TMI Blog1977 (12) TMI 144X X X X Extracts X X X X X X X X Extracts X X X X ..... per actuarial valuation, ₹ 8,06,019. Towards that the assessee made a provision of ₹ 8,00,000. This too its claimed as a deduction. The irrigation department of the State Government was claiming water charges at the rate of ₹ 12.50 per 10,000 c.ft. for the water which was being supplied to the assessee s factory at Shahad, but the assessee was disputing the levy at that rate, contending that it was liable to pay only at the rate of ₹ 2 per 10,000 c. ft. In fact it had filed a Writ Petition in the High Court challenging the right of the Irrigation Department to charge it at a rate in excess of the rate admitted by it and had obtained a stay order against recovery of the disputed levy. It had actually paid as charges for the year under consideration only ₹ 8,370, that being the amount payable at the admitted rate. At the same time, however, it made in its accounts a provision of ₹ 1,96,189 being the balance in accordance with the claim of the Irrigation Department. The assessee claimed in its assessment deduction for this provision too as an admissible expenditure. It also claimed deduction, as a revenue expenditure, of the amount of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue and ascertained, it will be allowed as a deduction in the year in which it so becomes due and ascertained . 6. Regarding the payments for the process and design of the Cyanuric Chloride, the ITO was of the opinion that the expenditure incurred was in connection with the development of new processes for new products and was therefore to be treated only as of capital nature. He also provided due allowance on the same under section 35(1) of the Act. 7. The assessee took up the matter in appeal before the AAC. Pursuing its claim under section 80J, it was contended before that appellate authority that in determining under rule 19A of the Income-tax Rules, 1962, the capital employed in the new industrial undertakings, the ITO should not have deducted the fixed liabilities which had no connection whatever with the new projects. It was further argued that the amounts due from sundry debtors should have been included in the computation of capital as on 1-1-1969, the contention being that the same formed part of the current assets. The validity of the deduction of ₹ 2,14,157 made in the capital computation on account of self-assessment tax payable was also challenged, stating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... garding the point in dispute with the State Government. The AAC was also furnished with a copy of the letter, dated 19-7-1974 received by the assessee from the State Government regarding the water charges as settled. The AAC hence directed the ITO to allow water charges on actual payment basis when the payments in respect of disputed water charges are paid by the appellant company . 10. Before the AAC the assessee also raised the contention that after considering the amount of ₹ 1,52,392 incurred by the assessee for the cost of processes and designs for its production of Cyanuric Chloride as capital expenditure the ITO should have allowed development rebate thereon. The AAC rejected this claim observing thus : It is understood from the learned representative of the appellant that the processes and designs connected with the development of production of Cyanuric Chloride has not been put to use by the appellant-company. Under section 33 of the Act, the development rebate is admissible in respect of plant if it is wholly used for the purpose of the business carried on by the assessee and if the plant is installed or is put to use. Since the designs connected with the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admitted the relevant additional grounds, it felt that the earlier decision required reconsideration. That Bench hence placed the matter before the President for consideration whether a Special Bench need be constituted for going into the point de novo. 13. At that stage there came a request from the assessee that the question whether rule 19A(3) of the Income-tax Rules, 1962, which mandates deduction of borrowed moneys in computing capital for purposes of section 80J can legally have its full run in that manner, vis-a-vis, section 80J may also be taken up for reconsideration by a Special Bench. In July 1973, the C Bench of the Tribunal in [IT Appeal No. 1654 (Bom.) of 1972-73] in the case of Sri A.T., Bombay, had held that what is prescribed in rule 19A(3) has the effect of whittling down the relief granted by section 80J and the rule conflicting, as thus it is, with the section must be ignored. This decision was however reconsidered by a Special Bench of this Tribunal, consisting of the learned President and two learned members in Emco Transformers Ltd. [IT Appeal No. 2473 (Bom.) of 1973-74], of and that Special Bench by its order, dated 26-9-1974 held that far from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l was the creature that had come up for consideration, and in none of them had the question whether it would be competent for an authority created under a statute to question the vires of a rule made under the self same statute arisen. The same is to be said about also the Bombay High Court s decision in Dhrangadhra Chemical Works Ltd. v. CIT [1975] 101 ITR 491 . We have however the Full Bench decision of the Allahabad High Court in J.K. Manufacturers Ltd. v. STO [1970] 26 STC 310 , wherein on the ratio of the aforequoted decisions of the Supreme Court it is decided that the question whether a rule framed under the Sales Tax Act is ultra vires or not cannot be entertained by the authorities constituted under that Act. Beg., J. (as he then was), after referring to the aforequoted Supreme Court decisions and some others said : Although the Supreme Court had not specifically held in any case brought to our notice that an authority created by a statute cannot question the validity of even a rule purporting to be made under the statute, yet, after the pronouncements of the Supreme Court, in the wide terms indicated above, sales tax authorities could not be expected to decide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised relates to the vires of rule 17 which is made by the State Government under a delegated authority by virtue of section 96(1)(b) of the Act. We do not think that either the Employees State Insurance Court, the Tribunal constituted under the Act or the High Court exercising its appellate jurisdiction is precluded from considering the vires of the rules made under the Act, including rule 17. It cannot validly be argued that the Tribunal is the creature of the rules made under the Act, nor can it validly be contended that the appellate jurisdiction is being conferred on the High Court under any rules under the Act. The validity of the rules, therefore, can, in our opinion, be considered not only by the Employees Insurance Court but also by the High Court in the exercise of its appellate jurisdiction. No authority was brought to our notice, nor we are aware of any, which makes the principle laid down in Venkatraman s case applicable even to a case where the vires of rules made under the Act under which the Tribunals are constituted was challenged. No doubt this decision fully encourages the assessee in its contention that it is well open to us to go into the vires of rule 19A( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above observations of the Supreme Court were only stray and casual remarks even without which the matter before it stood disposed of by whatever had been stated earlier in that judgment and the same should not hence be taken as a binding decision on the point referred to therein. We have no doubt in our mind that a careful analysis of the facts of the matters dealt with in that decision can in no way support this extreme stand. The assessee in that case was a registered dealer under the UP Sales Tax Act, 1948 and carried on business in hydrogenated oil and washing soap. It also imported and distributed vanaspati as an agent of a company in Indore. It disclosed in the sales tax return filed for the year a gross as well as net turnover of ₹ 1,66,387.03 and paid along with that return ₹ 1,060.30 towards the tax due. In the assessment proceedings the assessee however admitted before the STO that its tax liability was ₹ 10,339.19 and also that in fact it had collected that amount from its purchasers. The assessing authority, on the basis of its best judgment determined the turnover of the assessee at ₹ 58,06,132.30 and determined its tax liability at ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ast two contentions would have disposed of only the writ appeals and the findings there given would in no way have afforded the answer to the first contention which alone would dispose of the reference. The Supreme Court first took up the last two contentions and for reasons stated in para 8 of its judgment rejected them. Thereafter it took up for consideration the first, evidently for the reason that by that alone could the appeal arising out of the reference be disposed of. In rejecting that contention and dismissing that reference appeal, the Court gave three reasons : (i) Under section 9(1) of the Sales Tax Act read with rule 41(2) of the Sales Tax Rules, the appeal against the assessment had to be accompanied by proof of payment of the amount of tax admitted to be due and insofar as there was the admission that the tax due was ₹ 10,339.19, by the deposit of ₹ 1,600 which alone had been made in the appeal, the assessee had not complied with the mandatory requirement. In that context, the Court rejected the contention that tax admitted was only the tax admitted in the memorandum of appeal. (ii) The stand taken by the appellant before the Appellate Judge t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld only mean, as Beg, J. (as he then was) expressed in J.K. Manufactures Ltd. s case (supra) that the Supreme Court by the pronouncements in wide terms made in Venkatraman s case and in the others that followed it intended to cover not only the sections of the statute but also the rules framed thereunder. 