court held that the words 'income by way of dividends' occurring in Section 80M of the Income-tax Act, 1961 ('the 1961 Act'), referred to gross dividends and not net dividends. However, the said decision has been overruled recently by a five Judge Bench of the Supreme Court in Distributors Baroda (P.) Ltd. v. Union of India [1985] 155 ITR 120. The Supreme Court has held that the words 'such income by way of dividends' referred to net dividend income and not gross dividend income. The Supreme Court has further held that the decision in Cloth Traders (P.) Ltd.'s case (supra) was wrong.
Consequently, identical words in Rule l(viii) and (ix) would have to be construed in the light of the subsequent decision of the Supreme Court, referred to above.
In computing the chargeable profits of a previous year, the total income computed for that year under the Income-tax Act shall be adjusted as follows :- 1. Income, profits and gains and other sums falling within the following clauses shall be excluded from such total income, namely :- (ix) income by way of royalties received from Government or a local authority or any Indian concern ; 4. In the definition of 'chargeable profits' in Section 2(5) of the Act, the total income as assessed for the relevant previous year under the 1961 Act is taken as a first step in the computation of chargeable profits and adjustments are made to this total income in order to arrive at the 'chargeable profits'. The First Schedule in which Rule 1 quoted above appears deals with adjustments Rules 1 and 2 specified downward adjustments there are two kinds, one is styled 'exclusions' (Rule 1) and the other is styled 'reductions' (Rule 2). The broad differentiating principle between these two kinds of adjustments is that reductions are of tax liabilities while exclusions in general are of certain types of income included in the calculation of total income under the 1961 Act. It is clear that as far as exclusions under Rule 1 are concerned, they are by and large of the amounts which are included in the total income assessed under the 1961 Act. The use of the word 'exclusion' as distinguished from reduction in Rule 1 is significant.
Consequently, when in Rule 1(viii) there is provision for exclusion of income by way of dividends. What is sought to be excluded is income by way of dividends as included in the total income. Similarly, when in Rule 1(ix) income by way of royalties is mentioned what is sought to be excluded is income by way of royalties as included in the total income computed under the 1961 Act.
These expressions do not refer to the gross income by way of dividends or gross income by way of royalties. They represent net income by way of dividends and net income by way of royalties as computed under the 1961 Act and included in the total income. The interpretation which we have placed on these expressions is derived directly from the interpretation put by the Supreme Court on the words 'such income by way of dividends' in Section 80M which occurred in the same setting as the words in Rule 1(viii) and Rule 1(ix) occurred.
5. The learned representative of the assessee drew our attention to the fact that from 1-4-1981 Explanation has been inserted by the Finance Act, 1981 in Rule 1 in which a specific provision has been made to the effect that the amount of any income, profits and gains which was required to be excluded from the total income under Rule 1 would be the amount of such income, profits and gains as computed in accordance with the provisions of the 1961 Act as reduced in accordance with the provisions in Chapter VIA of the 1961 Act. It was submitted that since this amendment was brought into force with effect from 1-4-1981 it should be presumed that the intention of the Legislature was that prior to 1-4-1981 gross amounts of income, profits and gains should be excluded under various clauses of Rule 1. It was further submitted that whereas Section 80AA of the 1961 Act was inserted by the Finance (No.2) Act, 1980 with effect from 1-4-1968 in order to make provision to the effect that net income by way of dividends should be taken into account for calculating deductions under Section 80M of the 1961 Act, similar provision in Rule 1 of the First Schedule of the Act was made effective from 1-4-1981. This, according to the learned representative, also indicated that prior to 1-4-1981 gross amounts of income, profits and gains were intended to be excluded under various clauses of Rule 1.
It was further submitted that the words 'for removal of doubts' were not mentioned in the Explanation inserted in Rule 1, which also indicated that prior to 1-4-1981 gross income, profits and gains were to be excluded.
