1. These two appeals are filed by the assessee against the common revisionary orders dated 13-8-1984 passed by the Commissioner and they relate to the assessment years 1977-78 and 1978-79.
2. The assessee is a public limited company. We are concerned with the assessment year 1977-78 for which the previous year is the calendar year of 1976 and with assessment year 1978-79 for which the previous year is the calendar year of 1977. We are concerned with the correct computation of the capital for the purpose cf the Second Schedule to the Companies (Profits) Surtax Act, 1964 ('the Act'). Two amounts, viz., Rs. 68,19,399 and Rs. 19,78,116, for the assessment years 1977-78 and 1978-79 were considered by the ITO as part of the capital reserves held by the assesseecompany. The ITO computed the net total of the various reserves as on 31-12-1976 at Rs. 22,25,51,303 and as on 31-12-1977 at Rs. 22,41,43,219.
3. There are three main common grounds involved in these appeals. The first ground is regarding jurisdiction of the learned Commissioner to pass the common impugned revisionary order covering both the assessment years. The second ground is against considering Rs. 68,19,399 representing the net difference in exchange as part of the capital reserve account. The third ground is about the finding given against not deducting Rs. 19,78,166 shown as debit balance in the miscellaneous expenditure account, representing the miscellaneous expenditure which was not yet adjusted. Now let us take up the grounds one by one.
4. The ITO completed the surtax assessment for 1977-78 on 30-8-1982 and for 1978-79 on 10-9-1982. The assessee preferred appeals against the assessments before the Commissioner (Appeals) who passed orders dated 14-3-1983 disposing of the appeals filed before him. As against the said appellate order dated 14-3-1983, the assessee preferred separate appeals before this Tribunal end the Tribunal by its order dated 28-7-1984 disposed of these appeals. It is, no doubt, true that the grounds covered by the Tribunal's order are not about the amounts now involved in these appeals before this Tribunal. The amounts which are now the subjectmatter of these appeals were neither considered by the ITO in his assessment orders nor by the Tribunal in its second appellate orders. It is the contention of the assessee now before us that inasmuch as the assessment orders passed by the ITO were merged with those passed by the Commissioner (Appeals) and later in those passed by the Tribunal, the learned Commissioner was no longer vested with any revisionary powers under Section 16(1) of the Act. It is the contention of Shri Dalvi before us that under Section 11(4) of the Act, the first appellate authority had the powers of enhancement just like he had the said authority under Section 251 of the Income-tax Act, 1961 ('the 1961 Act'). It is submitted that if the ITO had once considered the particular point (amount) the Commissioner (Appeals) can order enhancement with regard to the same amount considered by the ITO.However, in case if consideration of a new source has been felt necessary but the first appellate authority, the Commissioner (Appeals) had to remand the matter with a direction to the ITO to go into and determine the amount liable to be assessed under the new source found out by him. According to Shri Dalvi the learned Commissioner (Appeals) while passing his appellate orders dated 14-3-1983, was quite competent to go into the question whether the impugned amounts should form part of the capital of the assessee-company or not. Admittedly, appeals were filed at the instance of the assessee-company against assessment orders dated 30-8-1982 for the assessment year 1977-78 and dated 10-9-1982 for the assessment year 1978-79 before the learned Commissioner (Appeals).