20. Then arises the question as to what the Tribunal, powerless as it is to pronounce on the vires of the provisions of the statute of which it is the creature and even the rules framed thereunder, is to do in cases where in reality a rule framed by the rule making authority in exercise of the delegated authority vested in it is either in conflict with the relevant provision in the statute, or cribs, cabins whittles or nullifies it. Is the Tribunal to shut its eyes and leave unnoticed a rule framed even in excess of the delegated authority vested in the rule making authority ? We do not think such questions need present any difficulty. What is delegated by section 295 of the Act to the rule making authority is the power to make rules for carrying out the purposes of the Act. It is taking note of this that the Supreme Court in CIT v. Taj Mahal Hotel [1971] 82 ITR 44 made it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and are subject to such modification, amendment or annulment as the Legislature may think fit, and for certain purposes, including for purposes of construction, are to be treated as if contained in the Act, does not in any way detract from the position that they continue to be rules subordinate to the Act, as pointed out by the Supreme Court in Chief Inspector of Mines v. Karam Chand Thapar AIR 1961 SC 838 and Kerala State Electricity Board v. Indian Aluminium Co. [1976] 1 SCR 552 . It is this that the Bombay High Court also in CIT v. Abdul Hussein Essaji Arsiwalla [1968] 69 ITR 38 made clear when it observed that it is the main statute which will govern the rules made by the rule making powers given under the Act and not vice versa, and that if the interpretation of the provision of the statute is clear, a rule framed under the rule making power given under the statute cannot affect it. In other words, no exercise of the rule-making power can affect or derogate from the full operative effect of the provisions of the statute. In Central Bank of India v. Their Workmen AIR 1960 SC 1 2 this was made further clear by the Supreme Court when it said that if a rule goes beyond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fective on account of it being repugnant to the parent section, and for that reason ignored, there is no erasure of the rule from the statute book, and it would still be open to the competent authority to cure its defect by necessary amendment to make it consonant with the parent section and effect. Or with the necessary amendment to the parent section too, the rule can once again be invigorated. Once the defect is cured and it is brought in line with the statute, it becomes effective again. In the former case the declaration erases the provision completely out of the book. In the latter case it is only silenced so long as it utters against the parent statute. That the Tribunal, even as a creature of the statute, has not only the right to do the latter but is even bound to do it is amply made clear by the Supreme Court in Venkatraman s case (supra) when it observed that an authority created by a statute bound to act under the statute would be acting outside the statute if it acts on the basis of a provision that is ultra vires. In other words, it would be the duty of the Tribunal to uphold and act under the statute by ignoring any rule framed in delegated legislation which strikes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (The rest of the rule is not relevant for our present purpose.) It may be seen from the above that the relief by way of deduction contemplated by the section is a percentage of the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be, computed in the prescribed manner in respect of the previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section referred to as the relevant amount of capital employed during the previous year). It is the manner of computation of capital thus left by the Parliament to the rule making authority to prescribe that is framed by the latter in rule 19A. If the criticism is that in thus leaving everything to the rule making body without defining the ambit, there has been by the section an excessive delegation far beyond the legal limits referred to and defined by the Supreme Court In re. Delhi Laws Act [1951] SCR 747 the answer must be that it is a challenge offered to the statute itself and for that reason alone beyond our competence to entertain. 25. What is then contended before us in short is-its elaborate details we shall refer to later-that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital is violative of the authority given under section 80J. The High Court did that as in its opinion section 80J does not provide that the capital employed must be out of the money belonging to the assessee and therefore borrowed money, if it is employed as capital in a new industrial undertaking is entitled to a place in the computation of capital. We were told by Shri Dastur in the course of the hearing that a Bench of the Madras High Court too has, in a recent decision not yet reported, following the decision in the case of Century Enka (supra), struck down the rule as ultra vires section 19A. A copy of the said decision was not made available to us at that stage, but we have since seen a copy of the said decision which is the decision of Madras Industrial Linings Ltd. v. ITO [WP No. 446 of 1977]. Since, these decisions are not binding precedents outside the territorial limits of the respective High Courts, it cannot be said that by their reason the rule now stands erased to put us in no further need to go into the question here debated. We hasten to add that by this we are not to be understood that the reasons given by the learned Judges in those two decisions for finding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter, a copy of the decision of the Madras High Court in the case of Madras Industrial Linings Ltd. (supra), has been seen by us. For the present, we may state that the Madras High Court have also taken a view against the department and while doing so has had occasion to consider and reject a few of the arguments which were advanced before us on behalf of the department. However, both the High Courts, with respect, have not had occasion to deal with all the aspects which were urged before us. Be that as it may, we have decided the merits of the issue having regard to the able assistance received by us from the learned representatives of both sides. 29. The area of the conflict between the section and the rule which the assessee wishes to bring out in the instant case is limited. The scheme of rule 19A(3) is broadly that the capital is determined by deducting from the total amount of the value of the assets the amount of the borrowed moneys or liabilities. According to the assessee there is no scope for deducting the amount of the loans or the liabilities from the value of the assets. This is the stand because according to the assessee, the section requires that we must deter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal or own resources of a certain person. The moneys borrowed by such a person are not his capital in this sense. His capital is whatever may survive if he realises all his assets and pays off all his dues. 33. When it comes, however to the capital of an undertaking, the entrepreneur or his financier does not think in terms of what he himself invests in the undertaking. If the project requires a total outlay, of say ₹ 10 lakhs, the proprietor who may be the promoter, may put in ₹ 6 lakhs and borrow the balance of ₹ 4 lakhs. All the concerned persons understand the capital of the undertaking to be ₹ 10 lakhs, whereas the capital of the proprietor invested in the undertaking would be only ₹ 6 lakhs. 