2002 (8) TMI 73 - HC - Income Tax

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that Rs. 4,55,000 being the cost of shares from which the assessee did not derive any income during the relevant accounting period was to be excluded for determining the assessee s capital for the purposes of surtax under rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964? - we are of the opinion that the decision of the learned Tribunal is correct. - This reference is answered in the affirmative, i.e., in favour of the Revenue and against the assessee.

Summary

Issues:
Interpretation of rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 regarding exclusion of asset value for determining capital.

Analysis:
The judgment of the High Court of Delhi pertained to a reference under the Companies (Profits) Surtax Act, 1964, and the Income-tax Act, 1961, concerning the exclusion of the cost of shares from the capital of an assessee where no income was derived during the relevant period. The dispute revolved around the interpretation of rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, which deals with the exclusion of asset values from capital if income is not included in chargeable profits. The Tribunal held that the value of shares amounting to Rs. 4,55,000 should be excluded from the calculation of capital based on the interpretation of the rule.

The Tribunal referenced differing views of the Karnataka and Madras High Courts on the interpretation of rule 2. The Tribunal emphasized the legislative intent behind the Companies (Profits) Surtax Act, 1964, to levy additional tax on companies earning larger profits, acting as an instrument of social engineering. It highlighted the exclusion of certain incomes from chargeable profits under rule 1 of the First Schedule and the corresponding exclusion of asset costs under rule 2 of the Second Schedule.

The judgment discussed the interpretations of rule 2 by different High Courts, including the Karnataka and Madras High Courts. The Karnataka High Court's view, as expressed in CIT v. United Breweries Ltd., was that the application of rule 2 is not dependent on the actual receipt of income. In contrast, the Madras High Court, in Addl. CIT v. Madras Motor and General Insurance Co. Ltd., held that rule 2 is attracted only when there is income under specific clauses of rule 1. The High Court preferred the Karnataka High Court's interpretation, emphasizing that the literal meaning of a taxing statute must be upheld.

The High Court rejected the equitable considerations in the Madras High Court's opinion and stressed that the literal interpretation of rule 2 is essential. It concluded that the rule applies irrespective of whether income was derived from the assets, focusing on the assets' capability to generate income. Therefore, the High Court upheld the Tribunal's decision to exclude the value of shares from the assessee's capital. The reference was answered in favor of the Revenue and against the assessee, affirming the correctness of the Tribunal's decision.