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Commissioner of Income Tax v/s Stanes Tyre and Rubber Products Limited

    TC No. 973 to 977 of 1984, REF No. 869 to 873 of 1984
    Decided On, 18 July 1996
    At, High Court of Judicature at Madras
    By, THE HONOURABLE MR. JUSTICE K. A. THANIKKACHALAM AND THE HONOURABLE MR. JUSTICE N. V. BALASUBRAMANIAN
   


Judgment Text
K. A. THANIKKACHALAM J.


At the instance of the Department, the Tribunal referred the following common question of law for the assessment years 1975-76 to 1979-80, for the opinion of this court under section 256(1) of the Income-tax Act, 1961, read with section 18 of the Companies (Profits) Surtax Act, 1964

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that while computing the chargeable profits for purposes of surtax assessment, the deductions contemplated in clauses (viii) and (ix) of rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, should be allowed at their gross amounts?" *


The assessee is a company in which the public are substantially interested and the assessment years involved are 1975-76 to 1979-80 for which the respective financial years are the accounting years. The point for consideration relates to adjustment of dividends and royalty for the purpose of computing the chargeable profits in terms of rule 1(viii) and (ix) of the First Schedule to the Companies (Profits) Surtax Act, 1964. The rule provides for adjustment of income by way of dividends and income by way of royalties. A plain reading of the rule gives the impression that the income contemplated in the aforesaid rule refers to gross and not net income. This is the view of the Kerala, Punjab and Haryana and Himachal Pradesh High Courts. However, the Tribunal found that the Supreme Court has granted special leave to the Department to appeal against the judgment, dated June 21, 1979, of the Karnataka High Court in I. T. R. C. No. 2 of 1976, whereby the High Court following the decision of the Supreme Court in the case of Cloth Traders (P.) Ltd. v. Addl. CIT 1979 AIR(SC) 1691, 1979 (3) SCR 984, 1979 (3) SCC 538, 1979 (118) ITR 243, 1979 (10) CTR 393, 1979 (1) TAXMAN 335, 1979 TaxLR 1170, 1977 SCC(Tax) 246, 1979 (10) CTR(SC) 393, 1979 (10) CTR(S) 393 answered in favour of the assessee-company the question whether for the purpose of assessment under the Companies (Profits) Surtax Act, 1964, the assessee was entitled to deduction under rule 1(viii) of the First Schedule of the full amount of dividend or only the lesser amount (vide CIT v. Consolidated Coffee Co. Ltd. (See [1983] 142 ITR(St) 5) S. L. P. Civil No. 10350 of 1980, decided on April 15, 1983)While finalising the assessment, the Income-tax Officer has adjusted only the net income assessed under sections 80M and 80MM of the Income-tax Act, 1961, as against the gross amounts claimed by the assessee


On appeal, the Commissioner of Income-tax (Appeals) accepted the plea of the assessee that only the gross income by way of dividends and royalties should be adjusted and not the net income as taken by the Income-tax Officer. On further appeal by the Revenue, the Tribunal upheld the decision of the Commissioner of Income-tax (Appeals)


In so far as the first part of the question relating to deduction claimed under rule 1(viii) of the First Schedule to the Companies (Profits) Surtax Act, 1964, is concerned, the assessee claimed that the gross dividend income received should be allowed as deduction and not the net income after deducting the expenditure. A similar question came up for consideration before the Calcutta High Court in CIT v. Hindustan Gum and Chemicals Ltd. 1990 (182) ITR 396 wherein the Calcutta High Court, by following the decision of the Supreme Court in the case of Distributors (Baroda) Pvt. Ltd. v. Union of India 1985 AIR(SC) 1585, 1985 (S1) SCR 778, 1986 (1) SCC 43, 1985 (1) SCALE 1216, 1985 (2) CompLJ 389, 1985 (155) ITR 120, 1986 (1) UJ 86, 1985 (47) CTR 349, 1985 (22) TAXMAN 49, 1986 SCC(Tax) 159, 120 SCC(p) 46, 1985 (47) CTR(SC) 349 held that the assessee deriving dividend income from another Indian company is not entitled to exclusion of the gross dividend income, but only the net dividend after the deduction of the amount allowed under section 80M of the Act