34. The kind of a situation discussed above arises because the industrial undertaking as such is not a person. In modern industrial development, various persons pool together their resources for setting up or acquiring and running, as the case may be, an industrial undertaking. The total outlay in the undertaking is commonly understood by all concerned as its capital. This capital may come in various forms giving different kinds of legal rights to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attention may be devoted to the person interested in the undertaking. Let us say, he is the owner of the building. If the building is used for the undertaking, it is the undisputed that the value of the building is part of the capital of the undertaking. If the building is sold and the proceeds are invested in the undertaking, it is also undisputed that there is capital employed in the undertaking to that extent. If the building is mortgaged and the loan raised consequently is utilised in the undertaking, in the view canvassed by the department it is capital employed in the undertaking only if the moneys are brought into the undertaking as if they are concerned persons, own moneys. If, however, the building is mortgaged and the loan is entered in the books as owing to the creditor, in the view canvassed by the department it is not a part of the capital of the undertaking. It appears to us that in all these different kinds of situations, the extent of resources plonghed into the undertaking are the same. The businessman finds it difficult to recognise that there is a distinction in the amount of capital employed in the undertaking in the last kind of the case on the one hand and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rowed by the concerned person. This is the situation because, what is to be noticed is the capital employed in the undertaking. Similarly, it is the capital employed in the undertaking that has to be identified and it is not the capital of any particular person, even if he is the owner, that is employed or invested in the undertaking that is to be ascertained. The source of the capital is immaterial,whereas what is material is the channel in which it is ploughed. If the latter is an industrial undertaking, one does not look further to find out how and from whom it has come. Indeed, from the various illustrations set down earlier, it is manifest that the initial source of the capital may change from time to time. For example, the proprietor may take away a certain part of his original investment and this may necessitate the introduction of an equal amount by way of loan capital. So far as the undertaking is concerned, there is no change. From the above discussion, it is clear that from the limited angle of an understanding of the relevant expression in the world of business and in common parlance, there is no scope for excluding any amount utilised in the undertaking having re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not a newly established industrial undertaking. For this purpose, the newly established undertaking is clearly earmarked as a separate unit. When this is so,there is no valid reason why when it comes to the capital employed in the undertaking, the separate identity of the new undertaking should not be recognised. We put it to the learned departmental representative whether in a given case,where the concerned assessee may have no source of income other than the newly established undertaking and the capital of the assessee exceeded his investment in the undertaking it could be said that the relief under section 80J had to be calculated in relation to the concerned assessee s capital. It is not surprising that we have not received any clear answer. We come back to this that the plain meaning of the language in the section as it may be understood by a businessman or a common man is such that the capital employed in the undertaking has to be determined focusing attention on the undertaking and regardless of its source. 42. The next step or the second angle from which the matter may be examined is from the point of view of accountancy. We are doing this for more than one reason. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan of ₹ 30,000 and that there is a credit balance in the proprietor s capital account of ₹ 1 lakh. The description of the sum of ₹ 1 lakh will be capital account . It is because of this description and that the relevant amount happens to be the surplus of the assets over the loans shown in the balance sheet that one of the equations understood in accountancy is that capital represents the net worth . As we shall discuss a little later, this does not mean that capital does not have any meaning or sense other than net worth. The hypothetical case stated above is intended to bring out how in respect of the business the total resources which are necessary for its commencement and continuation need not be represented by the personal contribution of the proprietor. The personal contribution is the capital of the proprietor invested in the said business whereas at the same time, the borrowed capital is also invested in the business. The attempt of the accountant is to present the picture in such a way as to give an analysis of the sources of the various kinds of capital employed in the business and this need not mean that in translating the abstract idea of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en if part of the resources are loans raised by the proprietor, the accounts will show the total capital employed in the relevant activity as represented by the abovementioned credit balance. By contrast, if all the accounts should have been kept in only one set, the possibility is that attention may be diverted to the source of the investment in each activity and if one of the sources is borrowed or loan capital, the temptation may be to say that the capital employed in the business or the industrial undertaking is reduced to that extent. It is manifest that such an understanding of the accounts is fallacious. If the amount which is to be ascertained is the capital employed in the undertaking, the separate set of accounts and the corresponding balance sheet set apart for this purpose is a surer guideline. The hypothetical case discussed above shows how confusion can be caused because of the practice adopted in accounts of displaying the personal resources of a person as his capital as distinct from the capital employed in an undertaking whatever may be its source. 44. The confusion or the debate in this regard arises perhaps because the word capital has been used in dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wer of money since the expenditure was incurred or to the amount of money it would now cast to replace them. The balance sheet therefore is a statement showing on the one hand the amount of capital sunk or employed in the business and the sources from which it is derived (e.g., capital provided by the proprietors,loan capital, retained profits etc.), and on the other, the form in which such capital is employed, i.e., the unexpired expenditure, at the date of the balance sheet, on the various assets by which the total capital fund is represented. (p. 20) In this treatise also there is a recognition of the principle that the capital employed in a business has to be determined regardless of its source. 47. The learned departmental representative relied upon the observations in J.R. Batliboi s Advanced Accounting, 26th Edition (Revised) which are as below : The word capital means : The capital introduced by a trader in his business is credited to his Capital Account. The amounts withdrawn by him out of his business for his personal use, from time to time, are debited to a separate account called the Drawing Account. As these drawings go to reduce the original cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... person and the capital employed in an undertaking has been well recognised and a method of computing the former is not appropriate for computing or determining the latter. 50. The Madras High Court in its decision in the case of Madras Industrial Linings Ltd. (supra) has also after considering the matter from the angle of accountancy come to the view which have taken above. 51. All said and done, however, in adjudicating upon the point at issue, we have to interpret the provisions of section 80J(1) in accordance with accepted principles which are relevant in this regard. We have dwelt at length upon the manner in which capital of a person and the capital of a business or an undertaking as the case may be is understood in common parlance by a businessman and by an accountant because, it is well settled that in interpreting the legal provision, the plain meaning of the words used should be the primary guide. Now the learned representative of both sides referred us to the meaning of the word capital as stated in dictionaries like Chambers Twentieth Century Dictionary and the Shorter Oxford English Dictionary and they also referred us to the meaning of the word according ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... side of the balance sheet of the undertaking) may be useful for a different purpose. For example, it bring out the legal rights of the concerned persons, vis-a-vis, the undertaking and inter se. A secured creditor may be better placed than an unsecured creditor. Therefore, the amounts contributed towards the capital of the undertaking by the groups comprising the two kinds of creditors, may be conveniently displayed separately in the balance sheet. Both, however, fall in the common category of borrowed capital. The rights of this category are different from the rights of those who have proprietary interest in the undertaking. This is one of the reasons for showing under different categories the various kinds of resources used in the undertaking depending upon the source of each. Another reason for doing so is that the concerned persons such as the proprietors, the shareholders in the case of a company, the Government officials such as the officers of the Company Law Board, Income-tax Department, etc., can readily get at a general picture of the financial affairs of the undertaking. These and other reasons may require an analysis of the source of the capital employed in an un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e capital of a person or the capital of the proprietor of an undertaking. This has been recognised by competent courts. 