Indian Steel And Wire Products Ltd. v. Commissioner Of Income-Tax

Chakravartti, C.J:— This is a reference under Section 66(1) of the Income-tax Act, read with Section 19 of the Business Profits Tax Act by the Calcutta Bench of the Appellate Tribunal of three questions of law. The facts are as follows.

2. The common feature of the three questions is that, by each the Court's opinion is asked as to whether a certain amount was entitled to be treated as reserve for the purpose of the computation of capital in order that the abatement allowable to the assessee might be determined. The chargeable accounting periods are two, the first being 1-4-1946 to 31-3-1947, and the second being 1-4-1948 to 31-3-1949. With regard to the first chargeable accounting period, the material fact is that the balance sheet of the assessee company as at 31-3-1946, or what is the same thing, 1-4-1946, showed as unappropriated balance of Rs. 12,33,417/-. That sum was made up of two smaller sums. The first of the latter sums was an amount of Rs. 44,233/- which had been carried forward out of the balance as at 31-3-1945, and the second sum was an amount of Rs. 11,89,183/- which was the balance of the profit for the year ending on 31-3-1946. The assessee company claimed that it was entitled to have the entire sum of Rs. 12,33,417/- treated as a reserve for the purposes of the computation of its capital under R. 2(1) of Sch. II to the Business Profits Tax Act of 1947. The Tribunal allowed the assessee's claim with regard to the smaller sum of Rs. 44,233/-, but rejected it with respect to the larger sum of Rs. 11,89,183/-.

3. With regard to the second chargeable accounting period, the material fact is that the balance sheet as at 31-3-1948, or what is the same thing at as 1-4-1948, showed an unappropriated balance of Rs. 11,95,043/-. That sum was made up of two smaller sums. The first of those smaller sums was an amount of Rs. 14,553/- which had been carried forward out of the balance as at 31-3-1947, and the second of those sums was an amount of Rs. 11,80,489/- which was the balance of the profits for the year ending on 31-3-1948. As in connection with the other chargeable accounting period so in connection with this, the assessee company claimed that the whole of the amount of Rs. 11,95,043/- should be treated as a reserve for the purposes of R. 2(1) of Sch. II to the Business Profits Tax Act. The Tribunal allowed the assessee's claim with respect to the smaller sum of Rs. 14,553/-, but disallowed it with respect to the larger sum of Rs. 11,80,489/-.

4. The Commissioner of Income-tax, West Bengal, was dissatisfied that the two smaller suras should have been allowed and similarly, the assessee company was dissatisfied that the two larger sums should have been disallowed. Both applied to the Tribunal for a reference to this Court. The Tribunal has combined the allowances in one question which it has referred at the instance of the Commissioner of Income-tax and similarly has combined the disallowances in another question which it has referred at the instance of the assessee. The two questions referred are as follows.

(1) “Whether the above Profit and Loss account balances of Rs. 44,233/- and Rs. 14,553/- have been rightly held by the Tribunal to be a reserve for the purposes of R. 2(1) of Sch. II, Business Profits Tax Act, 1947.”

(2) “Was the Income-tax Officer justified in holding that Rs. 11,89,183/- and Rs. 11,80,489-10-7 being the profit of the assessee for the years ending 31-3-1946 and 31-3-1948, was not reserve for the purposes of the Business Profits Tax capital computation under R. 2(1) of Sch. II, Business Profits Tax Act?”

5. In my view both the questions are wholly concluded by the decision of the Supreme Court in the case of—‘I.T Commr., Bombay City v. Century Spinning and Manufacturing Co. Ltd.’, AIR 1953 SC 501 (A). The computation of the Business Profits Tax is a rather complicated affair. The tax is levied at a certain percentage of the taxable profits and the taxable profits are ascertained after allowing a certain abatement.

6. That abatement again is computed by reference to what is called the capital of the company and the capital, again, has got to be computed by reference to the paid-up share capital and the reserves as on the first day of the relative chargeable accounting period. It is in that way that the question of a particular amount being or not being entitled to be treated as a reserve becomes relevant.

7. It only requires to be added that so far as chargeable accounting periods ending on or before 31-3-1947 are concerned, the relevant provisions are Section 2(1)(a) of the Business Profits Tax Act read with R. 2(1) of Sch. II to the same Act, but so far as chargeable accounting periods beginning after 31-3-1947 are concerned, the amount of abatement is such sum ss may be fixed by the annual Finance Act.

8. The Finance Act of 1948, however, has virtually laid clown the same standard as the two provisions I have already mentioned. It has been necessary to add this statement, because one of the chargeable accounting periods concerned in the present case commenced on 1-4-1948.