6. We have carefully considered the submissions. However, we find ourselves unable to accept them. Mere fact that the Explanation was not stated to be inserted for removal of doubts did not indicate that the Legislature accepted that prior to insertion of the Explanation gross amounts of income, profits and gains should be excluded under various clauses of Rule 1. It is to be noted that interpretation of words in Rule 1 was based on the interpretation of similar words in Section 80M made by the High Court and initially accepted by the Supreme Court in Cloth Traders (P.) Ltd.'s case (supra). The correctness of that view was under challenge before the Supreme Court. The department had always in the past contended that the words 'income by way of dividends' in Section 80M and similar words in Rule 1 referred to net income by way of dividends and not gross income. That interpretation of the department has been accepted by the Supreme Court in the case of Distributors Baroda (P.) Ltd. (supra). Consequently, it must be held that even prior to the amendments made by insertion of the Explanation by the Finance (No. 2) Act, 1961, the relevant words in Rule 1 referred to net income and not gross income. Our attention was drawn to the circular of the Board in which provisions of Explanation inserted in Rule 1 have been explained. We do not find anything in that circular which prevents us from interpreting the relevant words in Clauses (viii) and (ix) of Rule 1 on the basis of the decision in Distributors Baroda (P.) Ltd.'s case (supra). Considering all the circumstances, we hold that under Clauses (viii) and (ix) of Rule 1 net income by way of dividends and net income by way of royalties have to be excluded from the total income computed in accordance with the provisions of the 1961 Act.
7. It was further submitted on behalf of the assessee that on the basis of the decision of the Supreme Court in Distributors Baroda (P.) Ltd.'s case (supra), we should hold that what is to be excluded under Clauses (viii) and (ix) of Rule 1 is income by way of dividends as reduced by expenses incurred for earning the same and income by way of royalties as reduced by expenses incurred for earning royalties and that reduction under Chapter VIA from income by way of dividends and income by way of royalties should not be taken into account. We are unable to accept this submission. In Section 80A of the 1961 Act it is mentioned that in computing the total income, reductions are to be made in accordance with the provisions of Chapter VIA. It is obvious that total income is computed by deducting the amounts mentioned in various Sections in Chapter VIA from gross total income. Some of these reductions have direct reference to the particular head of income. For example, in Section 80M reduction is to be made from income by way of dividends as computed under other provisions of the 1961 Act.
Similarly, under Section 80-O of the 1961 Act reduction is provided from income by way of royalties. In the computation of total income, income by way of dividends and income by way of royalties after deductions under Chapter VIA for such income are included. Those amounts which are included in the total income are sought to be excluded by Clauses (viii) and (ix) of Rule 1. This is also mentioned in the Explanation inserted with effect from 1-4-1981. In the circumstances and in the context of the interpretation derived from the decision of the Supreme Court, referred" to above, we are of the opinion that Explanation inserted in Rule 1 with effect from 1-4-1981 was clarificatory in nature and that income by way of dividends and income by way of royalty has computed in accordance with the provisions of the said Act including Chapter VIA, shall have to be excluded under Clauses (yiii) and (ix) of Rule 1. We, therefore, set aside the order of the Commissioner (Appeals) on this point and direct the ITO to exclude the net income by way of dividends and royalties as explained above.
8. The next ground raised in the departmental appeals is that the learned Commissioner (Appeals) had erred in holding that Rule 4 of the Second Schedule to the Act was not applicable to the deductions admissible under Chapter VIA of the 1961 Act and, consequently, erred in directing the ITO not to reduce the capital base proportionately with reference to such deductions allowed in the income-tax assessment of the assessee.
9. We find that the point in controversy has been decided against the department and in favour of the assessee by the Tribunal in the appeals for the assessment years 1973-74 and 1974-75 in ST Appeal No. 45 (Bom.) of 1978-79 dated 28-2-1980 and ST Appeal No. 4 (Bom.) of 1980 dated 23-3-1981.
This point has been decided in favour of the asses see by the Bombay High Court in CIT v. Century Spg. & Mfg. Co. Ltd. [1978] 111 ITR 6 and CST v. Ballarpur Industries Ltd. [1979] 116 ITR 528. The department wants to keep the issue alive. We respectfully follow these decisions and reject this ground.
