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Commissioner Of Income-Tax, Bihar v. Bihar State Financial Corporation.
Judgment Summary — Untwalia, C.J.
Factual and Procedural Background
The Commissioner of Income-tax, Bihar obtained a reference under section 256(1) of the Income-tax Act, 1961 from the Income-tax Appellate Tribunal, Patna Bench. The question of law referred was whether the deduction in section 36(1)(viii) of the Act envisages 10% of the "total income" or 10% of the "total assessed income" before deducting the amount so allowed.
The assessee was the Bihar State Financial Corporation. In the first assessment order dated 27 November 1965 the ITO assessed total income at Rs. 7,74,835. The Corporation's profit & loss account showed a net profit of Rs. 8,17,451 and it had transferred Rs. 81,745 (10% of that profit) to a special reserve fund. The ITO allowed Rs. 81,745 as deduction under s.36(1)(viii).
The ITO subsequently initiated proceedings under s.154 and by order dated 14 July 1966 revised the total assessable income to Rs. 7,78,709. In that revised computation the ITO first arrived at a figure of total income of Rs. 8,56,580 (after additions and other deductions but without deducting the Rs.81,745) and then restricted the s.36(1)(viii) deduction to Rs. 77,871 — which the text notes was exactly 10% of the ultimate total income assessed as chargeable to income-tax. The revised order therefore allowed a lesser deduction than the original order.
The AAC affirmed the revised order. On second appeal the Tribunal set aside the revised order as incorrect and bad, and the Tribunal framed the legal question for reference to this Court as above. The Chief Justice considered the point and concluded in favour of the Tribunal and the assessee.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the deduction referred to in section 36(1)(viii) of the Income-tax Act, 1961 envisages 10% of the "total income" (as computed under the Act) or 10% of the "total assessed income" before deduction of the amount so allowed.
Arguments of the Parties
Revenue's Position
- The Revenue treated the maximum deduction under s.36(1)(viii) as being limited to 10% of the total assessed income (i.e., the figure of income chargeable to tax after making the deduction). This is reflected in the ITO's revised calculation under s.154 which produced a deduction equal to 10% of the assessed income.
Assessee's Position
- The assessee's position (accepted by the Tribunal and ultimately by the Court) was that the 10% limit in s.36(1)(viii) applies to the "total income" as computed in the process of arriving at income (that is, after making all additions and ordinary deductions but before making the specific deduction under s.36(1)(viii)). Accordingly, if the amount actually carried to the special reserve fund is less than 10% of that computed total income, the whole amount should be allowed as a deduction.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Cape Brandy Syndicate v. IRC, [1921] 2 KB 403; 12 TC 458 (CA) | Authority that subsequent legislation may be used to resolve ambiguity in earlier legislation — a later Act can fix the proper interpretation of an earlier ambiguous Act. | The Court relied on the principle that if the earlier provision is ambiguous, later amendments (the Finance Acts) may illuminate the proper construction of s.36(1)(viii) as it stood at the relevant time. |
| John Walsh Ltd. v. Sheffield Corporation, [1957] 1 WLR 1074 (CA) | Statement that later legislation may be called in aid only to resolve a real ambiguity, and only if the subsequent enactment would be inept or otiose unless a particular view of the earlier enactment is taken. | The Court applied this test: finding ambiguity in the earlier wording of s.36(1)(viii), it examined later Finance Acts and concluded that the Revenue's interpretation would render the later amendments otiose; this supported the assessee's interpretation. |
Court's Reasoning and Analysis
The Court proceeded through the following analytical steps, using only the materials and reasoning contained in the opinion:
- Statutory context and definitions: The Court noted that "total income" is defined in s.2(45) as "the total amount of income referred to in section 5, computed in the manner laid down in this Act." The charging provisions (ss.4 and 5) and the computation rules for business income (ss.28–43) were observed to show that income is worked out by making allowable additions and deductions in sequence.
- Nature of s.36(1)(viii): Clause (viii) allows "an amount not exceeding ten per cent. of the total income carried to such reserve account" for qualifying financial corporations. The Court asked whether "total income" in this clause means (a) the figure before making the special-reserve deduction (the total arrived at after other additions/deductions), or (b) the total assessed income (i.e., the taxable income after making the special-reserve deduction).
