Commissioner of Income-tax Vs. Rane (Madras) Ltd. - Court Judgment

THE COURT

1. At the instance of the Department, the Tribunal referred the following three questions under s. 256(1) of the IT Act, 1961, for our opinion :

'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the ITO was not justified in applying the provisions of r. 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, to the deduction allowed under Chapter VI-A of the IT Act, 1961, for the asst. yrs. 1968-69 to 1974-75

(2) Whether the Tribunal was right in holding that the amendment to the previsions of s. 14 of the Surtax Act, 1964, introduced by the Taxation Laws (Amendment) Act, 1970, w.e.f. 1st April, 1971, are applicable to the asst. yrs. 1969-70 to 1970-71?

(3) Whether the Tribunal was right in holding that the proposed dividend declared subsequent to the end of the accounting year should be treated as a reserve for the asst. yr. 1972-73 ?'

2. So far as question No. 1 is concerned, at the time of hearing learned standing counsel for the Department represented that he is not pressing this question. Accordingly, this question is not answered and is returned unanswered.

3. So far as question No. 3 is concerned, it is squarely covered against the assessee by the decision in India Tube Co. P. Ltd. vs . CIT : [1992]194ITR102(SC) . Accordingly, the Tribunal was not correct in holding that the proposed dividend declared subsequent to the end of the accounting year should be treated as a reserve for the asst. yr. 1972-73. In that view of the matter we answer this question in the negative and against the assessee.

4. So far as question No. 2 is concerned, it relates to the asst. yrs. 1969-70 and 1970-71. The ITO while making the assessment for the asst. yrs. 1969-70 and 1970-71 made certain deductions under Chapter VI-A of the IT Act. On appeal, the CIT(A) held in favour of the assessee that in respect of the incomes which are deducted under Chapter VI-A of the IT Act, the capital could not be proportionately reduced. In order to take this view the CIT(A) followed the decision in Addl. CIT vs . Bimetal Bearings Ltd. : [1977]110ITR131(Mad) . Aggrieved, the Revenue filed the appeal before the Tribunal. According to the Department, the CIT(A) erred in directing the ITO to compute the surtax liability on the basis of the reliefs allowed by him in the income-tax appeals for the corresponding assessment years in ITA Nos. 505 and 506 of 1972-73, 106 of 1975-76, 502 of 1973-74, 323 and 324 of 1974-75 dt. 13th Nov., 1978. In fact the CIT(A) has directed for the asst. yrs. 1969-70 and 1970-71 that the assessee will be entitled to the consequent relief in the surtax assessment following his appellate order in the income-tax appeals for the corresponding years. Before the Tribunal, the Department submitted that this ground was taken by the Department by way of abundant caution in case the CIT(A)'s orders in the income-tax appeals get modified, which would also affect the surtax assessments as a sequel. However, the Tribunal held that s. 14 of the Surtax Act provides that following any appellate or revision order under the IT Act, the chargeable profit for the purpose of the Surtax Act will have to be recomputed and the surtax payable redetermined. Therefore, the Tribunal directed the Surtax Officer to compute the surtax assessment on this basis of the total income as finally determined in the income-tax appeals. Before us, learned standing counsel for the Department submitted that the amendment introduced by the Taxation Laws (Amendment) Act, 1970, brought about an amendment in s. 14 of the Surtax Act w.e.f. 1st April, 1971. Therefore, according to learned standing counsel, this amended provision of s. 14 of the Surtax Act would not be applicable for the asst. yrs. 1969-70 and 1970-71 since the amended provisions would be applicable for the asst. yr. 1971-72 and thereafter. Learned standing counsel further submitted that s. 14 of the Surtax Act is a substantive provision and it is not either procedural or machinery in nature. Therefore, the amendment brought about w.e.f. 1st April, 1971, cannot be made applicable retrospectively. In order to support his contention, learned standing counsel relied upon the decision of this Court in K. Krishnaveni vs . AAC : [1985]151ITR83(Mad) . In that decision while considering the amended provisions of s. 64(1)(iii) of the IT Act, 1961, it was held that 'it is well settled that in the matter of imposition of income-tax, the law as on the first day of April, covers the previous year. The amended law came into force on or 1st April, 1976, and it naturally applied for the accounting year preceding that date. The statute itself specifically declares that the law as on 1st April, 1976, would be applicable to the income earned in the previous year. The law did not come into operation retrospectively but the law acting prospectively applied to certain stated facts which took place in the previous year.' Therefore, according to learned standing counsel, inasmuch as the assessment years involved in the present case are 1969-70 and 1970-71, the law as it stood on 1st April, 1971, cannot be made applicable. It remains to be seen that according to the facts arising in the abovesaid decision the point for consideration is whether the amended provisions would be applicable to the income earned in the previous accounting year. While considering this aspect this Court pointed out that the amended law came into force on 1st April, 1976, would naturally be applicable for the accounting year preceding that date. Therefore, the contention put forward by learned standing counsel that the provisions of s. 14 of the Surtax Act would not applicable to the facts arising in this case cannot be accepted.

