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1975 Supreme(Cal) 202
High Court Of Calcutta
Samarendra Chandra Deb, Dipak Kumar Sen
BRAITHWAITE AND CO.(INDIA) LTD. - Appellant
Versus
COMMISSIONER OF INCOME-TAX - Respondent
Income-Tax Reference 44 Of 1972
Decided On : 07/18/1975
AJIT SEN GUPTA, BALAI CHANDRA PAUL, K.ROY, R.N.DUTTA
The reserve for surtax was in the nature of a provision for taxation and could not be included in computing the capital base. The term loan was repayable during a period of not less than 7 years and qualified to be included in the capital base.
Headnote:
COMPANIES (PROFITS) SURTAX ACT, 1964 - S. 2(5), 2(8), 4, 6, 9(1)(v), 10 - INCOME-TAX ACT, 1961 - S. 256(1) - COMPANIES ACT, 1956 - S. 87, SCHEDULE I, REGULATION 87, SCHEDULE VI, PART I, PART III, RULE 7 - GENERAL CLAUSES ACT - S. 9 - TRANSFER OF PROPERTY ACT - S. 110 - Whether the assessee company was right in including a reserve for surtax in its capital base and whether the Tribunal was right in holding that only the last instalment of a term loan qualified for inclusion in the capital base - Held, yes - The reserve for surtax was in the nature of a provision for taxation and could not be included in computing the capital base - The term loan was repayable during a period of not less than 7 years and qualified to be included in the capital base.
Fact of the Case:
The assessee company, a public limited company, included a reserve for surtax in its capital base and also included a proportionate amount of a term loan claiming statutory percentages of the said amounts as deductions in the calculation of chargeable profits. The Income-tax Officer treated the reserve for surtax as a provision for taxation and held that the same was not includible in the capital base. The Appellate Assistant Commissioner upheld the order of the Income-tax Officer. The Tribunal accepted the resolution which was passed by the assessee on the 18th June, 1964, which had a retrospective effect. But the Tribunal also noted that, (a) the meeting took place on the 18th June, 1964, when the Act had come into force and the directors of the assessee had known of it, (b) the Super Profits Tax Act, 1963, was in force, in any event, on the 1st January, 1964, and provision would have to be made for the same even if the other Act was not promulgated. The Tribunal held that the provision was for a known liability and not a reserve though shown under the heading "reserves and Surplus" in the balance-sheet and upheld the orders of the Income-tax Officer and the Appellate Assistant Commissioner. In the appeal preferred by the revenue against the'decision of the Appellate Assistant Commissioner in respect of the said term loan, the Tribunal held that only the last instalment of Rs. 16,00,000 was to he paid during a period of not less than seven years. The Tribunal held that the first four instalments aggregating Rs, 34,00,000 were provided for in the agreement to be repaid during a period of less than seven years and did not satisfy the requirement of Rule l (v) of the Second Schedule. The Tribunal held that only the last instalment satisfied such requirement and could be included for computation of the capital base.
Finding of the Court:
1. The reserve for surtax was in the nature of a provision for taxation and could not be included in computing the capital base. 2. The term loan was repayable during a period of not less than 7 years and qualified to be included in the capital base.
Issues: 1. Whether the assessee company was right in including a reserve for surtax in its capital base? 2. Whether the Tribunal was right in holding that only the last instalment of a term loan qualified for inclusion in the capital base?
Ratio Decidendi: 1. The Explanation in Rule 1 to the Second Schedule of the Companies (Profits) Surtax Act, 1964, clearly states that any amount standing to the credit of any account in the books of a company which is in the nature of any item under the head "current Liabilities and Provisions" in the column relating to the liabilities in the form of balance-sheet shall not be recorded as a reserve. The reserve for surtax was in the nature of a provision for taxation and, therefore, could not be included in computing the capital base. 2. The proviso to Sub-rule (v) to Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, specifically speaks of repayment of a loan during a period of not less than seven years. The period of seven years should be calculated from the date of the loan. The term loan was repayable during a period of not less than 7 years and qualified to be included in the capital base.
Final Decision: Question No. 1 is answered in the affirmative, in favour of the revenue and question No. 2 is answered in the negative, in favour of the assessee.
( 1 ) THIS reference arises out of the assessment of M/s. Braith-waite and Co. (India) Ltd. , a public limited company, within the meaning of the Companies Act, 1956, for the assessment year 1965-66. The facts found as appearing from the statement of the case and the annexures thereto are as follows : on the 2nd May, 1964, the Companies (Profits) Surtax Act, 1964, received the assent of the President and came into force while the corresponding earlier Act, namely, the Super Profits Tax Act, 1963, ceased to be in operation. On the 15th May, 1964, the recommendations of the directors for the ensuing annual general meeting of the assessee was finalised. The statement of the chairman of the assessee to the members was recorded as follows:"the profit for the year after providing Rs. 14,19,333 for depreciation and transferring Rs. 7,03,186 to development rebate reserve, amounted to Rs. 1,24,47,705 which shows an increase of approximately Rs. 18 lakhs over the previous year. This result is most encouraging but once again very large sums are required for payment of taxes as, in addition to income and super taxes amounting to Rs. 62,20,706, Rs. 17 lakhs has been provided for payment of surtax, making a total of Rs. 79,20,706 or more than 63% of the profit. It is interesting to note that this provision for payment of surtax is very nearly the same as that for super-tax in the previous year but is, of course, calculated on the increased profit referred to above. "
( 2 ) THE 34th annual general meeting of the assessee was held on the 18th June, 1964, and the recommendations of the directors as contained in the above statement of the chairman were accepted. In the balance-sheet for the year ending 31st December, 1963, Rs. 17,00,000 was shown under the head "reserve and Surplus" as reserve for surtax appropriation during the year.
( 3 ) ON the 1st August, 1964, the assessee entered into an agreement in writing with the National and Grindlays Bank Ltd. , whereunder the assessee obtained a "term loan" of Rs. 50,00,000. The agreement provided for repayment of the said loan in instalments as follows :
. 1. On the 31st day of July, 1967 5,00,000 2. On the 31st day of July, 1968 7,00,000 Rs . 3. On the 31st day of July, 1969 10,00,000 4. On the 31st day of July, 1970 12,00,000 5. On the 31st day of July, 1971 16,00,000
( 4 ) THE agreement also provided that if any default would be made by the assessee in payment of any instalment as above then in such cases the whole of the amount then due and owing to the bank on account of or in relation to the said term loan would at once become due and payable.
( 5 ) AT this stage it will be convenient to consider the scheme of the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as the said Act ). The said Act imposes a charge or tax on the chargeable profits of companies. Chargeable profits have been defined in Section 2 (5) of the said Act as follows :" 'chargeable profits' means the total income of an assessee computed under the Income-tax Act, 1961 (43of 1961), for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule. "
( 6 ) SECTION 4 of the said Act, the charging section, provides as follows:"charge of tax.--Subject to the provisions contained in this Act, there shall be charged on every company for every assessment year commencing on and from the 1st day of April, 1964, a tax (in this Act referred to as the surtax) in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the Third Schedule. "
( 7 ) THEREFORE, under the said Act, surtax is charged on the portion of the chargeable profits as exceeded the "statutory deduction" at the rate or rates specified.
( 8 ) "statutory deduction" has been defined in Section 2 (8) of the said Act as follows :" 'statutory deduction' means an