56. There are observations in the decision in the case of Burmingham Small Arms Co. Ltd. [1951] 2 All. ER 296 (HL) which recognise the distinction between the capital employed in a business on the one hand and the capital of the proprietor of the business on the other hand. It is true that the controversy in this matter which related to the levy of excess profits duty in the UK revolved round the question whether the value of a certain chose-in-action in which the proprietor of a business had acquired a right was includible in the computation of the capital of the business as an asset of the business. While holding that it was not an asset of the business, the learned Law Lords have recognised on more than one occasion the distinction between the capital of the business on the one hand and the capital of the proprietor of the business on the other hand. We may extract some of the relevant observations hereafter : My lords, it is plain on the face of this sub-para (1) that, capital employed means assets employed. For the capital is something which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or requires some other meaning to be given to the expression. The relevant part of the section is as follows : Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall... be allowed, in computing the total income of the assessee, a deduction from such profits and gains... of so much of the amount thereof as does not exceed the amount calculated at the rate of 6 per cent per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be,.... 59. One of the arguments advanced by the learned departmental representative is that since the deduction is from the profits of the undertaking which are included in the total income and gross total income of the assessee, the corresponding deduction must be also understood to be from the capital of the assessee employed in the said undertaking . The suggestion is that after all it is the assessee who is the proprietor of the undertaking who gets the benefit of the deduction and the amount of the deduction has also to be in proportion to his capital e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould also be in proportion to his capital employed in the industrial undertaking. 61. The other and yet more important aspect is that the quantum of the relief need not depend upon the description of the pre-conditions for being eligible for the relief and the description of the procedure to be adopted in giving the relief. The two aspects operate in different spheres. For example, if the rate to be applied to the capital for determining the amount of relief is varied, there is no need at all to amend or vary the earlier part of the section. Even if the scheme of determining the amount of relief is varied, by laying down for example, that it shall be a certain proportion of the profits of the undertaking, the earlier part of the section need not be amended. The scheme of the other sections like sections 80M and 80L placed in Chapter VI-A also is similar, i.e., the measure of the relief does not have any relationship with the conditions prescribed for qualifying for the relief. 62. It must be stressed, however, that it is not suggested that the provisions of section 80J should be interpreted in a certain manner having regard to the provisions of those sections. The othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he undertaking. 64. The next aspect is to consider whether the use of the expression ....computed in the prescribed manner.... makes any material difference. The argument advanced on behalf of the department is that this means that the Legislature itself has laid down that the capital of the industrial undertaking shall be computed in accordance with the method commonly called the net worth method as this is the method prescribed under the relevant rule 19A. The first difficulty about accepting this argument is that it means that the Legislature left in the sphere of uncertainty even the character of what it described as the capital employed in the industrial undertaking. If the prescription under the rule should vary, the character of the capital would also vary. To take an extreme case, if it should be prescribed under the rule that the capital shall be Re. 1, can we say that the capital employed in the industrial undertaking shall be Re. 1? The very fact that the rule making authority has from time to time made amendments to rule 19A making material variations in the computation of the capital even within the board framework the net worth method, shows that such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule making authority to prescribe merely what particulars are to be mentioned in the said form and nothing else. The guidance available from these decisions is that the expression in the prescribed manner when used together with another expression cannot curtail the scope or change the colour of the other expression. The learned representatives of the assessee have advanced further arguments which support the abovementioned view. The attempt is to contrast the use of certain other expressions or devices employed in other legislation. Reference was made to section 7 of the Wealth-tax Act in which the expression used is subject to any rules made in this behalf... . The suggestion is that it is arguable that when the Legislature had used this expression in 1957, it could have as well used the same expression in section 80J which was introduced later instead of the expression in the prescribed manner if the intention was to leave to the rule making authority any scope for varying the meaning of the expression the capital employed in the industrial undertaking . 66. The Madras High Court in the decision in the case of Madras Industrial Linings Ltd. (supra) has specific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion against the profits of the standard year. The profits of the standard year so adjusted were deducted from the profits of the chargeable accounting period and the residue was the excess profits. The tax was levied at a flat rate on the excess profits. If the standard profits were determined in a sum which was less than ₹ 36,000 for a period of 12 months, the standard deduction was allowable in the sum of ₹ 36,000 for a period of 12 months. The scheme shows that the object was to mop up the bulk of the profits arising from the inflationary conditions prevailing during the period of war. We suggested this to the learned departmental representatives and they have not controverted it. 70. The computation of capital under the Excess Profits Tax Act, has to be made in accordance with the provisions of Schedule II which formed part of the Act. The broad scheme in the first instance, i.e., up to 31-3-1941 was that the total amount of the liabilities was deducted from the total value of the assets. From 1-4-1941 the borrowed capital was not so deducted. There were also other exceptions provided in the rules entered in Schedule II which made a departure from time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l up the paid-up capital and the reserves and thus borrowed capital is not included in the capital determined for this purpose. 73. In the course of the arguments, we put it to the learned departmental representatives that all the abovementioned pieces of legislation were introduced from time to time with the object of taking away a substantial portion of unusual profits of business and the object was not to give a boost to industry or to any other sector not covered by the charge of these Acts. These Acts created a tax burden over and above the income-tax payable by the concerned assessees, whereas section 80J reduces the burden of income-tax payable by the concerned assesses.They have not controverted that such was the case. We also put it to the learned departmental representatives that in all the abovementioned Acts, the Legislature itself had laid down the scheme and even the provisions for the determination of the capital and not left it to the rule making authorities to do so, that there were departures from time to time from the strict scheme of determining the net worth and that there was nothing to show that these pieces of legislation had any relevance when it came to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeding an amount equal to 6 per cent on the capital employed in the undertaking, computed in the prescribed manner . The corresponding rule was rule 19. The scheme of the rule was broadly to deduct the total amount of liabilities from the total value of the assets of the undertaking. 