The learned Commissioner (Appeals) had adequate powers not only to dispose of the ground raised in the appeals but also he had adequate powers to enhance the assessment after taking up for consideration any item of assessment, which is not necessarily a ground, raised by the assessee, in the appeals. His jurisdiction extends over the whole subject-matter of the assessments of these two assessment years and not confined to the subject-matter of appeal relevant to each of the assessment years. This position is made clear by the authoritative pronouncement of the Hon'ble Supreme Court as per the decision in CIT v. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443. In that decision, the powers of the AAC for enhancement of the assessment were considered. In the said decision, the principles laid down by the Supreme Court on the said subject till then, were also considered. The Hon'ble Supreme Court considered the principles laid down in an earlier case decided by them in CIT v. Shapoorji Pallonji Mistry [1962] 44 ITR 891, the Bombay High Court decision in Narrondas Manordass v. CIT [1957] 31 ITR 909 and the decision of the Supreme Court approving the abovesaid decision, in CIT v. McMillan & Co. [1958] 33 ITR 182 at page 193. After considering the above decisions, the Hon'ble Supreme Court in Rai Bahadur Hardutroy Motilal Chamaria's case (supra) held that the principles which emerge from the above authorities are as follows : The principle that emerges as a result of the authorities of this Court is that the Appellate Assistant Commissioner has no jurisdiction, under Section 31(3) of the Act, to assess a source of income which has not been processed by the Income-tax Officer and which is not disclosed either in the returns filed by the assessee or in the assessment order, and, therefore, the Appellate Assistant Commissioner cannot travel beyond the subjectmatter of the assessment. In other words, the power of enhancement under Section 31(3) of the Act is restricted to the subject-matter of assessment or the source of income which have been considered expressly or by clear implication by the Income-tax Officer from the point of view of the taxability of the assessee.... (p. 450) 5. The learned counsel for the assessee, Shri Dalvi, argued that admittedly the two impugned amounts, involved in this appeal, constitute the subject-matter of assessment by the ITO for the assessment year 1977-78 and for the assessment year 1978-79 and, therefore, while passing consolidated appellate order dated 14-3-1983, the learned Commissioner (Appeals) was quite competent to give notice of enhancement if he had felt that the ITO erred in allowing the two impugned amounts and to deal with the assessability of the two impugned amounts, in each of the two assessment years and pass necessary orders, assessing the two impugned amounts in each of the two assessment years under consideration. Now we have to find out what would happen if he did not consider the assessability or otherwise of these two impugned amounts, in his appellate orders dated 14-3-1983. It was submitted by Shri Dalvi that if matters which would have been taken up in appeals suo motu by the learned Commissioner (Appeals) were not in fact taken up and decided in appeal, the matters not only decided by him in the appeals but also other matters, which constitute the subject-matter of assessment, before the ITO merges with the order of the learned Commissioner (Appeals). That means, that portion of the assessment also which does not form part of the subject-matter of the appeal merges with the appellate orders of the Commissioner (Appeals) and, therefore, applying the principle to the facts before us, the appellate orders of the learned Commissioner (Appeals) dated 14-3-1983 should be deemed to be a decision on the whole subject-matter of the assessment, for each of these two assessment years. It is the contention of Shri Dalvi that the above common appellate order should be deemed as order even on the allowability of the two impugned amounts for each assessment year, as part of capital computation, under the Second Schedule of the Act and must be deemed to be a decision to the effect that 15 per cent of those impugned amounts were correctly allowed as statutory deductions under the Act. He relied upon the decision of the Allahabad High Court in J.K. Synthetics Ltd. v. Addl. CIT [1976] 105 ITR 344 in support of his stand. In that case, the petitioner-company claimed that it was manufacturing Nylon-6 and it was a petro-chemical industry to which Section 33(1)(b)(B)(i) of the 1961 Act was applicable. It was also claimed that it was a priority industry and so entitled for depreciation at 15 per cent under Section 80E of the 1961 Act, for 1967-68. Both these claims were allowed by the ITO. As certain deductions claimed by the assessee-company were not allowed, the assessee filed an appeal which was partly allowed by the AAC on 14-12-1972 with the result that the assessment was motified. The Additional Commissioner served notice upon the assessee on 20-12-1973 that he was intending to revise the order of the ITO for the assessment year 1967-68, inasmuch as the assessment order was prejudicial to the interests of revenue, for the ITO allowed development rebate at 35 per cent instead of 20 per cent and depreciation under Section 80E was also wrongly allowed. The jurisdiction of the Commissioner was contested before the Allahabad High Court, inter alia, on the ground of merger.