- Practical and textual construction: The Court held that in the computation process the assessing officer should first make all additions and ordinary deductions, arrive at the figure of total income (the computation-stage total), and then apply s.36(1)(viii) to allow up to 10% of that figure. The Court rejected the view that the officer should compute what the assessable income would be after allowing the s.36(1)(viii) deduction and then limit the deduction so that it equals one-tenth of that assessable income (a circular calculation producing effectively only one-eleventh of the pre-deduction total). The Court found such a circuitous method contrary to the spirit and scheme of s.36(1)(viii).
- Ambiguity and use of subsequent legislation: The Court noted that, even if the department's interpretation were plausible, the language of cl. (viii) as it stood at the relevant time was ambiguous. Relying on authorities (as cited from Craies and the English cases), the Court considered subsequent amendments (Finance Act, 1966 and Finance (No. 2) Act, 1967). The latter amendment expressly inserted a parenthetical phrase specifying that "total income" for the purposes of the clause be computed "before making any deduction under Chapter VI-A," which demonstrated that the legislature intended "total income" to refer to a pre-deduction figure for the limit calculation and underlined that the Revenue's interpretation would render that later amendment otiose.
- Application to the facts: The ITO's original allowance of Rs. 81,745 was permissible because the total income computed by the ITO after making additions and other deductions (but before the special-reserve deduction) was Rs. 8,56,580, and the amount actually carried (Rs. 81,745) was less than ten per cent of that figure. The ITO's subsequent rectification reducing the allowable deduction was therefore incorrect.
Holding and Implications
HOLDING: The Court answered the referred question in favour of the assessee. It held that, on the facts and in the circumstances of this case, the deduction referred to in section 36(1)(viii) of the Income-tax Act envisages 10% of the "total income" (that is, the total income computed in the manner laid down in the Act before making the special-reserve deduction), and not 10% of the "total assessed income" before deduction of the amount so allowed.
Implications and immediate consequences:
- The ITO's rectification order under s.154 that reduced the allowable deduction was held to be incorrect and set aside; the original allowance was correct on the statutory construction adopted.
- The Department was ordered to pay the costs of the reference. Hearing fee was assessed at Rs. 100.
- The opinion bases its conclusion on the statutory text as construed, the computation scheme in the Act, and established principles allowing subsequent legislation to illuminate an earlier ambiguous provision. The opinion does not elaborate broader policy consequences beyond the direct effect on the parties and the interpretation applied to s.36(1)(viii) as it stood for the assessment year in question.
Judge S.K. Jha concurred.
Untwalia, C.J:— At the instance of the Commissioner of Income-tax, Bihar, the Income-tax Appellate Tribunal, Patna Bench, has made this reference under s 256(1) of the I.T Act, 1961 (hereinafter called “the Act”). The question of law referred for determination by this court reads as follows:
“Whether, on the facts and in the circumstances of the case, the deduction referred to in section 36(1)(viii) of the Act envisages 10% of the total income or 10% of the total assessed income before deduction of the amount so allowed?”
2. The assessee in this case is the Bihar State Financial Corporation (hereinafter referred to as “the Corporation”) established by the State Govt. under s. 3 of the State Financial Corporations Act, 1951 (Central Act LXIII of 1951). The ITO by his first assessment order dated the 27th of November, 1965, assessed the total income liable to tax to the tune of Rs. 7,74,835. According to the profit and loss account of the Corporation, it had earned a net profit to the tune of Rs. 8,17,451. It had transferred 10% of this sum to the extent of Rs. 81,745 to the special reserve fund. The ITO allowed the whole of this amount as admissible deduction under s. 36(1)(viii) of the Act in order to arrive at the total assessable income. Later on, the ITO thought that a mistake apparent from the record had occurred in his assessment order dated the 27th of November, 1965. He, therefore, started a proceeding under s. 154 of the Act and finally by his order dated the 14th of July, 1966, determined the total assessable income of the Corporation at Rs. 7,78,709. The method adopted by the ITO in his order passed under s. 154 of the Act was to arrive at the figure of the total income after making all additions and deductions, but without deducting the sum of Rs. 81,745. The said figure of the total income came to Rs. 8,56,580. As against the original deduction of Rs. 81,745, the admissible deduction held to be allowable under s. 36(1)(viii) of the Act was reduced to Rs. 77,871. After deducting the said amount from the figure of Rs. 8,56,580, the net assessable income determined was Rs. 7,78,709. It would thus be noticed that the amount deducted under s. 36(1)(viii) of the Act in the revised order of the ITO was exactly 10% of the ultimate total income assessed as chargeable to income-tax. The bone of contention between the assessee and the Revenue has been as to whether the maximum deduction admissible under the said provision of law to the tune of 10% would be on the final figure of the total income assessed after deducting the 10%, or it would be 10% of the total income arrived at on a computation, in accordance with the provisions of the Act, before deducting the 10% admissible under s. 36(1)(viii) of the Act. The AAC did not accept the stand of the assessee and affirmed the revised order of assessment. On second appeal by the Corporation, the Tribunal has held the revised order to be incorrect and bad and set it aside. On being asked to refer a case, it has done so on the question of law stated above. The point for determination presented some difficulty, but on a careful consideration of the matter and for the reasons to be recorded hereinafter in this judgment, I have arrived at the conclusion that the view taken by the Tribunal is correct and not erroneous in law.
