1977 (11) TMI 19 - HC - Income Tax

Summary

Issues Involved:
1. Interpretation of Rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.
2. Whether the cost of assets that did not produce any income should be considered under Rule 2 of the Second Schedule.

Detailed Analysis:

Interpretation of Rule 2 of the Second Schedule:
The primary issue concerns the interpretation of Rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The court was tasked with determining whether the cost of assets that did not produce any income should be considered under Rule 2. The relevant statutory framework includes Section 4 of the Act, which imposes surtax on "chargeable profits" exceeding the "statutory deduction." The definitions of "chargeable profits" and "statutory deduction" are provided under Sections 2(5) and 2(8) respectively.

Rule 1 of the First Schedule specifies that certain types of income, including dividends from Indian companies (Clause viii), should be excluded from chargeable profits. Rule 2 of the Second Schedule mandates that the value of assets producing such excluded income should be deducted from the statutory deduction. However, the interpretation of whether this rule applies to assets that did not produce any income in a given year was in question.

Consideration of Assets Not Producing Income:
The court examined the legislative intent behind Rule 2 of the Second Schedule. It was argued that the rule's wording suggests that the statutory deduction should be reduced by the value of assets capable of producing income mentioned in Clauses (iii), (vi), and (viii) of Rule 1 of the First Schedule, regardless of whether such income was actually produced. The revenue contended that the rule's natural, literal, and grammatical meaning should be applied, emphasizing the words "is required to be excluded" in Rule 2.

Conversely, the assessee argued that the rule should be read in conjunction with Column 8(2)(a) in Form No. 1, Part III, which indicates that the value of such assets should only be deducted when the income from them is included in chargeable profits. The court noted that rules and statutory provisions should harmonize and that a rule conflicting with the statute cannot override the statute.

Judicial Reasoning and Conclusion:
The court referred to principles of statutory interpretation, emphasizing the need to consider the general intent, purpose, and scope of the Act. It cited several Supreme Court decisions supporting the view that provisions should be construed in a manner consistent with the Act's overall objective. The court found that interpreting Rule 2 literally would lead to unjust results, contrary to the Act's reasonable and fair approach.

Ultimately, the court held that Rule 2 of the Second Schedule should only apply when there is income of the kind mentioned in Clauses (iii), (vi), and (viii) of Rule 1 of the First Schedule. Therefore, if no such income is present in a particular assessment year, the value of the corresponding assets should not be deducted from the statutory deduction. This interpretation aligns with Column 8(2)(a) in Form No. 1 and the Act's general purpose.

Judgment:
The court concluded that the assessee, having no income falling under Clause (viii) of Rule 1 of the First Schedule, should not have the value of such assets deducted from the statutory deduction. The Tribunal's decision was affirmed, and the question was answered in favor of the assessee and against the revenue. The parties were directed to bear their respective costs due to the complexity and novelty of the issue.