2008 (3) TMI 308 - HC - Indian Laws

Surtax - Chargeable profits - Whether Tribunal is right in law in cancelling the order of CIT passed u/s 16 of the Companies (Profits) Surtax Act holding that rule 2 of the Second Schedule to the Act cannot be applied - assessee contend that it has had no income in the return of dividends and, consequently, the provisions of rule 1(viii) of the First Schedule to the Surtax Act would not apply. It followed, therefore, that rule 2 of the Second Schedule pertaining to the reduction in the capital base would also not apply contention of assessee accepted order of tribunal is upheld

Summary

Issues:
1. Interpretation of rule 2 of the Second Schedule under the Companies (Profits) Surtax Act for the assessment year 1980-81.

Analysis:
The case involved a dispute regarding the application of rule 2 of the Second Schedule to the Companies (Profits) Surtax Act for the assessment year 1980-81. The Commissioner of Income-tax contended that the Assessing Officer had not applied rule 2 while computing the capital of the assessee, a public limited company. The Commissioner directed a recalculation to exclude the net cost of shares owned by the assessee from the capital base for computing the standard deduction. The assessee argued that since it had no income from dividends during the relevant previous year, rule 1(viii) of the First Schedule would not apply, and consequently, rule 2 of the Second Schedule should not be applied. The Tribunal referred to a previous decision of the Madras High Court and concluded that as there was no income in the nature of dividends during the relevant year, rule 1(viii) would not apply, thereby negating the need to reduce the capital as required under rule 2. The Tribunal canceled the revision order by the Commissioner, stating that the Assessing Officer was bound by the decision of the jurisdictional High Court.

The Revenue argued that previous decisions of the court supported the stand taken by the Tribunal, citing cases such as CIT v. United India Fire and General Insurance Co. and CIT v. Sri Rama Vilas Service Ltd. The court examined the provisions of the Companies (Profits) Surtax Act and emphasized that chargeable profits, adjusted according to rule 1 of the First Schedule, were subject to statutory deductions. It clarified that rule 2 of the Second Schedule is applicable only when rule 1 of the First Schedule is triggered. Specifically, if there is no income falling under certain clauses of rule 1, rule 2 of the Second Schedule would not be applicable. The court highlighted that under rule 1(viii) of the First Schedule, dividends from shares of specific Indian companies are excluded from chargeable profits, leading to the exclusion of such investments from the capital base under rule 2. The court concluded that the question regarding the application of rule 2 had to be answered in favor of the assessee based on the precedents and interpretation of the relevant provisions of the Surtax Act.