Kania, J.:—

This is a reference made by the Income-tax Appellate Tribunal under s. 66(1) of the Indian Income-tax Act, and the question referred for our opinion is in these terms:

“Whether, in the circumstances of the case, the profits of the assessee company liable to excess profits tax have been rightly computed by taking into account the average of the bank overdraft and debenture loans during the standard period, viz., Rs. 12,31,008, under r. 5, Sch. I, read with s. 6 of the Excess Profits Tax Act?”

The question appears to have come for consideration by the Tribunal in respect of three charging periods, namely, from September 1, 1939 to December 31, 1939 and the calendar years 1940 and 1941. In the statement of case it is observed that the agreed facts are as follows:—

Rs. The average of the bank overdraft and debentures for the standard period .. 12,31,008 Total of the bank overdraft and the debentures loan on the last date of the standard period, i.e, December 31, 1938 .. 5,29,313 Average of the bank overdraft and debenture loans for the first chargeable accounting period (September 1, 1939 to December 31, 1939) .. .. .. 10,61,661 Average of the bank overdraft and debenture loans for the second chargeable accounting period (January 1, 1940 to December 31, 1940) .. .. .. 19,18,586 Average of the bank overdraft and debenture loans for the third chargeable accounting period (January 1, 1941 to December 31, 1941) .. .. .. 48,58,880

The rival contentions are these. The assessee contends that under s. 6 of the Excess Profits Tax Act the taxing authorities have to ascertain the average amount of capital and the profits during the standard period. The taxing authorities have also to ascertain the average amount of during the chargeable accounting period and make adjustment of the standard profit according to the increased the capital employed by it (the assessee) in the chargeable accounting period. In order to do so, the taxing authorities must take the capital as it existed on the last day of the standard period and work out the increase in capital over that figure. To support this line of reasoning, the assessee relies on sch. I, r. 5, and sch. II, r. 2, read with the opening words of sch. I, r. 1. It is argued that the increase in capital has to be computed only having regard to the rules found in the schedule and not in the sections of the Act. The contention on behalf of the Commissioner is that the scheme of the Excess Profits Tax Act must be seen first. The object is to tax the excess profits. The first question is, excess over what? The answer clearly is, over the standard profit. The first step, therefore, is to ascertain what is the standard profit. Ordinarily it is not difficult to find that. The next step is to ascertain the profit during the accounting period. That is not also difficult ordinarily to find. The two figures having been thus ascertained, the assessee would contend that the profits in the chargeable accounting period, although more, are largely attributed to the fact that there was an increase in capital. Therefore, in order to compare the standard profit, you must take the average amount of capital during the standard period and the average amount of capital during the chargeable accounting period. That is what is provided by the first proviso to s. 6(1) of the Excess Profits Tax Act. That proviso enables the authorities to make adjustments, and if it is found that the average amount of capital during the chargeable accounting period is more than the average amount of capital during the standard period, the standard profit is increased by a statutory percentage. It is, therefore, argued on behalf of the Commissioner that when the assessee contends that his average amount of capital during the chargeable accounting period was more, one has to turn to the schedule to find out if the contention is true, and if so, to what extent.

Section 2, sub-s. (3), defines “average amount of capital” as the average amount of capital employed in any business as computed in accordance with the second schedule, or Section 2, sub-s. (19), defines “profits” as profits determined in accordance with the first schedule. In order therefore to determine what is the average amount of capital during the chargeable accounting period, one must turn first to sch. II. Amongst other rules, the relevant portion of r. 2 of the second schedule is in these terms:

“Any borrowed money and debt shall be deducted ….”

Therefore, if this rule stood by itself, in ascertaining the increased capital, if any borrowings were found, they must be excluded. But the assessee in that event would contend that provision is made in sch. I in respect of certain class of borrowings, and if these borrowings fell under that clause, such borrowings cannot be excluded. It is, therefore, next necessary to turn to sch. I, r. 5, which deals with this argument. That rule runs as follows:

“If at any time after the close of the standard period, any increase in the capital employed in a business has been effected by means of a loan from a bank carrying on a bona fide banking business, or by means of a public issue of debentures secured on the property of the company, the interest on so much of the loan or debentures as has been utilised in effecting the increase in the capital shall not be deducted in computing the profits for the purposes of excess profits tax and, notwithstanding the provisions of r. 2 of sch. II, that amount of such loan or debentures shall not be deducted in arriving at the amount of the capital employed in the business.”

It is argued that if the assessee is thus able to show that the borrowings consist of loans from such a bank or by the public issue of debentures, so as to fall within the words of r. 5, such borrowings should not be excluded in computing the average amount of capital for the chargeable accounting period. Having thus computed the average amount of capital for the chargeable period, a comparison must be made, as provided by s. 6, and the standard profit increased or decreased by the statutory percentage. That is the scheme of the Act. It is contended that this view creates no killick complications and makes r. 5 perfectly intelligible. The and Co. argument of the assessee against these contentions is that s. 6 is quite independent and has nothing to do with r. 5 of sch. I. The contention is that having regard to the opening words of r. 5 the amount of capital of the standard period should be ascertained as of the last date of that period and would include the borrowings from banks on the last date. That should be accepted as the figure over which the increase in the chargeable accounting period should be considered.

