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  • Sankar Prasad Mitra, C.J
  • S.C Deb, J.
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  • Sankar Prasad Mitra, C.J
  • S.C Deb, J.
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Smart Summary

Judgment Summary: Sankar Prasad Mitra, C.J. (Reference under s. 256(1) of the Super Profits Tax Act, 1963)

Factual and Procedural Background

The matter arises from a reference under section 256(1) of the Super Profits Tax Act, 1963. Relevant statutory provisions set out by the court include s.2(5) (definition of "chargeable profits"), s.2(9) (definition of "standard deduction"), s.4 (charging section), the First Schedule (rule 1(viii) excluding dividend income from chargeable profits), and the Second Schedule (rule 1 governing computation of "capital" and exclusions related to assets generating non-includible dividend income).

For the assessment year 1963-64 the Income-tax Officer reduced the assessee's capital by Rs. 32,44,340 — representing investment in shares — when computing capital under the Super Profits Tax Act. The assessee had received dividends on shares worth about Rs. 18 lakhs but on the balance of the shares no dividends were received in the year under consideration. After the deduction the capital figure became negative and the ITO allowed a standard deduction of Rs. 50,000.

On appeal, the AAC and then the Tribunal considered whether the cost of investments (shares) the income from which was not actually included in the assessee's total income for the year should nevertheless be excluded from the capital base under rule 1 of the Second Schedule. The AAC and the Tribunal held for the department (i.e., supported exclusion of the investments). The following question of law was referred to this Court:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in computing the capital of the company under the Super Profits Tax Act, the income-tax authorities were right in reducing the capital as on the 1st day of the relevant previous year by Rs. 32,44,340?”

Legal Issues Presented

  1. Whether the Tribunal was correct in holding that the Income-tax authorities were right in reducing the company's capital as on the relevant previous year by Rs. 32,44,340 (i.e., whether the cost of share investments should be excluded from the capital base for super profits tax purposes).
  2. Whether, for the purpose of excluding the cost of an asset under rule 1 of the Second Schedule, the exclusion depends on dividend income from that asset having actually been included in the company's total income under rule 1(viii) of the First Schedule (i.e., the interpretive question whether "includible" in the Second Schedule requires actual inclusion in the I.T. Act total income for that year).

Arguments of the Parties

Applicant (Assessee) — arguments summarized (Dr. D. Pal for the applicant)

  • Computation of chargeable profits begins with the total income computed under the Income-tax Act; adjustments in the First Schedule then exclude specific items (such as dividend income) only if such items have actually been included in that total income for the year.
  • Rule 1(viii) of the First Schedule excludes dividend income from the total income; according to the assessee, that exclusion applies only to dividend income that has actually been included in the total income. If a dividend was not taxable in that year (i.e., not included), no exclusion under the First Schedule arises for that dividend.
  • By extension, rule 1 of the Second Schedule should exclude the cost of only those assets the dividend income of which has been actually excluded under the First Schedule. The word “includible” should be read as meaning “has been included” (actual inclusion), not merely “capable of being included.”
  • When in doubt in construing a taxing statute, the court should prefer an interpretation favourable to the taxpayer.

Respondent (Department) — arguments summarized (departmental representative)

  • The word “includible” in rule 1 of the Second Schedule refers to the quality or description of the assets (assets the income from which is of a kind not includible in chargeable profits) and not to whether dividend income was actually received or taxed in the particular year.
  • The exclusion in the Second Schedule should not be made dependent on the fortuitous circumstance that dividends were not received in a particular year; the character of the asset (i.e., whether its income is of the class excluded under r.1(viii) of the First Schedule) controls.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The court began by setting out the statutory framework: definitions in s.2(5) and s.2(9), the charging section s.4, rule 1(viii) of the First Schedule excluding dividend income from chargeable profits, and the rule in the Second Schedule which prescribes computation of capital and speaks of excluding the cost of assets "the income from which in accordance with clause (viii) of rule 1 of the First Schedule is not includible in its chargeable profits".

The factual matrix: the assessee held shares partly yielding dividends in the year and partly not; the ITO deducted the total investment cost of Rs. 32,44,340 from capital when applying the Second Schedule, which produced a negative capital figure and led to a standard deduction of Rs. 50,000.

The core interpretive dispute was the meaning of the phrase “is not includible” (used in rule 1 of the Second Schedule) and whether it requires actual inclusion/exclusion in the Income-tax Act total income for the same year or whether it denotes a class/quality of assets the income from which is of a kind that is not to be included in chargeable profits.

The court examined the language: it observed that the First Schedule operates by taking the total income as computed under the Income-tax Act and then excluding certain items to arrive at chargeable profits; the Second Schedule defines capital for standard deduction by reference to assets whose income is "not includible".

Relying on dictionary meanings cited in the judgment, the court held that the word “includible” means “capable of being included” rather than meaning “has been included”. The court also considered the phrase “in accordance with” and concluded it does not alter the meaning of “includible”.