3. The assessment year in question is 1965-66, and the law which was applicable was before cl. (viii) of sub-s. (1) of s. 36 of the Act was amended by the Finance Act of 1966 or Finance (No. 2) Act of 1967. I shall, therefore, read the relevant provisions of the Act as they stood at the relevant time.
4. Section 2 of the Act says:
“In this Act, unless the context otherwise requires,—…
(45) ‘total income’ means the total amount of income referred to in section 5, computed in the manner laid down in this Act.”
5. The charging section is s. 4, and the scope of total income is mentioned in s. 5. But then the total income as defined in s. 2(45) means the total income computed in the manner laid down in the Act. In case of determination of income from profits and gains of business or profession, s. 28 enumerates the income which shall be chargeable to income-tax under the said head. Then s. 29 says:
“The income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43.”
6. Various deductions from the gross income determined under s. 28 have got to be made in accordance with the relevant provisions applicable to a particular case engrafted in ss. 30 to 43, and then is arrived at the figure of total assessable income chargeable to tax under s. 4 of the Act. In respect of deductions allowable under the various provisions aforesaid, a difficulty of the kind presented in this case does not arise. Section 36 provides for various kinds of other deductions in various clauses of sub-s. (1). Clause (viii), at the relevant time, reading with the main part of sub-s. (1), would read as follows:
“36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28—……
(viii) in respect of any special reserve created by a financial corporation which is engaged in providing long-term finance for industrial development in India, an amount not exceeding ten per cent. of the total income carried to such reserve account:
Provided that the corporation is for the time being approved by the Central Government for the purposes of this clause:
Provided further that where the aggregate of the amounts carried to such reserve account from time to time exceeds the paid-up share capital (excluding the amounts capitalised from reserves) of the corporation, no allowance under this clause shall be made in respect of such excess.”
7. It would thus be noticed that, simpliciter, the definition of the expression “total income”, as given in s. 2(45) means the total income computed for the purpose of charging tax. But, as it is customary to start every definition section with the phrase “unless the context otherwise requires”, s. 2 of the Act also proceeds to define the various terms with this rider. The question for consideration is, whether the literal and the face meaning of the expression “total income” given in s. 2(45) has got to be taken for the purpose of finding out the extent of the admissible deduction under cl. (viii) of s. 36(1), as has been the stand of the Revenue, or is-it legitimate to take the view that the context in this regard requires otherwise? In the case of a corporation of the kind envisaged in cl. (viii), of which kind undoubtedly the assessee-Corporation is, the amount carried to the special reserve fund by the Corporation has got to be allowed as a deduction. If the amount falls short of the maximum limit provided in the clause, then the whole of the amount will be allowable as a deduction. But if the amount is in excess of the maximum limit, then, on account of the transfer of a portion of the income to the special reserve fund, an amount which will be equivalent to one-tenth of the total income will be allowed and the rest will be disallowed. I am, however, of the opinion that in the process of computing the income all additions which can justifiably be made should be made; all deductions which are permissible to be allowed should be deducted. Then comes a figure of total income at a stage where the I TO proceeds to give a further deduction under s. 36(1)(viii) of the Act. Should he at that stage, while computing the income, by a circuitous method, find out what would be the total taxable income after making the deduction and then limit the amount of deduction to one-tenth of such income; or, while computing the income, is it permissible for him to proceed straight and allow one-tenth of the total income determined at the stage where he has exhausted his power of making additions and deductions and then allow one-tenth of the amount of such total income? To my mind the answer to the first question which I have posed here should be in the negative and that to the second in the afirmative. While in the process of computation it is not incumbent upon the ITO to allow only one-eleventh of the amount of the total income determined before making the deduction under s. 36(1)(viii) and then rest content by saying that the one-eleventh amount so deducted is only the one-tenth amount of the assessed income. In my opinion, by doing so, the assessing authority would be going against the spirit and the scheme of the deduction allowable under s. 36(1)(viii) of the Act.