10. The third ground which is common to all the departmental appeals is that the learned Commissioner (Appeals) had erred in holding that the General Reserve No. 2 which was created out of the profits exempt under Section 80J of the 1961 Act, should be included in the computation of the capital base for the surtax purposes. This point has been decided on identical facts against the department and in favour of the assessee by the Tribunal in the appeal for the assessment year 1973-74 referred to above. The department wants to keep the issue alive. We respectfully follow the said decision and confirm the order of the Commissioner (Appeals) on this point.
11. The next ground which arises only in the departmental appeal for the assessment year 1977-78 is that the learned Commissioner (Appeals) had erred in holding that the amount deposited by the assessee-company with IDBI in lieu of surcharge was eligible for deduction under Rule 2(i) to the extent of the surcharge that would have been payable by the assessee-company. The point in controversy was considered at length by the Special Bench of the Tribunal in Travancore Chemical & Mfg. Co.
Ltd. v. ITO [1985] SOT 364 (Coch.) and was against the assessee and in favour of the department. The assessee wants to keep the issue alive.
We respectfully follow the said decision of the Special Bench of the Tribunal and set aside the order of the Commissioner (Appeals) on this point and restore that of the STO.12. We now come to the appeals filed by the assessee. The first ground raised is that the learned Commissioner (Appeals) had erred in upholding the action of the ITO in reducing short provision of gratuity from general reserve while computing the capital employed under the Second Schedule. This ground arises in the assessee's appeals for the assessment years 1975-76, 1976-77 and 1977-78. We find that Rule 1A in the Second Schedule was inserted by the Finance Act, 1976 retrospectively with effect from 1-4-1975 in order to counteract evasion of tax, which resulted by the assessee's failure to creat provision for (i) taxation or (ii) proposed dividends, at all or to the full extent necessary. As a result of insertion of said rule, the ITO is empowered to reduce the capital otherwise computed protanto, vis-a-vis, needed provision or shortfall therein. However, that rule does not refer to the assessee's failure to create provision for gratuity liability at all or to the full extent necessary.
Consequently, that rule cannot be resorted to, to reduce the capital base vis-a-vis shortfall in the provision. There is no other provision under which such reduction in the capital base can be made on account of short provision for gratuity. It is to be noted that the amount representing short provision has not been claimed as deduction in the income-tax assessment. In the circumstances, the ITO was not justified in deducting the short provision for gratuity from the reserve. We, accordingly, direct the ITO not to deduct the amount representing short provision for gratuity from the reserve.
13. The second ground is that the learned Commissioner (Appeals) had erred in upholding the action of the ITO in not granting the proportionate increase of Rs. 30,11,222 in paid-up share capital under Rule 3 of the Second Schedule, on account of issue of bonus shares during the year. This ground arises in the assessee's appeal for the assessment year 1977-78 only. It is fairly conceded by the learned representative for the assessee at the time of hearing of the appeal that the point in controversy has been decided against the assessee by the Bombay High Court in Century Spg. & Mfg. Co. Ltd.'s case (supra).
The assessee wants to keep the issue alive. We respectfully follow the decision of the Bombay High Court and reject this ground.
14. The last ground is that the learned Commissioner (Appeals) had erred in upholding the action of the ITO in granting deduction in respect of donations under Rule 1(vii) to the extent of Rs. 2,50,000 instead of Rs. 2,80,051 being 50 per cent of the donation eligible under Section 80G of the 1961 Act amounting to Rs. 5,60,101. This ground arises in the assessee's appeal for the assessment year 1979-80 only. The assessee had made donations of Rs. 5,60,101 to charitable institutions referred to in Section 80G(2). Under" Sub-section (1) of Section 80G, deduction of an amount equal to 50 per cent of the said amount of donations was allowable. However, Sub-section (1) was subject to Sub-section (4) of Section 80G. Sub-section (4) laid down that the deduction under Sub-section (1) shall not be allowed in respect of such sum as exceeded 10 per cent of the gross total income or five lakhs, whichever was less. In the present case the amount of five lakhs was lower amount. Consequently, deduction under Section 80G was allowable with reference to amount of Rs. 5 lakhs in the present case. In the income-tax assessment deduction of 50 per cent of Rs. 5 lakhs amounting to Rs. 2,50,000 was granted. Clause (vii) of Rule 1 of the First Schedule is as follows : In computing the chargeable profits of a previous year, the total income computed for that year under the Income-tax Act shall be adjusted as follows :- 1. Income, profits and gains and other sums falling within the following clauses shall be excluded from such total income, namely :- (vii) an amount equal to fifty per cent of the sum with reference to which a deduction is allowable to the company under the provisions of Section 80G of the Income-tax Act.