The petitioner-company relied on the Supreme Court's decision in Sheodan Singh v. Daryao Kunwar AIR 1966 SC 1332 where it was held as follows : ... We are, therefore, of opinion that where a decision is given on the merits by the trial Court and the matter is taken in appeal and the appeal is dismissed on some preliminary grounds, like limitation or default in printing, it must be held that such dismissal when it confirms the decision of the trial Court on the merits itself amounts to the appeal being heard and finally decided on the merits whatever may be the ground for dismissal of the appeal. (p. 1337) Following the above ratio of the Supreme Court and also after considering some of the case laws of other High Courts, the Allahabad High Court laid down the ratio in J.K. Synthetics Ltd.'s case (supra).
as follows : ...From the point of view of the applicability of the doctrine of merger the fact that some points decided by the inferior authority were or were not canvassed before the superior authority is not material. Once an appeal is taken and is decided the original order merges in the appellate order and, thereafter, it is the appellate order which is operative and enforceable. In this view, after the appeal has been decided on December 14, 1972, the Income-tax Officer's order merged in it ; and the Commissioner of Income-tax lost jurisdiction to act under Section 263 of the Act, In the present case the notice under Section 263 was issued on 22nd December, 1973, that is to say, about one year after the decision of the appeal. The notice was without jurisdiction. (p. 350) 6. Shri Dalvi stated that no doubt there is a cleavage of judicial opinion on this point inasmuch as the decision of the Gujarat High Court in Karsandas Bhagwandas Patel v. G.V. Shah, ITO [1975] 98 ITR 255 and the Madras High Court in Yercaud Coffee Curing Works Ltd. v. State of Madras [1974] 33 STC 170 and those of the Madhya Pradesh High Court in Central Indian Insurance Co. Ltd. v. ITO [1963] 47 ITR 895, Kalooram Tirasilal v. ITO [1966] 59 ITR 308, Alok Paper Industries v. CIT [1983] 139 ITR 1064 and CIT v. R.S. Banwarilal [1983] 140 ITR 3 (FB) strike a different note than the position taken by the Allahabad High Court. He had also submitted before us that the learned Commissioner had purported to follow the Full Bench decision of the Madhya Pradesh High Court in R.S. Banwarilal's case (supra). He urged that we should follow the Allahabad High Court decision in preference to the Madhya Pradesh High Court decision as it is more favourable to the assessee. He pointed out that there is no direct Andhra Pradesh High Court decision on this point. He also referred to the decision of the Hon'ble Supreme Court in Addl. CIT v. Gurjargravures (P.) Ltd. [1978] 111 ITR 1 and the Andhra Pradesh High Court decision in the case of CIT v. Gangappa Cables Ltd. [1979] 116 ITR 778. But we are unable to find any relevance of these two decisions and their applicability to the facts before us.
7. On the other hand, the learned departmental representative argued that the revisionary jurisdiction was correctly exercised by the learned Commissioner. He argued that the subject-matter of revision was never considered by the first appellate authority. He invited our attention to the legal position considered in Sampath Iyengar's Law of Income-tax, Seventh edn. The learned authors stated the law, as to the doctrine of merger, as follows : 18. Applicability of doctrine of merger to Commissioner's power under Section 263.-There has been a judicial controversy with regard to the applicability of the doctrine of merger of orders. The view taken by most of the High Courts is that the merger is only of that part of the order of the Income-tax Officer which relates to items considered and decided by the Appellate Assistant Commissioner and would have no application to matters which have not been touched by the appellate authority. The contrary view appears to have been expressed by the Allahabad High Court in the undernoted case. In the undernoted case, it was held that the Commissioner cannot revise an order of the Income-tax Officer which was the subject-matter of an appeal to the Appellate Assistant Commissioner in regard to an aspect which is relevant to the subject-matter of the appeal whether or not it was agitated before, or decided by the Appellate Assistant Commissioner or not. The applicability of this doctrine has already been discussed with regard to the rectification of mistakes earlier under Section 154. Though there existed a controversy under that section, the matter has been clarified by the provisions inserted as Sub-section (1A) in Section 154. Even in cases where the Commissioner has to exercise his powers conferred on him under Section 263 the same position should hold good. Reference may in this regard be made to the undernoted decisions. (p. 4601) In view of what was stated above, he persuaded us to follow the decision in R.S. Banwarilal's case (supra) as laying down the correct law.