On the statutory scheme and the language used, the court agreed with the view expressed by the AAC and the Tribunal: the Second Schedule describes the character of assets that are to be excluded from the capital base (i.e., assets the income from which is of a class not includible in chargeable profits), and the exclusion should not be made to depend upon whether dividends were actually earned or taxed in the particular year. Accordingly, the cost of the shares the income from which is of the class excluded under r.1(viii) should be deducted from capital even if no dividends were actually paid or taxed in the year under consideration.

The court therefore answered the referred question in the affirmative and in favour of the department.

Holding and Implications

Holding: The reference is answered in the affirmative — the Tribunal was right and the Income-tax authorities were right to reduce the capital by Rs. 32,44,340 for the purposes of computing the capital under the Super Profits Tax Act. The court agreed with the Tribunal and the AAC, and there will be no order as to costs. (Deb, J. agreed.)

Implications: The direct effect of the decision is that, for the facts of this case, the cost of the relevant share investments was properly excluded from the capital base under rule 1 of the Second Schedule when computing the standard deduction for super profits tax, even though dividends on some shares were not actually received or included in total income in that year. The opinion does not discuss broader precedent-setting implications beyond its interpretation of the particular statutory language; the decision resolves the referred question in favour of the department for these facts.

Show full summary ...

    Nav Bharat Vanijya Ltd. v. Commissioner Of Income-Tax.

    Sankar Prasad Mitra, C.J:— This is a reference under s. 256(1) of the LT. Act, 1961. Before we go into the facts of the case it would be appropriate to set out a few provisions of the Super Profits Tax Act, 1963, and a few provisions of the First and Second Schedules to the Act. Section 2(5) defines “chargeable profits”. It means the total income of an assessee computed under the I.T Act, 1961, for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule.

    2. Section 2(9) defines “standard deduction”. It means, inter alia, an amount equal to 6% of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of fifty thousand rupees, whichever is greater. Section 4 is the charging section. It says:

    “Subject to the provisions contained in this Act, there shall be charged on every company for every assessment year commencing on and from the 1st day of April, 1963, a tax (in this Act referred to as the super profits tax) in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the standard deduction at the rate or rates specified in the Third Schedule.”

    3. We have seen that chargeable profits under s. 2(5) have to be computed in accordance with the provisions of the First Schedule. The provisions of the First Schedule, relevant for our purposes, run thus:

    “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:— ……

    (viii) Income by way of dividends from an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends within India,”

    4. Under section 2(9) the capital of a company is to be computed in accordance with the rules in the Second Schedule. The provisions of the Second Schedule which require our attention are as follows:

    “1. Subject to the other provisions contained in this Schedule, the capital of a company shall be the sum of the amounts, as on the first day of the previous year relevant to the assessment year, of its paid-up share capital and of its reserves, if any, created under……………and of its other reserves ……….diminished by the amount by which the cost to it of the assets the income from which in accordance with clause (viii) of rule 1 of the First Schedule is not includible in its chargeable profits, exceeds the aggregate of……”

    5. In the light of the above provisions we have to examine the facts of this case. For the assessment year 1963-64, the ITO proceeded to compute the capital of the assessee under the Super Profits Tax Act, by reducing from its capital an amount of Rs. 32,44,340 representing the investment in shares. The assessee was doing business at the material time and had also held certain shares by way of investment. It received dividends on shares of the value of about Rs. 18 lakhs. On the balance of the shares it did not receive any dividends during the year under consideration. After reducing the capital by Rs. 32,44,340, the ITO found that the result was a negative figure. He, therefore, gave a standard deduction of Rs. 50,000 to the assessee.

    6. Before the AAC, it was contended that the scheme of the Act was first to start with the total income computed under the I.T Act and then proceed to make adjustments according to the First Schedule.

    7. The income by way of dividends has to be excluded from the total income under r. 1(viii) of the First Schedule. This would imply, according to the assessee, that only that dividend income which is actually included in the total income initially that had to be excluded for super profits tax purposes. The assessee contended that if the total income did not include any dividend because they were not taxable in that year, the question of making any adjustment with respect to the total income did not arise. Extending this reasoning to computation of the capital, the assessee contended further that the cost of investment, income from which was not actually included in the total income, should not be deducted from the capital of the assessee under rule 1 of the Second Schedule.

    8. The AAC held that the relevant provisions in the Second Schedule are concerned with the description of the character or quality of investments which are to be excluded from the capital base of the company. He dealt with the scheme of the Act and noticed that super profits tax is essentially leviable on the business income with reference to the assets which have produced it. Whether dividends on the investments are received or not or are taxed in that year of account or not, the question of including such investments in the capital base under r. 1 of the Second Schedule would not, according to the AAC, arise. He was of the view that the dividend income had to be kept out of the chargeable profits in the same way as the corresponding investments have to be kept out of the capital base.