75. In 1967, Government appointed a One Man Committee on Tax Laws commonly called the Bhoothalingam Committee for suggesting measures for Rationalisation and Simplification of the Tax Structure. It submitted an interim report which included recommendations for substituting the rebates allowed under the Act by corresponding straight deduction in the computation of total income. One of the provisions which was affected by this recommendation was section 84. Legislation as a consequence of the recommendation was brought in by the Finance (No. 2) Act, 1967. The relevant speech of the Finance Minister shows that the object was simplification of the law. Section 84 was deleted and section 80J was introduced with effect from 1-4-1968. The straight deduction as discussed earlier is an amount not exceeding 6 per cent on the capital employed in the industrial undertaking computed in the prescribed man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital was a flat amount of ₹ 1 lakh. Therefore, it cannot be said that factually, the Business Profits Tax Act recognised that the capital of an undertaking had to be computed by the net worth method alone. A far as the provisions of section 15C of the 1922 Act and section 84 of the 1961 Act are concerned, these provisions themselves do not in fact lay down how the capital shall be determined. It is only the corresponding rules that prescribe the method of computation of capital and it is true that under these rules liabilities and borrowed moneys are not includible in the capital. 78. Therefore, we find that it cannot be said that right from 1940 onwards, the meaning of the capital employed in a business or undertaking was uniformly understood as the capital determined broadly by the net worth method and thereby, excluding the liabilities and the borrowed moneys. This being the factual position, there is an infirmity in the very foundation of the arguments advanced by the learned departmental representatives. Thus, there is a material distinction between the factual situation in which the principle of the decision in the case of Balakrishna Malhotra (supra), was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meanings which can be possibly attributed to it, including the meaning suggested on behalf of the department. Therefore, this is yet another material distinction between the relevant facts on which the decision reported Balakrishna Malhotra (supra) is based and the relevant facts of the case of the assessee. 81. The third aspect is that, as discussed earlier, the object and purpose of the Legislation like the Excess Profits Tax Act, Business Profits Tax Act (Super Profits Tax Act and Surtax Act), was quite different from the object of the legislation such as section 15C of the 1922 Act and section 84 and section 80J of the 1961 Act. There is only a superficial similarity in all these Acts in so far as a certain amount determined as a percentage of the capital is deducted from taxable profits. In the legislation relating to the industrial undertaking the object is to exempt from the rigours of taxation the new undertaking during its teething troubles and give a boost to the growth of new industry. In the other kind of legislation, the object is to take away a fair part of surplus profits. Thus, it should not be surprising if the manner in which capital is to be understood a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is force in the contention urged by the learned representatives of the assessee that the mere absence of a dispute from the side of the taxpayers for a period of time has no significance. One of the points made on behalf of the assessee is that under section 15C and 84 the assessee was entitled to a rebate and not a straight deduction. Therefore, the amount of relief, if any, was not very substantial. What is still more important is that when there was a change brought about with the introduction of section 80J(1), it was not merely to allow a straight deduction in respect of a rebate, but it was also simultaneously provided that the deficiency in the profits of the undertaking as compared with an amount equal to 6 per cent of its capital shall be carried forward for giving a corresponding deduction in a later assessment year. In such a situation, it is manifest that the denial of the relief had a harsher consequence it terms of the amount of tax involved. There is force in this limb of the argument because it is understandable that taxpayers might not have considered it worthwhile agitating against a certain interpretation adopted by the Board if in terms of the liabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e did not adopt a different expression in sections 84 and 80J then the expression used in the first instance in section 15C when the corresponding rules had been framed in a certain manner by the Board from time to time, it cannot be said that the Legislature had accepted that meaning which was given to the expression by the Board. 85. This brings us to yet another limb of the argument advanced by the learned departmental representatives to persuade us that the Legislature had understood the meaning of the expression capital employed in the undertaking in the manner in which it was implemented under the rule corresponding to section 15C and as the said rule as well as rule 19 framed under section 84 had been placed on the table of the House of Parliament, it should be accepted that the repetition of the same expression in section 80J(1) was made with the intention of giving it the same meaning. Two points were highlighted in this connection. One of them is that the Indian Income-tax (Computation of Capital) Rules, 1949 had been made on 15-10-1949, whereas the Legislature introduced section 15C by an amendment of the 1922 Act only later in December 1949. The suggestion is that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wer provided in the statute. Where an executive authority is given power to frame subordinate legislation within stated limits, rules made by such authority, if outside the scope of the rule-making power should not be deemed to be valid merely because such rules have been placed before the Legislature and are subject to such modification, annulment or amendment as the Legislature may think fit. The process of such amendment, modification or annulment is not the same as the process of legislation and in particular it lacks the assent either of the President or the Governor of the State. Therefore, this limb of the argument advanced by the learned departmental representatives also does not advanced the case of the department. 88. Since, as discussed above, none of the various points made on behalf of the department is acceptable, we revert to the situation that the interpretation of section 80J(1) has to be adopted having regard to the plain meaning of the expressions used in the section and without introducing anything more in the language in the section. The construction of the section in accordance with these principles, as discussed earlier, requires that the crucial expr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losophy behind every statute. We cannot see how this observation helps the case of the department. As stated earlier, the provisions of section 80J are designed to give a boost to industry and an interpretation which may even frustrate the purpose is being suggested on behalf of the department. 91. Similarly, the learned departmental representatives relied upon the observations at page 631 of the report of the decision in the case of Chandulal Harjiwandas v. CIT [1967] 63 ITR 627 (SC) that the object of enacting section 15(1) of the 1922 Act is the encouragement of thrift and that the section should therefore be interpreted in such a manner as not to nullify that object. In our opinion, these observations also not only do not help the case of the department but perhaps help the case of the assessee. This is so because the object of the section which is to give a boost to new industry may not be promoted if the relief is to be denied merely because the undertaking depends upon borrowed capital. 92. The learned departmental representatives referred us to the decision in the case of CIT v. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443 (SC). Suffice it to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... came capital of the business or of the undertaking. To that limited extent that guidance is available from the abovementioned observations. In any event they do not help the case of the department. 96. The decision of the Bombay High Court in the case of Indian Oil Corporation Ltd. v. S. Rajagopalan, ITO [1973] 92 ITR 241 is a decision relating to the provisions of section 80J and the corresponding rule 19A. The learned representatives of both sides naturally referred to this decision. However, with respect , we are of opinion that the decision does not provide any guidance in deciding the issue before us. This is the situation because the controversy which the High Court had to consider was in a very narrow compass and proceeded on the footing that rule 19A had been framed in conformity with the provisions of section 80J. There was no occasion, therefore, for the Hon ble High Court to consider the larger question which is before us. In this view of the matter, we do not find it necessary to deal with various comments made by the learned representatives of both sides on the observations of the High Court. 