8. We have considered the respective arguments advanced before us.
According to the learned counsel for the assessee, if these amounts were already considered by the ITO at the time of relevant assessment, then they would become part of the subject-matter of assessments. What is meant by the word 'consideration' occurring in Section 31(3) of the Indian Income-tax Act, 1922 was decided by the Supreme Court in Rai Bahadur Hardutroy Motilal Chamaria's case (supra) on which reliance was placed by the learned counsel for the assessee-company. The following is the meaning attached to the word 'consideration' by the Hon'ble Supreme Court while interpreting Section 31(3) in Rai Bahadur Hardutroy Motilal Chamaria's case (supra) : ...In this context 'consideration' does not mean 'incidental' or 'collateral' examination of any matter by the Income-tax Officer in the process of assessment. There must be something in the assessment order to show that the Income-tax Officer applied his mind to the particular subject-matter or the particular source of income with a view to its taxability or to its non-taxability and not to any incidental connection.... (p. 451) Section 31(3) is analogous to the provisions of Section 250(2)(b) and Section 251 of the 1961 Act. It is not the case of the assessee's counsel that the two impugned amounts, now before us, were considered by the ITO during the assessments, within the meaning given to the word 'considered' by the Hon'ble Supreme Court. It is not the case of the assessee's counsel that the question of eligibility or otherwise of the two impugned amounts to be considered as part of capital computation, for which statutory deduction is allowable, was considered by the ITO at the time of the relevant assessments. Even on considering the facts on record, we are unable to hold that the ITO already considered the two impugned amounts specifically and gave a decision as to their eligibility to be considered, as part of capital under the Second Schedule, or their being eligible for statutory deduction, under Section 4 of the Act. Hence, the argument of the learned counsel for the assessee can be held to be of no avail.
9. Even otherwise, we are inclined to follow the ratio of the majority decisions among the High Courts which is reflected ultimately in R.S.Banwarilal's case (supra). The headnote of the decision which brings about the ratio of the decision, correctly, is as follows : ...Where an appeal has been preferred by the assessee to the AAC from an order of assessment made by the ITO in respect of only some of the items covered by the ITO's order and the remaining items, forming part of the ITO's assessment order, were not agitated by either party, though it was open also to the revenue to agitate them or the AAC to consider them suo motu and no decision of the AAC is, therefore, made in respect of the remaining items, the ITO's order merges with the appellate order of the AAC only to the extent it was considered and decided by the AAC but the matters which are not covered by the appellate order of the AAC are left untouched and to that extent the ITO's assessment order survives, permitting exercise of revisional jurisdiction by the Commissioner under Section 263 of the Income-tax Act, 1961.... (p. 3) In this case, the finding of the learned Commissioner is that the subject-matter concerning his revisionary orders were not considered by the ITO at the time of relevant assessment years and, accordingly, they did not form part of the subject-matters of appeal before the Commissioner (Appeals). This finding of the Commissioner (Appeals) was not contested, as incorrect and, therefore, inasmuch as, the character of the impugned sums were not decided by the ITO specifically, because he did not consider their eligibility for being treated as part of capital under the Second Schedule and the subject-matter of appeal before the Commissioner (Appeals) is with regard to other items different from the impugned items, we hold that applying the ratio of the Full Bench decision of the Madhya Pradesh High Court in R.S.Banwarilal's case (supra), the assessment with regard to the two impugned sums did not merge with the appellate order dated 14-3-1983 and, therefore, the learned Commissioner is quite competent to take up revision of the assessment, with regard to them. We, therefore, hold the first point against the assessee and in favour of the revenue.
10. Now let us take up the question of character of two impugned sums and their eligibility to be considered as items of capital entitled for statutory deduction. The first of the amounts which fall for our consideration is Rs. 68,19,399 in each of the two assessment years under consideration.
11. The assessee-company had some sterling balances in foreign banks even prior to 1966. On 6-6-1966, the Indian rupee was devalued with reference to foreign currency, more especially the dollar and the pound. Therefore, the value of sterling balances which the assessee had got in foreign banks increased in terms of its rupee value, owing to devaluation of rupee. In view of the fact that the assessee adopted new exchange value to the sterling balances it had in foreign banks, the sterling balances though remained constant resulted in increase of Rs. 68,19,399 in rupee value in each of two accounting years relevant to the two assessment years under our consideration due to devaluation. As can be seen from page 27 of the printed Annual Report for 1976 (Balance sheet of the assessee-company as on 31-12-1976) this difference in exchange was shown as an accretion to the reserves and surpluses and it was described as 'net difference in exchange per last balance sheet'.