In my opinion the contention of the Commissioner is correct. The object of the Excess Profits Tax Act is to tax the excess profits over the standard profits. The scheme of s. 6 is to compare the average amount of capital during the standard period with the average amount of capital during the chargeable accounting period, and make adjustments in the standard profits on the footing of the increase in the capital during the chargeable accounting period. For this purpose two figures only are relevant and they are the average amount of capital for the standard period and not the amount of capital ascertained as in use on the last date of the standard period. The object of sch. II, as found in the definition of the average amount of capital and the heading of the schedule, is to prescribe rules for computing the average amount of capital. If r. 2 alone existed, all borrowings will have to be excluded. By virtue of r. 5 of sch. I, the Legislature has however provided that borrowings from banks of the type mentioned in the rule and in the shape of debentures issued to the public, should not be excluded in arriving at the average amount of capital for the chargeable accounting period. In respect of the increase of capital there will thus arise two questions:

(1) increase over what sum and

(2) increase as compared to what date or period?

The opening words of r. 5 of sch. I, deal with the last question, namely, that the increase mentioned therein is the increase Contemplated after the closure of the standard period. It does not deal with the question of amount at all. The word “increase” necessarily means “more than”, but the answer to the question “more than what” is not found in r. 5 of sch. I. It is argued on behalf of the assessee that the words “after the close” in r. 5 would be useless if that interpretation is given to the rule. I do not think so. When the legislature uses the word “period”, it must describe the termination of the period, as at the close. It cannot state the date. This is obvious because individual assessee may select different periods for their assessment. Moreover the ascertaining of the exact amount of capital (and not the average amount) in use at the end of the standard period is not material for any purpose of the Act whatsoever. It is contended that it is material for the purpose of r. 5 itself. I do not agree. The natural reading of r. 5 is that the Legislature had granted a certain privilege to the assessee, who had increased his capital after the standard period had come to an end. It is argued that interest, which is mentioned in the first part of r. 5, must be calculated as at the end of the year. I do not see why it should be so done. It must be on the borrowings throughout the year. The interest paid by the assessee in respect of that portion of the increased capital (which consists of borrowings from the Banks mentioned in the Rule and the debentures) has to be retained on the debit side and not excluded as it would have to be done if the borrowings were totally excluded. In my opinion there is nothing inconsistent in the first and second part of r. 5. It is true that better drafting might have provided for the non-exclusion of such borrowings in computing the average amount of capital for the chargeable accounting period in a rule in sch. II. However as sch. I is framed for computation of profits, r. 5 is not completely out of place because in computing the profits, the increase or decrease of capital has to be considered, and on the ascertainment of that, the statutory percentage to the standard profit has to be applied.

The argument that r. 1 of sch. I provides that the computation of capital as to be according to the schedule is not proper reading of r. 1 at all. The rule says that the profits of a business during the standard period, or during any chargeable accounting period, shall be separately computed, and shall, subject to the provisions of the schedule, be computed on the principles on which the profits of a business are computed for the purposes of income-tax under s. 10 of the Indian Income-tax Act, 1922. The plain meaning of that rule is that the profits of a business shall be computed according to s. 10 of the Indian Income-tax Act, 1922, but subject to the rules which are found in the schedule. It is, therefore, not correct to say that no reference should be made to the income-tax Act to ascertain the profits under the Excess Profits Tax Act. In my opinion, the conclusion arrived at by the Tribunal is correct, and the answer to the question is in the affirmative.

The assessee to pay the costs of the reference.

Chagla, J.:—The construction of r. 5 is not free from difficulty, and it is not without some hesitation that I have arrived at the same conclusion as my learned brother. It is our duty to give effect to the plain language of the rule. We are not concerned with the intention of the Legislature or what result the Legislature might have aimed at: but in construing the rule, we must try and avoid patent absurdities and incongruities and, as far as possible, give a construction to the rule as would fit it in the general scheme of the Act. Schedule I deals with rules for the computation of profits for purposes of Excess Profits Tax; and sch. II deals with rules for computing the average amount of capital. But if r. 5 of sch. I was confined to dealing with the interest which had to be paid by an assessee on the loans borrowed from a bank or on debentures, then I should have been strongly inclined to favour the construction put upon the rule by Sir Jamshedji Kanga. Logically r. 5 should have been confined to that only because the schedule, as I have pointed out, deals with computation of profits; and what the first part of r. 5 says is that when you compute profits, if there is an increase in the capital effected by means of loans from banks or debentures at any time after the close of the standard period, then you must not deduct from those profits the interest which you have to pay on such loans or debentures. But r. 5 does not stop there. It goes on to deal with a subject which should logically have been dealt with in sch. II either under r. 2 itself or under any other appropriate rule; and the second part of r. 5 says that notwithstanding the provisions of r. 2 of sch. II the increased amount of loan or debentures shall not be deducted in arriving at the amount of the capital employed in the business. Now this portion of the rule undoubtedly refers to the capital employed in the business during the chargeable accounting period. But one cannot take the average of the capital used in the chargeable accounting period and compare it with the moneys borrowed from bank or on debentures at one fixed point of time in the standard period. Such a construction would lead to absurdities and incongruities and, therefore, on the whole I think the construction suggested by Mr. Setalvad on behalf of the Commissioner is more consistent with the general scheme of the Act.

I, therefore, agree that the question should be answered as suggested by my learned brother.

Attorneys for assessee: Messrs Payne & Co.

Attorney for Commissioner: Mr. D.H Nanavati.

A.J.P