8. Even assuming that the interpretation sought to be put on behalf of the Department is correct, I can say unhesitatingly that the language of cl. (viii) of s. 36(1), as it stood at the relevant time, was ambiguous and not clear enough to sustain the argument of the Revenue. In such a situation, following certain decisions of the English courts as noticed by Craies on Statute Law, 6th Edn., pp. 146 and 147, I shall refer to the amendments brought about by the Finance Act of 1966 and the Finance (No. 2) Act of 1967, especially the latter, in order to sustain the stand taken on behalf of the assessee. The passage in the Craies's book runs as follows:
“Except as a parliamentary exposition, subsequent Acts are not to be relied on as an aid to the construction of prior unambiguous Acts. A later statute may not be referred to to interpret the clear terms of an earlier Act which the later Act does not amend, even although both Acts are to be construed as one, unless the later Act expressly interprets the earlier Act: but if the earlier Act is ambiguous, the later Act may throw light on it, as where a particular construction of the earlier Act will render the later incorporated Act ineffectual.”
9. At p. 147 a passage has been quoted from the judgment of Lord Sterndale M.R in the case of Cape Brandy Syndicate v. IRC, [1921] 2 KB 403; 12 TC 458 (CA), which emphasises that if there was any ambiguity in the earlier legislation, then the subsequent legislation may fix the proper interpretation which is to be put upon the earlier. In John Walsh Ltd. v. Sheffield Corporation, [1957] 1 WLR 1074 (CA), Jenkins L.J, sitting in the Court of Appeal, has said at p. 1079:
“I think the effect of those cases is that it is only legitimate to call in aid later legislation to resolve some real ambiguity in the enactment which falls to be construed. Even then, even when it is legitimate to look at such legislation, no assistance can be derived from it, unless it can really be said that the provisions of the subsequent legislation would be wholly otiose and inept unless a particular view of the earlier legislation was taken.”
10. Omitting the main portion of sub-s. (1) of s. 36 of the Act, the amended cl. (viii), without the two provisos, reads as follows:
“(viii) in respect of any special reserve created by a financial corporation which is engaged in providing long-term finance for industrial development in India, an amount not exceeding—
(a) in the case of a financial corporation whose paid-up share capital does not exceed three crores of rupees, twenty-five per cent.,
(b) in the case of any other financial corporation, ten per cent., of the total income (computed before making any deduction under Chapter VI-A) carried to such reserve account : ……”
11. The first portion of the amendment which was brought about by the Finance Act, 1966, is not very relevant for our purpose. The words in parenthesis were inserted by the Finance (No. 2) Act, 1967, with effect from the 1st of April 1968. After this amendment, it is clear that the expression “total income” occurring in cl. (viii) cannot mean the total assessed income. For the purpose of determining the maximum limit of allowable deduction in cl. (viii), the figure of total income computed before making any deduction under Chap. VI-A has got to be taken. In such a situation, will it be reasonable to say that the total income must be the total assessed income plus the amount of deduction allowable under Chap. VI-A of the Act? It would thus be seen that if the interpretation which is sought to be put by the Department on the expression “total income” is accepted, then the amended provisions would be wholly otiose and inept; but it would not be so, rather it would be consistent and in consonance with the earlier Act, if the interpretation sought to be put on behalf of the Corporation is accepted to be correct.
12. It would thus be seen, in view of the law enunciated above, that for the purposes of finding out the maximum limit, to which deduction under s. 36(1)(viii) ought to have been allowed in this case, the total income arrived at by the ITO after making additions and other deductions was Rs. 8,56,580. Since the amount of Rs. 81,745 transferred to the special reserve fund by the Corporation was less than ten per cent. of the said total income—the whole of it was permissible to be deducted under s. 36(1)(viii) of the Act—it was rightly allowed by the ITO in his original order; and the order of rectification was not correct. On a careful consideration of the matter, therefore, I have come to the conclusion that the question of law referred for the determination of this court has got to be answered in favour of the assessee and against the Revenue. I accordingly hold that on the facts and in the circumstances of this case the deduction referred to in s. 36(1)(viii) of the Act envisages 10% of the total income, and not 10% of the total assessed income, before deduction of the amount so allowed. The Department must pay the costs of this reference. Hearing fee is assessed at Rs. 100 only.
S.K Jha, J.:— I agree.
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