97. As stated earlier, the decisions of the Calcutta High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier, the question arises for consideration by way of an additional ground taken by the assessee and admitted by an order of the bench before whom the appeal came up originally for hearing. The bench admitting the additional ground in this connection, however, felt that the decision in an earlier order of the Tribunal accepting the claim for deduction and relied on by the assessee before it [ IT Appeal Nos. 3068 and 3097 (Bom.) of 1972-73] required re-consideration as it found itself unable to agree with all that has been stated in the order. It, therefore, considered it necessary to refer the matter to the Special Bench. It may be stated at the outset that the assessee s representative restricted the claim to the amount of surtax attributable to the income determined under the head Profits and gains of business or profession and not to the amount referable to other income assessed. 102. The learned representative for the assessee, Shri Srinivasan, prefaced his submissions with the following propositions of the law referred to in Law and Practice of Income-tax by Kanga Palkhivala, Seventh edition, Volume I, under the heading Profits and gains and elsewhere for su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de the determination of the figure for the purpose of the charge because to that figure which is equal to total income computed under the Income-tax Act certain adjustments in accordance with the provisions of the First Schedule are required to be carried out. Referring to the various adjustments referred to in the rules to the First Schedule and taking the Profit Loss Account and Balance Sheet of the Tata Engg. Locomotive Co. Ltd., for its accounting year 1976-77 contained in the 32nd Annual Report of the Company as an instance, he pointed out quite credibly that in a conceivable case the chargeable profits can far exceed the total income assessed or assessable for income-tax. In particular he referred to the provisions of rule 3 of the First Schedule which require the amount calculated with reference to rule 2 to be increased by the aggregate amount of interest payable by a company in respect of debentures which are not redeemable before the expiry of seven years from the date of issue or moneys borrowed from various financial institutions referred to in clause (5) of rule 1 of the Second Schedule and contended that in cases where the rate of interest applicable to such loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause cannot be held to prohibit the deduction claimed by the assessee because surtax is not a tax within the meaning of the word occurring in this clause because, for one thing definition of that word in section 2(43) does not take in surtax and for another it cannot be a tax on the profits and gains or assessed at the proportion of or otherwise on the basis of such profits and gains, the words profits and gains in this clause meaning the profits and gains determined in accordance with the provisions of the Income-tax Act for the purpose of computing its total income whereas, as already demonstrated by him with reference to the provisions of the Surtax Act, the chargeable profits for the purpose of surtax is totally different from the total income computed for the purpose of income-tax and even such chargeable profits are not fully taxed, there being a standard deduction allowed at a percentage of the capital employed. For the proposition that the provisions of this clause contemplate only profits and gains computed for the purpose of income-tax and not profits computed in any other manner, strong reliance was placed on the decision of the Supreme Court in Jaipuria Samla A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... half of the revenue ably stated by the learned departmental representative Shri Ajinkya was that surtax cannot be deducted in computing the assessee s profits or income-tax firstly because of the prohibition contained in section 40(a)( ii) which, in his submission, applies to surtax and secondly because the payment of surtax is an application of the income or profit after it is earned and not itself a charge on profit before it is earned. He sought to draw support for the contention that levy of surtax is also another form of tax on income or profit from the facts that the levy of both income-tax and surtax is made through the same machinery, namely, the hierarchy of Income-tax Administration, following the almost identical procedure and administered by the same officers. It was further submitted that having regard to the scheme of the Surtax Act it is manifest that the levy arises only after income is earned and consequently it is very much tax on income, profits and gains. Referring to the charging provisions under the Act which is section 4 read with definition of chargeable profits in section 2 it was argued that the contention that reference to the computation of total incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tally different from the basis of charge for the purpose of income-tax and, therefore, the nature of surtax is not like that of income-tax, and consequently its allowance of deduction in computing the total income is not prohibited. On the other hand, the levy being related to the assessee s activity of carrying on business particularly when the levy is made only on persons having the corporate status, it is submitted, it is an expenditure or an outgoing incidental to the carrying on of the business and, therefore, admissible as deduction in computing its profits and gains. 111. Before we advert to the authorities relied on by the assessee s learned representatives, let us look at the scheme of this levy. The Companies (Profits) Surtax Act, 1964 is, undoubtedly, a Central Act and the authority for this levy is, as stated in Sampat Iyengar s Three New Taxes , Fourth edition, Volume II, 356 is the entry No. 82 of the Union List which is List (I) in the Seventh Schedule to the Constitution authorising the Parliament to legislate on taxes on income other than agricultural income . The preamble states that it is an Act to impose a special tax on the profits of certain companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and for his giving notice of such an intention, etc. Such variations are very few and are of a minor nature and by and large the procedure for assessment, levy and collection and for appeals, etc., is identical with that relating to income-tax levy. 112. All these facts clearly indicate, according to us, that the nature of the levy is one of tax on income, profits and gains though confined to only certain types or classes of assessee, namely companies not limited by guarantee. The provisions of the enactment clearly envisage that before the tax becomes leviable or levied the companies must earn profits, such profits have to be computed, we shall not say assessed, in accordance with the provisions of the Income-tax Act and then adjusted. The fact that the entire profits determined for the purpose are not charged but only the amount exceeding the return of 10 per cent on the investment by way of capital computed according to the provisions in the Schedule show that it is sort of a levy on excess profits. The concept of tax on excess profits is not unknown in the history of Indian fiscal legislation as we have already had three predecessors to this enactment in the Excess Profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computation as determination of the profits for the purpose of the levy. It may be seen that even in determining taxable income under the 1961 Act adjustments are contemplated to be made to the actual accounting profits by restricting the allowances on account of expenditure in the case of certain items, such as for instance, the payment of remuneration to a director or employee beyond the limits prescribed in section 40(c) or 40A(5). On the other hand, there are substantial deductions allowed under Chapter VI-A from the profits. Thus, the adjustments in the Schedule to Surtax Act is one in the field of determination or computation of profits for the purpose of this particular levy and do not alter the character of the amount of chargeable profits arrived at thereby to anything other than the profits and gains of business. It is well settled that the income, profits and gains for the purpose of assessment to taxation under entry 82 of List I of the seventh Schedule to the Constitution do not have a restricted meaning but can include not only the income or profit which has actually been received or ordinarily understood in commercial or accountancy practice but also income which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to that effect in the enactment. In the Income-tax Act, however, section 