The learned Commissioner in his impugned orders considered the increase as having resulted from the revaluation of an existing book asset and so according to Explanation 1 to Rule 2 of the Second Schedule, the increase should not be considered as part of capital. Explanation 1 to Rule 2 of the Second Schedule of the Act is as follows : A paid-up share capital or reserve brought into existence by creating or increasing (by revaluation or otherwise) any book asset is not capital for computing the capital of a company for the purposes of this Act.
It is contended on behalf of the assessee-company before the learned Commissioner that the above Explanation comes into play only when the book asset was revalued by act of volition or by any unilateral act of the assessee-company and relied on the Bombay Bench 'E' decision of the Tribunal dated 16-3-1974 in the case of Boots Co. (India) Ltd. (supra).
The learned Commissioner did not agree with the view expressed in the above case. He further held that if creating or increasing the value of any book asset, whether by revalution or otherwise or whether by any unilateral act or extraneous circumstances like that of Governmental action in devalution of currency, brings into existence a reserve, then such reserve has necessarily to be taken as not capital for computing capital of a company for the purposes of surtax Act.
12. Now this matter is squarely covered by the Andhra Pradesh High Court decision in Case Referred No. 198 of 1979 dated 6-11-1984. A copy of the judgment is furnished to us. A similar position is considered by the Andhra Pradesh High Court in that case. The Hon'ble High Court held, while interpreting Explanation 1 to Rule 2 of the Second Schedule of surtax Act as follows : In our opinion, Explanation 1 will have no application in a case where there is no revaluation of a book asset. In the present case, we have seen that, on account of devaluation the value of rupee has increased and the sum of Rs. 2,69,048 credited by the assessee-company to 'gain on devaluation' account represents the real increase in the value of the asset which is realised as opposed to any unrealised increase by taking recourse to revaluation.
Inasmuch as the value of the asset has actually gone up, it was necessary for the company to give effect to the actual increase and that was done by the assessee by crediting the increase to a reserve account. This is not a case where a book asset is revalued within the meaning of Explanation 1. The sum of Rs. 2,69,048, in our opinion, represents an increase in value of the asset-which is realised. In this view of the matter, we consider that Explanation 1 has no application to the facts and circumstances of this case.
In view of the categorical decision of the Andhra Pradesh High Court, we hold that increase in rupee value of sterling deposits in foreign bank held by the assessee-company, when entered in its books of account, does not amount to revaluing the existing assets of the company. Hence, we set aside the impugned order of the learned Commissioner on this point and restore the treatment given by the ITO to the amount of Rs. 68,10,399 in his assessment order dated 30-8-1982 for the assessment year 1977-78 and dated 10-9-1982 for the assessment year 1978-79. Hence, we allow the appeals of the assessee on this point.
13. Now let. us consider the nature of the other amount of Rs. 19,78,116 involved in each of the two assessment years. The assessee-company have incurred certain share income expenses. The said expenses were either not written off or adjusted for each of the two assessment years. This amount was shown as debit balance in the miscellaneous expenditure account. While preparing the balance sheet as on 31-12-1976 and 31-12-1977 this amount was debited from the total of the uncommitted reserves. After deduction of the said amount, the net total of the various reserves as on 31-12-1976 were shown at Rs. 22,05,73,087 and as on 31-12-1977 they were shown at Rs. 22,21,65,103.
However, by virtue of treating this debit balance of Rs, 19,78,116 as part of the total capital reserve in each of the two assessment years under our consideration, the ITO considered Rs. 22,25,51,203 and Rs. 22,41,43,219 respectively as capital employed for 1977-78 and 1978-79.