The Kerala High Court had an occasion to consider the provisions of s. 14 of the Companies (Profits) Surtax Act, 1964, in CIT vs. Marikar Motors Ltd. (1978) 111 ITR 36, wherein the Kerala High Court held as under :

'Held, on the facts, that the Tribunal was right in holding that the ITO could not invoke s. 14 of the Companies (Profits) Surtax Act, 1964, as amended w.e.f. 1st April, 1971, by the Taxation Laws (Amendment) Act, 1970, to recompute chargeable profits in a case where the order of the Tribunal under s. 254 of the IT Act, 1961, as a result of which order it became necessary to recompute the chargeable profits, was passed prior to 1st April, 1971.'

Therefore, according to the Kerala High Court, the amendment brought about to s. 14 of the Companies (Profits) Surtax Act w.e.f. 1st April, 1971, would be applicable to all assessment orders made by the ITO and appellate orders passed by the appellate authority and the Tribunal.

Another decision relied upon in this context in Waldies Ltd. vs . CIT : [1978]115ITR286(Cal) , wherein the Calcutta High Court had an occasion to consider the consequent rectification of assessment under the Surtax Act under s. 13 of the Companies (Profits) Surtax Act, 1964. While considering this provision, the Calcutta High Court held that the assessment under the IT Act and the Companies (Profits) Surtax Act are not only closely connected but these are integral parts of each other and interwoven, because the 'chargeable profits' upon which the levy of the Companies (Profits) Surtax Act is directed cannot be computed without the records of the income-tax assessment, and neither can the income be assessed and determined nor the deductions contemplated by the First Schedule to the Companies (Profits) Surtax Act be given effect to. In the premises, the word 'record' occurring in s. 13 of the Companies (Profits) Surtax Act, 1964, dealing with rectification of mistakes, would include the record of the income-tax assessments. This would go to show that the rectification order passed by the ITO under the Companies (Profits) Surtax Act would be consequential to the assessment order made by the ITO while doing the income-tax assessment.

Relying upon the abovesaid decision, learned counsel appearing for the assessee submitted that s. 14 of the Companies (Profits) Surtax Act is only procedural in nature and it provides machinery for the recomputation of the tax payable by the assessee under the Companies (Profits) Surtax Act. Therefore, according to learned counsel, the amendment brought about to s. 14 of the Companies (Profits) Surtax Act w.e.f. 1st April, 1971, is procedural in nature and hence it is applicable to pending assessments. In the present case, the CIT(A) passed his order in the case relating to the asst. yrs. 1969-70 and 1970-71 on 30th Nov., 1978, granting certain reliefs to the assessee which were denied by the ITO with regard to the deduction under Chapter VI-A of the IT Act, 1961. Therefore, according to learned counsel for the assessee, the provisions of the amended s. 14 would be applicable to the facts of this case. On the other hand, learned standing counsel for the Department submitted that s. 14 of the Companies (Profits) Surtax Act is substantive in nature and it cannot be considered as procedural in nature. In order to support this contention reliance was placed upon ITO vs . S. K. Habibullah : [1962]44ITR809(SC) wherein the Supreme Court while considering the amended provisions of s. 35(5) of the Indian IT Act, 1922, held 'Clause (5) of s. 35 of the IT Act which was enacted by the IT (Amendment) Act, 1953, is not declaratory of the pre-existing law, nor a matter relating to procedure, but affects vested rights, and must be deemed to have come into force only from 1st April, 1952. It has no greater retrospective effect than has been expressly granted to it and the power conferred by the said clause to rectify the assessment of a partner of a firm by including or correcting his share of the profit or loss of the firm can, therefore, be exercised only in the case of an assessment of a firm made on or after 1st April, 1952. The ITO has no jurisdiction under the said clause to rectify the assessment of a partner consequent on the assessment of the firm, in cases where the firm's assessment was completed before 1st April, 1952.' In the abovesaid decision, the Supreme Court held that the amended provision is not procedural because it affects the vested right of the assessee. But in the present case, even the unamended provisions of s. 14 of the Companies (Profits) Surtax Act gave a right to the assessee to recompute the income in the surtax proceedings according to the assessment made in the income-tax proceedings. Therefore, the vested right of the assessee to get a rectification under the unamended s. 14 of the Surtax Act was not taken away by the amended provision. In fact, the amended provision enlarge the vested right of the assessee in getting benefit even after the income-tax assessment was completed by the first appellate authority and the Tribunal. Therefore, we are of the opinion that the amendment brought about to s. 14 of the Companies (Profits) Surtax Act w.e.f. 1st April, 1971, cannot be considered to be substantive in nature. But it provides machinery for rectification of the income for the purpose of levying surtax. Even otherwise, since the final order was made by the CIT on 30th Nov., 1978, which is after the coming into force of the amended Act on 1st April, 1971, the assessee is entitled to recomputation of his income under the Surtax Act in consequence of the order passed by the CIT in his income-tax assessment. Accordingly, we hold that the order passed by the Tribunal in directing the Surtax Officer to compute the income of the assessee in consequence of the order passed by the CIT(A) in the appellate proceedings appears to be in order. In that view of the matter, we answer the question referred as question No. 2 in the reference in the affirmative and against the Department. Counsel fee is fixed at Rs. 1,000.