2 contains the specific provision that the definitions would have the meaning attributed to them therein unless there is something repugnant in the subject or context. As pointed out earlier the language or section 40(a)( ii) of the 1961 Act is almost identical to the language contained in section 10(4) where also the word tax occurs and there is no definition of that word under the 1922 Act. It would not have been, therefore, possible to contend that the meaning of the word tax used in section 10(4) is income-tax chargeable under that Act and the word would only have been used carrying the general meaning of the word levy or impost . It cannot be disputed that the provision prohibiting deduction of tax as contained in section 10(4) of the 1922 Act is retained in the Act of 1961. In the absence of any contrary intention either in the enactment or in the context, therefore, it is not possible to accept the contention that tax defined therein pertains only to income-tax as computed for income-tax purposes and not to any other tax. Another reason for our conclusion is that if the Legislature wanted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmon ground that the cesses were not levied on the profits or gains of any business. It was the revenue s claim that they were cesses levied on the basis of profits or gains. A reference to the provisions of two Acts shows that the assessment of cess was not made as a proportion of the profits of the business and, therefore, the question for determination was whether a levy was on the basis of such profits. It was against this background and on a detailed reference to the provisions of the two State or Local Acts under which the levies were made that it was observed that the profits assessed under the two Cess Acts were not comparable to profits determined under section 10 and consequently, the levy did not fall under section 10(4). The further material observation of the Supreme Court in this case is that the whole purpose of enacting the sub-section (4) of section 10 appeared to be to exclude from the permissible educations under clauses (ix) and (xv) of sub-section (2) such cess, rate or tax which is levied on the profits or gains of any business, profession or vocation or is assessed at a proportion of or on the basis of such profits or gains. In other words, sub-section (4) wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come as part of the circumstances of the assessee with a view to the imposition of the Union rate does not fall within sub-section (4) of section 10 of the Income-tax Act. (3) That the Union rate is not levied on the profits or gains , which clearly implies an ascertainment of such profits and gains, and the words assessed... on the basis of any such profits or gains in the later part of the sub-section must also be so limited. (4) No such ascertainment of the profits and gains of the business can be undertaken for the purpose of the Union rate. In other words, it was held that the levy must be on profits to prohibit its allowance under the relevant section and any other levy such as on property of an assessee carrying on business within the municipal limit, etc., not depending upon earning of profit but calculated with reference to the profits where they are earned as one of the modes of determining the levy would be eligible for deduction. For in the absence of profits another basis or mode may be employed. In short, it appears to us that the levy to come within the prohibition must be conditional on the earning of profits. There can be no dispute that the sur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but the income which has to be computed on the principles of the provisions of the income-tax Act. In other words, the Tribunal had to separately consider the question of deduction afresh on merits and not to go merely by what had been decided in the income-tax appeal. There obviously can be no dispute that the computation of income in income-tax assessment does not finally determine the matter even for surtax assessment. If there is any error or mistake in computing the income for income-tax purposes or even if a particular deduction or claim has not been allowed for any reason such as the absence of any evidence in support of the claim or by a mistaken view of the law, it does not prevent the correct computation even applying the provisions of Income-tax Act for the purpose of surtax because the two enactments are distinct and separate and the proceedings are also separate. That is far different from saying that the principles of computation of total income for the purpose of income-tax and principles of computation of total income as defined under the Surtax Act are not one and the same. 117. Even apart from the prohibition contained in section 40(a)( ii) which, according ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ₹ 1,24,199 being levy of wealth-tax was deductible from the business income of the assessee either under section 10(1) or section 10(2)(xi) or section 10(2)(xv) and in upholding the claim of the assessee the test laid down by the Supreme Court was that when a person has a dual capacity as a trader and owner of the business and he pays tax in the course of performance of trade, the payment must be taken as one made by him in the capacity of a trader according to ordinary commercial principles. The Supreme Court modified its earlier view in Travancore Titanium Product Ltd. v. CIT [1966] 60 ITR 277 , that to be a permissible deduction there must be a direct and intimate connection between the expenditure and business, that is to say, between the expenditure and the character of the assessee as a trader and not as a owner of the business even if they are assets of the business, the modification being that if the expenditure is laid out by the assessee as owner-cum-trader, the expenditure would be really incidental to the carrying on of the business and must be held to have been laid out by him as a trader and as incidental to his business. We fail to see how the principl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... introduced do not touch the principles laid down in Indian Aluminium Co. s case (supra) and the local tax of Japan claimed as deduction in that case was not any tax of a similar character chargeable by any law in force in any country outside India as mentioned in the amendment relied on by the revenue. The Supreme Court found that an examination of the provisions of the Japanese statute and of the Wealth-tax Act, 1957 revealed basic dissimilarities. Here also the decision does not relate to any tax on profits. 120. In the case of Greaves Cotton (supra), the assessee s claim was for deduction of a sum of ₹ 1,110 which was payable by its Madras Branch under the Madras Municipal Act. The tax was payable by companies and the amount dependent upon its paid-up capital or gross total income. It will be noticed from the discussion at page 189 of the report of the decision that the finding of the court in this respect is that the basis of the tax was the carrying on of the business without the municipal limit and though the tax was based on the gross income earned, the essence of the charge of the tax was to permit carrying on of the business by the companies within the municipal l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure incidental to the carrying on of the business it would qualify for deduction if it is laid out whole and exclusively for the purpose of the business. But the question was to whether it fulfils the requirements, namely, whether it is expenditure and even if it is so whether it is incurred for the purpose of the business. 123. On the other hand, the following cases referred to in the course of the hearing and some of them relied on by the departmental representative in support of the revenue s stand clearly show that the tax on profits dependent upon the earnings of the profits cannot form an item of deduction for the ascertainment of the very profits on which tax is levied. 