    9. The matter then went to the Tribunal. Before the Tribunal also the contention of the assessee's representative was that only those investments which have yielded dividends included in the total income are to be excluded from the capital base. In the year in question the assessee did not receive dividends in respect of some of the shares. It was, therefore, argued that the cost of the shares for which no dividends were received should be included in the capital.

    10. The departmental representative argued that the word “includible” in rule 1 of the Second Schedule is used with reference to the assets to be excluded from the capital base and is indicative of the quality or description of the assets. This exclusion should not be made to depend upon the fortuitous circumstances of the assessee having not received the dividends from those assets for any particular year.

    11. The Tribunal accepted the department's contentions and gave its approval to the reasoning and conclusion of the AAC.

    12. The following question of law has been referred to this court:

    “Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in computing the capital of the company under the Super Profits Tax Act, the income-tax authorities were right in reducing the capital as on the 1st day of the relevant previous year by Rs. 32,44,340?”

    13. Dr. D. Pal, appearing for the applicant, has argued before us that in computing the chargeable profits under the Act one has to compute, firstly, the total income of the company under the I.T Act. Necessarily, in computing such total income, the dividend income, if any, and various other items of income referred to in r. 1 of the First Schedule, have to be and are included. The total income is then adjusted in accordance with r. 1 of the First Schedule. The dividend income, therefore, if any, which has been included in the total income, shall be excluded from such total income. In other words, if there is no dividend income which had not been included in the total income of any previous year, the question of excluding such dividend income cannot and does not arise.

    14. According to Dr. Pal, r. 1 of the First Schedule does not deal with any notional or hypothetical situation. It deals with the actualities in a given case. The legislature has not used the expression in r. 1 of the First Schedule that “certain incomes shall be excludible” from such total income. It employs the words “shall be excluded” from the total income. This shows that only when some income like the dividend income has been included in computing the total income there is a clear mandate to exclude that income, and not any hypothetical or notional income from the total income so computed.

    15. Rule 1 of the Second Schedule, says Dr. Pal, also does not deal with a hypothetical or notional situation. This rule is to be read together with r.??? of the First Schedule. Only the dividend income which has been actually excluded under the First Schedule can be said to be “not includible” in the chargeable profits within the meaning of r. 1 of the Second Schedule.

    16. Learned counsel submits that in r. 1 of the Second Schedule the cost of only those assets the dividend income of which has been excluded from the total income under r. 1 of the First Schedule is to be taken into account. He submits further that in case of doubt or difficulty in the construction of a taxing statute the court should lean towards the construction which is in favour of the taxpayer. From the relevant provisions of the statute and of its schedules we have already referred to, it appears that the First Schedule contains rules for computing chargeable profits, and the Second Schedule contains rules for computing the capital of a company for the purposes of super profits tax. Under the First Schedule one has first to take the total income as computed under the I.T Act. Then one has to deduct various items referred to in rule 1 to arrive at the chargeable profits. The super-tax is payable on chargeable profits. From this chargeable profits the assessee is entitled to a deduction known as “standard deduction”. The standard deduction is six per cent. of the capital as computed in accordance with the Second Schedule or Rs. 50,000, whichever is greater. The capital for purposes of standard deduction is to be determined in accordance with the Second Schedule. If after giving all the deductions the figure that is arrived at is a minus figure or a plus figure of Rs. 50,000 only the assessee is entitled to get a general deduction of Rs. 50,000. Whether or not the particular asset has yi???lded any income does not seem to be material for the purpose of the Second Schedule. This Schedule only describes the assets whose cost has to be excluded. In other words, it deals with the description or character of the assets. The words used in the Second Schedule are “is not includible”. The word “includible” means capable of being included: vide The Compact Edition of the Oxford English Dictionary, Vol. I, page 1403. The words “is not includible”, therefore, mean “is not capable of being i???uded”. They cannot mean, as contended by Dr. D. Pal, “has not been???cluded”. The dividend income is capable of being included under rule 1 of the First Schedule. Whether or not any dividend is earned, the cost of acquiring the shares has to be deducted in computing the capital of the company for purposes of super profits tax. Dr. D. Pal drew our particular attention to the words “in accordance with” in r. 1 of the Second Schedule. He said that these words suggest that unless an actual inclusion has been made in accordance with cl. (viii) of r. 1 of the First Schedule, the cost of the asset cannot be excluded under r. 1 of the Second Schedule. The words “in accordance with,” mean being in agreement or harmony with; in conformity to: vide the Compact Edition of the Oxford English Dictionary, Vol. I, page 62. It does not appear to us that these words alter the meaning of the word “includible” We are, therefore, in agreement with the Appellate Tribunal that “includible” in r. 1 of the Second Schedule is indicative of the quality or description of the assets, the costs of which are to be excluded from the capital base. Our answer to the question referred to us is, therefore, in the affirmative and in favour of the department. There will be no order as to costs.

    Deb, J.:— I agree.

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    Comments

    Nav Bharat Vanijya Ltd. v. Commissioner Of Income-Tax.
    (Jan 6, 1977)