The learned Commissioner held with regard to this sum that according to the normal commercial prudence and practice debit balances in profit and loss account are adjusted against uncommitted reserves and similarly debit balances in miscellaneous expenditure account are written off against the profits or the reserves. In this case, the assessee-company did not write off the debit balance in the miscellaneous expenditure account only with a view to show a higher figure for gaining advantage in surtax. He further stated that there is no balance whatsoever in the profit and loss account of the assessee either on 31-12-1976 or on 31-12-1977, as the entire amount in that account stood transferred to the reserve account and, therefore, the debit balance in the miscellaneous expenditure account would not have been adjusted or written off against any credit balance in the profit and loss account. However, the learned Commissioner took into consideration the voluntary act of the as sessee of deducting this debit balance of Rs. 19,78,116 from its reserves, in the published accounts for the two assessment years under consideration and held that it is only such reserves, after deducting the debit balance of Rs. 19,78,116 in each of the assessment years which should be taken into account for computing the assessee's capital for purposes of surtax.
Shri Dalvi advanced the same arguments which were advanced by him before the learned Commissioner. He argued that the deduction of debit balance of Rs. 19,78,116 in the miscellaneous expenditure account was only for the purpose of display in the published accounts. But in the accounts of the assessee-company these debit balances of Rs. 19,78,116 were not actually written off against the reserves. He stated before us that what is to be deducted from out of the uncommitted reserves of a company according to the provisions of Schedule VI of the Companies Act, 1956, are only debit balances in the profit and loss account and he is not obliged to deduct the debit balances standing in the miscellaneous expenditure account. He relied upon Note H to Part I of Schedule VI of the Companies Act, in support of his contention. He further argued that even though there was no statutory obligation, on the part of the assessee to show the debit balance in the miscellaneous expenditure account, as a deduction from uncommitted reserves, according to the assessee, it had displayed the said debit balance, in the published balance sheet as a deduction from the reserves and this mere display, cannot be taken as appropriation of uncommitted reserves or adjustment of the said debit balance and this should not stand in the way of the assessee to claim that amount of Rs. 19,78,116 for purposes of computing the capital for surtax. The debit balance in the miscellaneous expenditure account should not be deducted from the uncommitted reserves and, therefore, he argued that the ITO correctly allowed statutory deduction of Rs. 19,78,116 in each of the two assessment years under consideration.
14. As against this argument, the learned departmental representative vehemently contended that it is a matter of simple arithmetic, the assessee-company cannot be heard to say that the amount of Rs. 19,78,116 is still available with the company. The amount spent away should ordinarily be shown as a deduction from out of the credit balance in the profit and loss account. The assessee voluntarily transferred all the balances available under the profit and loss account as on 31-12-1976 and 31-12-1977 to the reserve accounts and made it impossible to deduct the debit balance under the miscellaneous expenditure account from those balances. However, the fact remains that the debit balance represents the amounts spent away, in each accounting year relevant to two assessment years, under consideration, and, therefore, while computing the capital of the assessee-company in each of the two assessment years, we have to deduct the amount of Rs. 19,78,116 from the uncommitted reserves and the remaining only reflects the net capital amount over which the assessee is entitled to the statutory deduction at 15 per cent.
15. After considering the respective arguments, thus, advanced before us, we are inclined to agree with the learned departmental representative. Though the statutory requirement is that this expenditure should be deducted from outstanding balances in the profit and loss account the assessee without following the statutory prescriptions, wanted to take refuge under his own statutory violation, as a defence, for not complying the statutory prescriptions. We cannot subscribe to this action of the assessee. To our minds also it appears that it is a simple matter of arithmetic. The amount of Rs. 19,78,116 in each of these years represent expenditure which had gone out from the coffers of the a ssessee-company and, therefore, while computing the capital reserves, this amount of Rs. 19,78,116 should be deducted.
The assessee itself, in fact, deducted the same while displaying its balance sheet as on 31-12-1976 and 31-12-1977 but still it wanted to argue that it should not be taken as a deduction for the purpose of surtax. According to us, the assessee is not entitled to do so and, hence, we hold that the assessee is not entitled to the statutory deduction. We confirm the order of the Commissioner on this point and dismiss the appeals of the assessee for the two assessment years on this point.