9. The only distinction between the case decided by the Supreme Court and the present case is that what their Lordships had to consider, appears to have been simply a sum which was the balance carried to the balance sheet of the next year without making or declaring it a reserve. It was a single sum and was treated as the balance of the year immediately preceding, whereas the balances we have to consider in the present case are, in each instance composed of two sums, one carried forward or brought over from an earlier year and the other being the balance of the immediately preceding year.

10. That distinction in fact, does not seem to me to make any difference, once it is borne in mind what the test was that the Supreme Court laid down. The crucial date, if I may borrow the language of their Lordships, is the first day of the relative chargeable accounting period and the one fact which in their Lordships' view furnished the answer to the question they had to consider, was that, on that crucial date, nobody possessed of the requisite authority had indicated the manner of the disposal or the destination of the balance concerned.

11. The amount of the balance had been simply pushed forward to the next year without being allocated to any particular purpose, whether general or special and their Lordships held that if a surplus was simply carried forward without the persons in requisite authority allocating it to any particular purpose as a reserve therefore it did not acquire the character of reserve for the purposes of capital computation under the Business Profits Tax Act. If that be the test, in my view it applies to the whole of the two sums concerned in each of the two instances covered by the present reference.

12. Just as the company had not indicated the manner of the disposal or the destination of the balance of the profits of the year immediately preceding, so it had not indicated the manner of the disposal or the destination of the balance brought lover from a still earlier year. The company was merely carrying a load of unappropriated profits, of which a part was a kind of floating balance which had floated forward into the year immediately preceding and being added to the balance of that year Iliad floated further forward into the chargeable accounting period without finding or being directed to a local habitation in any specific way anywhere at the direction of the company.

13. That being the way in which the two sums had been dealt with, there could not possibly be any distinction between the two for the purposes of capital computation. It follows that in so far as the Tribunal allowed the smaller sums, it was in error and in so far as it disallowed the larger sums, it decided rightly. The answer to the first question must, therefore, be in the negative and that to the second question in the affirmative.

14. A third question has also been referred to this Court in the following terms

“Whether the Income-tax Officer was correct in holding that advance payment of tax under S. 18-A was not a reserve of the assessee mentioned in R. 2(1) of Sch. II.”

15. The relevant facts are that during the period ending on 31-3-1948, the assessee company made an advance payment of Rs. 13,54,054/- under Section 18-A of the Income-tax Act. It was claimed that this sum ought to be treated as a reserve, inasmuch as its true character was that it had been set apart for the purpose of being applied to the discharge of the tax liability for the then current year, although it might have been set apart in the form of a deposit with the Government.

16. The Tribunal in its appellate order, dealt with the question on that general basis and disallowed the claim in the view that the payment under Section 18-A of the Income-tax Act had been made in the discharge of a present statutory liability and, therefore, it could not be said that, by making the payment, the assessee company was putting by the amount in question as a reserve. It was added that the circumstance that the exact amount of tax payable fell to be determined at some future date when the assessment of the relevant year would be completed, could not help the assessee, inasmuch as the payment was made to meet an instant liability imposed by a statute.

17. The assessee's contention before us was that in taking that view the Tribunal had been in error, inasmuch as although the payment under S. 18-A had been made in discharge of a statutory liability, it was still in the nature of the creation of a reserve and that the fact that the reserve had to be created compulsorily made no difference.

18. The question is an interesting and even an intriguing one, because the true nature of a payment under S. 18-A from the point of view of R. 2(1) of Sch. If to the Business Profits Tax Act is not altogether easy of determination. We, however, find, ourselves unable to deal with the question, because we do not feel sure that the facts have been correctly stated. It appears from the assessment order that the Income-tax Officer first took an amount of Rs. 1,70,91,795/- as the capital and reserve according to the computation filed by the assessee company and then he excluded certain items.

19. Among the items excluded was a sum of Rs. 13,54,054/- which was the advance payment under S. 18-A and the reason given by the Income-tax Officer for the exclusion was that it was an item “not treated as capital or reserve.” “Not treated as capital or reserve” could only mean not so treated by the assessee company itself. What that meant appears to have been clarified by the Appellate Assistant Commissioner in para. 2 of his order. He proceeded on the basis that the assessee company showed a sum of Rs. 36,67,481/- as the amount kept in reserve for purposes of income-tax, super-tax and business profits tax.

20. According to the Appellate Assistant Commissioner that sum included the amount of advance payment under S. 18-A of the Act and the whole of that amount which had been shown on the capital and liability side of the balance sheet, had been allowed by the Income-tax Officer as a reserve. But the assessee company had shown the amount paid under S. 18-A a second time on the assets side of the balance sheet and it was that sum which had been disallowed.

21. In order that there may be no mistake about the matter, it would be better to quote the exact language of the Appellate Assistant Commissioner. He observed as follows:

“It is seen that in the Balance Sheet of the appellant company on 31-3-1948 the sum of Rs. 13,54,054/- appears on the asset side as advance payment of tax under S. 18-A. On the capital and liabilities side the reserve for income-tax, super-tax and business profits tax was Rs. 36,67,481/- and it is the gross figure. In the circumstances, the appellant company has no grievance and cannot claim that the advance payment of tax appearing on the asset side of the Balance Sheet should be also considered in the reserve.