A similar view was taken by the Kerala High Court in the case of CIT v. Kil Kotagiri Tea and Coffee Estates Ltd. 1991 (191) ITR 283, 1992 (62) TAXMAN 221 by the Karnataka High Court in CIT v. T. T. Pvt. Ltd. 1992 (195) ITR 614, 1991 (100) CTR 183, 1992 (60) TAXMAN 383 by the Delhi High Court in Trade Links P. Ltd. v. CIT 1993 (200) ITR 575, 1993 (110) CTR 81, 1993 (67) TAXMAN 398 by the Andhra Pradesh High Court in CIT v. Vazir Sultan Tobacco Co. Ltd. 1995 (212) ITR 624, 1995 (126) CTR 387 by the Allahabad High Court in CIT v. R.B. Multanimal Modi and Sons 1991 (189) ITR 730 the Gujarat High Court in Commr. of Surtax v. Atul Products Ltd. 1994 (208) ITR 515, 1994 (119) CTR 448, 1995 (83) TAXMAN 88 and by the Madras High Court in CIT v. T. Stanes and Co. Ltd. 1995 (216) ITR 127 wherein the Madras High Court followed the earlier decision of its own in T. C. Nos. 136 and 137 of 1979, judgment dated June 19, 1986 (Virudhunagar Textile Mills Ltd.). A similar view was also taken by this court in T. C. No. 1518 of 1984, judgment dated April 22, 1996. In all these decisions rendered by various High Courts, they have followed the judgment of the Supreme Court in Distributors (Baroda) Pvt. Ltd. v. Union of India 1985 AIR(SC) 1585, 1985 (S1) SCR 778, 1986 (1) SCC 43, 1985 (1) SCALE 1216, 1985 (2) CompLJ 389, 1985 (155) ITR 120, 1986 (1) UJ 86, 1985 (47) CTR 349, 1985 (22) TAXMAN 49, 1986 SCC(Tax) 159, 120 SCC(p) 46, 1985 (47) CTR(SC) 349 In view of the abovesaid uniform view taken by the various High Courts and the Supreme Court, we hold that the Tribunal was not correct in coming to the conclusion that for the purpose of surtax assessment the deduction contemplated in clause (viii) of rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964


The Tribunal, while deciding this issue, held that the gross royalty income received by the assessee from the Government should be allowed as deduction, while computing the chargeable profits for the purpose of surtax assessment. Learned standing counsel appearing for the Department submitted that in view of the Explanation to rule 1 of the First Schedule to the Companies (Profits) Surtax Act, which came into effect from April 1, 1981, which is clarificatory in nature, according to the judgment of the Supreme Court in Distributors (Baroda) Pvt. Ltd. 1985 AIR(SC) 1585, 1985 (S1) SCR 778, 1986 (1) SCC 43, 1985 (1) SCALE 1216, 1985 (2) CompLJ 389, 1985 (155) ITR 120, 1986 (1) UJ 86, 1985 (47) CTR 349, 1985 (22) TAXMAN 49, 1986 SCC(Tax) 159, 120 SCC(p) 46, 1985 (47) CTR(SC) 349 the Explanation is applicable to the earlier assessment years, including the assessment years under consideration and, accordingly, the assessee is entitled to deduction of the net royalty income received from the Government while computing the chargeable profits for the purpose of surtax assessment. This Explanation was introduced under the Companies (Profits) Surtax Act, 1964 1985 AIR(SC) 1585, 1985 (S1) SCR 778, 1986 (1) SCC 43, 1985 (1) SCALE 1216, 1985 (2) CompLJ 389, 1985 (155) ITR 120, 1986 (1) UJ 86, 1985 (47) CTR 349, 1985 (22) TAXMAN 49, 1986 SCC(Tax) 159, 120 SCC(p) 46, 1985 (47) CTR(SC) 349 the Board's circular to the effect that the Explanation brought into the Companies (Profits) Surtax Act, rule 1, would be applicable only from the assessment year 1981-82, was not brought to the notice of the Supreme Court. Therefore, according to learned counsel, the abovesaid Explanation would be applicable only from the assessment year 1981-82 onwards. So also, learned counsel submitted that the Bombay High Court, while rendering its decision in CIT v. Banque Nationale De Paris 1992 (194) ITR 167, 1991 (91) CTR 163, 1991 (105) TAXATION 140 which had the occasion to consider clause (x) of rule 1 of the Companies (Profits) Surtax Act, 1964, held that only the net income received by way of interest or fees received for any technical service alone should be taken into consideration. According to learned counsel, clause (x) is pari materia with clause (ix) of rule 1 of the First Schedule to the Companies (Profits) Surtax Act. In the abovesaid decision also learned counsel submitted that the circular issued by the Central Board of Direct Taxes, as stated above, was not considered. Therefore, according to learned counsel for the assessee, on a plain reading of clause (ix) of rule 1 of the Companies (Profits) Surtax Act, while computing the chargeable profits, only the gross royalty received by the assessee from the Government should be taken into consideration and not the net royalty amount. In order to support this line of argument, learned counsel appearing for the assessee, relied upon the decision of the Madhya Pradesh High Court in CIT v. Gwalior Rayon Silk Manufacturing (Weaving) Co. Ltd. 1984 (146) ITR 178, 1983 (37) CTR 245, 1984 (17) TAXMAN 68, 1983 (37) CTR(MP) 245 wherein the Madhya Pradesh High Court held that the Explanation to rule 1(viii) of Schedule I to the Companies (Profits) Surtax Act, 1964, has not been given any retrospective effect, and so, it will have application only for the assessment year 1981-82 and subsequent years. After the coming into force of the Explanation, the deduction under clause (viii) of rule 1, for computing chargeable profits would be of the net income received from dividends. As the Explanation has no application to the assessment year 1968-69, the gross income from dividends has to be deducted in computing the chargeable profits for that year. While rendering this decision, the Madhya Pradesh High Court followed the decision of the Supreme Court in Cloth Traders (P.) Ltd. v. Addl. CIT 1979 AIR(SC) 1691, 1979 (3) SCR 984, 1979 (3) SCC 538, 1979 (118) ITR 243, 1979 (10) CTR 393, 1979 (1) TAXMAN 335, 1979 TaxLR 1170, 1977 SCC(Tax) 246, 1979 (10) CTR(SC) 393, 1979 (10) CTR(S) 393. This decision was reversed by the Supreme Court in Distributors (Baroda) Pvt. Ltd.'s case 1985 AIR(SC) 1585, 1985 (S1) SCR 778, 1986 (1) SCC 43, 1985 (1) SCALE 1216, 1985 (2) CompLJ 389, 1985 (155) ITR 120, 1986 (1) UJ 86, 1985 (47) CTR 349, 1985 (22) TAXMAN 49, 1986 SCC(Tax) 159, 120 SCC(p) 46, 1985 (47) CTR(SC) 349. Further, this decision is concerned with clause (viii) of rule 1 and not with regard to clause (ix) of rule 1While considering the Explanation to rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, the Andhra Pradesh High Court in CIT v. Andhra Bank Ltd. 1990 (186) ITR 192, 1990 (50) TAXMAN 15 held that the Explanation is only clarificatory or declaratory in nature, declaring the law, which was already in existence, and, therefore, the Explanation would be applicable to the earlier assessment years also, even though it came into effect from April 1, 1981. This amendment was brought to the Companies (Profits) Surtax Act, 1964, rule 1, in line with section 80AA, which was brought by an Amending Act to the Income-tax Act, 1961. A similar view was taken by the Calcutta High Court in the case of CIT v. Hindustan Gum and Chemicals Ltd. 1990 (182) ITR 396 by the Karnataka High Court in CIT v. T. T. Pvt. Ltd. Ltd. 1992 (195) ITR 614, 1991 (100) CTR 183, 1992 (60) TAXMAN 383 by the Delhi High Court in Trade Links P. Ltd. v. CIT 1993 (200) ITR 575, 1993 (110) CTR 81, 1993 (67) TAXMAN 398 and Commr. of Surtax v. Modi Industries Ltd. (No. 2) 1993 (200) ITR 325, 1992 (105) CTR 132, 1992 (65) TAXMAN 557, 105 CTR(Del) 132 Again by the Andhra Pradesh High Court in CIT v. Vazir Sultan Tobacco Co. Ltd. 1995 (212) ITR 624, 1995 (126) CTR 387. So also, the Bombay High Court in CIT v. Banque Nationale De Paris 1992 (194) ITR 167, 1991 (91) CTR 163, 1991 (105) TAXATION 140 while considering clause (x) of rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964 1985 AIR(SC) 1585, 1985 (S1) SCR 778, 1986 (1) SCC 43, 1985 (1) SCALE 1216, 1985 (2) CompLJ 389, 1985 (155) ITR 120, 1986 (1) UJ 86, 1985 (47) CTR 349, 1985 (22) TAXMAN 49, 1986 SCC(Tax) 159, 120 SCC(p) 46, 1985 (47) CTR(SC) 349 In view of the various decisions cited supra rendered by various High Courts wherein it was held that the Explanation brought to rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, is clarificatory in nature, and therefore it is applicable for the earlier assessment years also, we cannot ac