The short question to be decided is as to what was the sum with reference to which deduction was allowable to the assessee-company under the provisions of Section 80G. The answer to this question on the facts of the present case appears to us to be self-evident. The answer is that it is the sum of Rs. 5 lakhs with reference to which deduction is allowable to the company under the provisions of Section 80G. The sum of Rs. 5,60,101 which represents actual donation made by the assessee-company cannot be termed as 'the sum with reference to which a deduction is allowable to the company under the provisions of Section 80G of the Income-tax Act' within the meaning of the said expression in Clause (vii) of Rule 1. Consequently, the submission of the assessee was that 50 per cent of Rs. 5,60,101 was allowable as deduction under the said clauses cannot be accepted.
15. Before parting with this topic, we may mention here that the learned representative for the assessee had cited before us two decisions of the Tribunal. The first decision was in Carborundum Universal Ltd. v. STO [ST Appeal No. 9211 (Mad.) of 1978-79 dated 19-5-1971]. The other decision was Bajaj Auto Ltd. v. ITO [ST Appeal Nos. 53 to 59 (Bom.) of 1983 dated 27-3-1984]. In the latter decision, the Bench of the Tribunal has followed the earlier decision. In the earlier decision, it has been held that 50 per cent of the amount representing donations was allowable as deduction under Clause (vii) of Rule 1 and that the limit of Rs. 2 lakhs which was the upper limit at the time with reference to which deduction was allowed in the income-tax assessment, in view of the provisions in Sub-section (4) of Section 80G should be ignored. The main reason given is that the words in Clause (vii) are 'the sum with reference to which a deduction is allowable to the company under the provisions of Section 80G of the Income-tax Act' and not 'the sum with reference to which a deduction is allowed to the company under the provisions of Section 80G of the Income-tax Act.' In other words, the reason given by the Tribunal is that if the words in Clause (vii) had been 'the sum with reference to which a deduction is allowed to the company under the provisions of Section 80G of the Income-tax Act', the upper limit of Rs. 2 lakhs which was the limit at the time when the Tribunal decided the appeal would have to be taken into account. However, since the word used is 'allowable' and not 'allowed' the upper limit in Sub-section (4) of Section 80G should be ignored. What was lost sight of was that no deduction can be allowed unless deduction is allowable, and, as such, deduction allowable would always be equivalent to deduction allowed. Consequently, the use of the word 'allowable' would not make any difference. It is to be noted that Clause (vii) refers to Section 80G as a whole and not to Sub-section (1) of Section 80G. Consequently, when we have to ascertain as to what was the sum with reference to which deduction is allowable under Section 80G, we have to consider all the Sub-sections of 80G.Sub-section (4) of Section 80G cannot be ignored. In fact, Sub-section (1) is subject to Sub-section (4) of Section 80G. Consequently, the sum mentioned in Sub-section (4) is in sub-stance the sum with reference to which the deduction is allowable to the company under the provisions of Section 80C of the 1961 Act and it is with reference to that sum that deduction of 50 per cent is to be calculated under Clause (vii) of Rule 1. Two decisions of the Tribunal are in the appeals of some other assessees. If the decision had been in the appeal of the assessee of the earlier year, we would have followed the said decision inspite of our reservation about the correctness of the view. Ordinarily, we would have referred this question to a larger Bench. However, since the amount involved is small and the point does not arise very often, we do not consider it expedient in the present appeal to refer the matter to the Special Bench. We accordingly, see no justification to take a view different from the view taken by the Commissioner (Appeals) in the present case. Consequently, this ground is rejected.