The reserve for Income-tax shown in the Balance Sheet is not arrived at after deducting the advance payment of tax but it is the gross figure which has been considered in the capital computation. Therefore, no further relief is admissible.”

22. If the fact, indeed, be as stated by the Appellate Assistant Commissioner, the question of allowing the advance payment made under S. 18-A does not arise, because the amount has, in fact, been allowed and what has been disallowed is only a double allowance. But as I have stated, the Tribunal did not proceed on that basis and dealt with the question as a general question on the footing that whether the amount was or was not to be allowed, depended only upon its true character.

23. That also is the basis on which facts relative to the third question have been stated in the Statement of the Case submitted to this Court. Mr. Banerjee, who appears for the assessee, submits that the Appellate Assistant Commissioner was entirely wrong in proceeding on the view that the amount of advance payment under S. 18-A had been shown in the balance sheet both on the capital and liabilities side and the assets side and that it had in fact been claimed twice. He invited us to refer to the relevant balance sheet.

24. It is, however, not possible for us sitting as a referee Court to decide questions of fact for ourselves, particularly as we find that in the grounds of appeal taken by the assessee company before the Appellate Tribunal it was not stated that the basis of fact on which the Appellate Assistant Commissioner had proceeded, was mistaken. He may, however, have been mistaken in fact, but as I conceive the duties of this Court, it is not for us to make the necessary enquiry and find facts.

25. Whether the Appellate Assistant Commissioner was right or wrong, the statement made by him is there in his order. In those circumstances, one might expect that when the Appellate Tribunal proceeded on a general basis. It would at least state its reasons for doing so and in that connection say that the Appellate Assistant Commissioner's version of the facts being erroneous, the question could not be answered on the basis of a claim of double allowance, as he had done.

26. No such statement appears in the Tribunal's order, nor is any clerification to be found in the Statement of the Case. In those circumstances, the position in which we find ourselves is that the statements in the case submitted to us are not sufficient to enable us to determine the question raised thereby and, therefore, we must refer the case back, so far as the third question is concerned, to the Appellate Tribunal in order that we may be furnished with a correct statement of facts which will reconcile the discrepancy between the basis on which the Appellate Assistant Commissioner had proceeded and the basis adopted by the Tribunal itself.

27. Before parting with this case, I find it necessary to repeat once again what I had occasion to say during the last sittings of this Bench. The first appellate order in the present case was passed by Mr. S.M Gupta and Mr. B.M Chatrath. The second appellate order was passed by Mr. K.N Rajgopal Sastri and Mr. A.L Sahgal. The Statement of the Case was prepared and submitted by Mr. B.M Chatrath and Mr. A.R Aggarwal.

28. The appellate order relating to the first chargeable accounting period proceeded entirely on the basis that the smaller sum of Rs. 44,233/- had suffered taxation, whereas the larger sum of Rs. 11,89,183/- had not yet been taken into consideration for Income-tax purposes at all. It is clear that the Tribunal proceeded on the qualification contained in R. 2(1) of Sch. II to the Act which is that amounts will be treated as reserves “in so far as they have not been allowed in computing the profits of the company for the purposes of the Indian Income-tax Act.”

29. The two members of the Tribunal who composed the Statement of the Case, however, ignored altogether the grounds actually given in the first appellate order and submitted the case to this Court as if both the appellate orders had proceeded on the ground relied on in the second of them. If this Court cannot depend on the Tribunal even for the accuracy of the summary of the orders passed by itself, it becomes difficult to deal with these references, particularly as this Court is bound by the statements contained in the Statement of Case and should not be put to the necessity of verifying and if necessary correcting the summaries given of the various orders.

30. What makes the inaccuracy strange in the present case is that one of the Members who were responsible for the Statement of the Case was himself a member of the Bench which had passed the appellate order relating to the first of the two chargeable accounting periods. Nor can I regard it wholly satisfactory that in stating the facts with regard to the third question, the Tribunal should not have explained the apparent want of conformity between the basis on which the Appellate Assistant Commissioner had proceeded and the basis adopted by itself.

31. In the result, we answer the first question in the negative and the second question in the affirmative. With regard to the third question, we refer the case back to the Tribunal under the provisions of S. 66(4) of the Act and direct the Tribunal to submit a further Statement of Case in which it should clarify the matters referred to in this judgment. Let such further statement be submitted to this Court by the end of February 1955. Orders regarding the costs of the hearings already taken place will be passed at the time of the final disposal of the Reference.

Lahiri, J.:— I agree.

K.S.B

32. Answer accordingly.