124. The first case which has been strongly relied on by the revenue is the decision of the Patna High Court in Maharajadhiraj Sir Kameshwar Singh s case (supra). The claim by the assessee in that case was for deduction of interest on the overdraft taken by the assessee for advance payment of income-tax. It was held, rejecting the claim, that the well established proposition is that income-tax is not a deduction before arriving at the net profit of the assessee. Income-tax, as held in a decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to meet a similar tax at home. Finally a reference was made to the observation of Lord Normand in Smith s Potato Crisps case at page 275 of the report that a payment out of profits after they have been earned is not within the purposes of the trade carried on by the taxpayer and that excess profits tax which is also levied on profits after they are earned, apart from the statutory provisions is in pari passu with income-tax. The observations referred to are very apt and applicable to the claim for deduction of surtax before us. 125. We may next refer to the decision of the Madras High Court in CIT v. Indian Overseas Bank Ltd. [1963] 50 ITR 725 . One of the questions that came up for consideration in this case also was a claim for deduction of Ceylon excess profits tax in computing the income for income-tax purposes. Rejecting the claim of the assessee in this connection it was held that the prohibition contained in section 10(4) of the 1922 Act, corresponding to section 40(a)( ii) of the 1961 Act, would apply to the Ceylon excess profits tax also, and specifically rejected as unsound was the view of the Tribunal in that case that the prohibition contained in section 10(4) can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his is highlighted by the observations of Lord Ried extracted in Indian Overseas Bank Ltd. s case (supra) It is admitted that tax in Eire is assessable on the same principles as in the United Kindgom. So, if the respondents are right here, they would have been entitled in Eire to a deduction of United Kingdom excess profits tax payable by them. The amount of tax payable in the one country could not be determined until the amount of the deductions allowable there had been determined; but one deduction would be the amount of tax payable in the other country. The amount of tax payable in the other country could not be determined until the deductions allowable there had been determined; but one of those deductions would be the amount of tax payable in the first country. I see no way in which this circle could be broken.... (pp. 730-31) The complexity or the vicious circle referred to is also projected in the case of a claim for deduction of surtax in the following way. Under the provisions of Surtax Act and its Schedule the income-tax payable on the income computed for the purpose of or in accordance with the principles for computation of income for the purpose of income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of income for the purpose of the Income-tax Act shows that it is a levy which arises after the income, profits and gains are earned and the assessee pays the regular income-tax thereon. The provisions of section 15 of the Companies (Profits) Surtax Act, 1964 which require that the amount of surtax payable by a company shall be deducted from the total income assessable for the concerned year for ascertaining the distributable income of a company for the purpose of section 104 of the Act, indicate that but for the specific provision the surtax is not deductible for computing the profits and gains. Again the provisions of section 104 and their allied provisions under Chapter XI-D of the 1961 Act, provide that a company in which public are not substantially interested should distribute a minimum percentage of its profits after taxation as dividends and failure to do so would attract additional tax. It is obvious that for the purpose of distribution of dividend, a company can only take into account the profits or surplus available to it after the payment of income-tax. Therefore, certain outgoings which are not allowed or allowable in computing the income of the company for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the language used by Parliament in these various entries and referring to certain legislative practice which sanctioned the concept of a notional income as the basis of levy of tax on income. Their Lordships observed as under: To focus attention on the incidence of the tax for which also section 23A provided, to the exclusion of the basis of taxation, can only tend to cloud the issue of legislative competence. What was it that was taxed: undisbursed profits. Undisbursed profits were undoubtedly income, a part thereof. True it was the income of the company and it remained as part of the assets of the company even after the taxing authorities had passed an order under section 23A. Except notionally, and then only for the purposes of the incidence of the tax, undisbursed profits did not become the income of the shareholders. None-the-less, the position remains that what was taxed, undisbursed profits, was income. The net profits of the company were subject to tax. A provision for a further levy on undisbursed profits, which constituted a part of the net profits of the company would still be a statutory provision to tax income. Legislative power to provide for a further levy on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve pointed out that the statutory levy in respect of which deduction was claimed in that case was concerned with tax on net value of the assets over the liabilities and not with regard to the tax on profits. One particular aspect highlighted in that order as supporting the case for deduction of the surtax needs to be noted in this connection. It is that the assessee had to adopt the legal form of the company to carry on the activity of business to earn the profit which it could not avoid and therefore it follows that the adoption of the legal form of the company is wholly and exclusively for the purpose of business and the liability for payment of the tax arose as a direct consequence of the carrying on of the various activities and earning the profits of the company. Since, the Companies (Profits) Surtax Act, 1964, is an Act to impose a special tax on the profits, it is held that if an assessee has to be a company for the purpose of carrying on business or any activity for earning profits, the liability for payment of the tax would be a liability incurred for the purpose of carrying on business or earning profits and, therefore, would be a permissible deduction. After careful thou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he fact that the machinery provided for imposing the levy and collection thereof is the same as for income-tax was only to support the contention that surtax is also a national tax levied on the profits of the company. There is considerable substance in this contention because having regard to the scheme of the Act which we have already set out earlier and the relevant provisions of the Constitution particularly the entry in the Central List in Seventh Schedule authorising taxation on income other than agricultural income under which evidently the imposition is made, there can be no doubt that what is levied is the tax on profits, representing share of profits of the Government. 131. For all these reasons, we have no hesitation in rejecting the assesse s claim that surtax should be deducted in computing the assessee s profits and gains. 132. The next point taken before us by way of an additional ground is that the assessee is entitled to development rebate at the rate of 35 percent as against 20 per cent in respect of not only Beta Naphthol plant but also in respect of other plants as well in view of the claim that the assesee is a priority industry mentioned in item 18 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es rendered by the employees in the earlier years or in the current year. Accordingly, we hold that the assessee is entitled to the entire gratuity liability of ₹ 8 lakhs as against which the departmental authorities had allowed a liability of ₹ 1,03,780 only. 134. The next ground is against the departmental authorities disallowing the assessee s claim for water charges amounting to ₹ 1,87,819. As stated earlier, the departmental authorities had disallowed the assessee s claim on the ground that the assessee had disputed the liability and had in fact obtained a stay order. We however, find that the liability was fixed by the concerned authorities and therefore irrespective of the dispute raised by the assessee, the assessee s liability continued. The AAC has accepted that ultimately the dispute was settled with the Irrigation Department and the assessee was required to pay a certain sum accordingly. He has held that the relevant amount is allowable in the year in which the assessee may make the actual payment. As the method of accounting of the assessee is the mercantile method, we hold that it is proper to allow the assessee deduction in the year under conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he rule to that extent and give effect to the section. Moreover, in view of the recent unreported decision of the Bombay High Court pronounced on 27-9-1977 in the case of CIT v. Smt. Godavari Devi Saraf (supra) we have to proceed on the assumption that as held by the Calcutta High Court in 107 ITR 919 (sic) and Madras High Court in its unreported decision in W.P. No. 440 of 1977, sub-rule 19A(3) is non est, and 2. Rule 19A(3) is repugnant to section 80J and therefore the total value of the assessee s assets of the new industrial undertakings should be taken as capital employed for the purpose of computing relief under section 80J without deducting any sum by way of liabilities. (2) Surtax liability is not deductible in computing the income from the business under section 28 and/or sections 29 to 43A including section 37 because: (i) it is the Government s share of the profit after it is earned and is by way of application or appropriation of such profit; and (ii) its deduction is prohibited by section 40(a)( ii) of the Income-tax Act. (3) The issue regarding the assessee s increased claim for development rebate on the ground that it is a priority indus ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