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cept the argument advanced by learned counsel appearing for the assessee that while computing the chargeable profits, only the gross royalty income should be taken into consideration in view of the decision of the Madhya Pradesh High Court in CIT v. Gwalior Rayon Silk Manufacturing (Weaving) Co. Ltd. 1984 (146) ITR 178, 1983 (37) CTR 245, 1984 (17) TAXMAN 68, 1983 (37) CTR(MP) 245 wherein the Madhya Pradesh High Court followed the decision of the Supreme Court in the case of Cloth Traders (P.) Ltd. v. Addl. CIT 1979 AIR(SC) 1691, 1979 (3) SCR 984, 1979 (3) SCC 538, 1979 (118) ITR 243, 1979 (10) CTR 393, 1979 (1) TAXMAN 335, 1979 TaxLR 1170, 1977 SCC(Tax) 246, 1979 (10) CTR(SC) 393, 1979 (10) CTR(S) 393 which decision was reversed by the Supreme Court in the case of Distributors (Baroda) Pvt. Ltd. 1985 AIR(SC) 1585, 1985 (S1) SCR 778, 1986 (1) SCC 43, 1985 (1) SCALE 1216, 1985 (2) CompLJ 389, 1985 (155) ITR 120, 1986 (1) UJ 86, 1985 (47) CTR 349, 1985 (22) TAXMAN 49, 1986 SCC(Tax) 159, 120 SCC(p) 46, 1985 (47) CTR(SC) 349. In view of the foregoing discussion, we are of the opinion that the Tribunal was not correct in holding that while computing the chargeable profits, the gross royalty income should be deducted. In that view of the matter, we answer the second part of the question referred to us in the negative and in favour of the Department. No costs.
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