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TMI Blog1994 (2) TMI 128X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 73,000. For the purposes of computing the capital base under the Companies (Profits) Surtax Act, the assessee took into account the said sum of Rs. 73,000. In this regard the assessee referred to and relied upon the order of the ITAT Cochin Bench in the case of Peermedu Tea Co. Ltd. [S.T. Appeal Nos. 4 5 (Coch.) of 1981, dated 25-3-1985] 3. The Assessing Officer rejected the said contention relying on the order of the ITAT Madras Bench--A in the case of Manjushree Plantations Ltd. [ST Appeal No. 34 (Mad.) of 1979 and C.O. No. 158 (Mad.) of 1979, dated 31-7-1980]. 4. This issue was one of the subject matters of appeal filed by the assessee before the CIT(A). Besides reiterating the arguments that had earlier been advanced, unsuccessfully, before the Assessing Officer, the assessee also advanced before the CIT(A) an alternative contention, namely, that if the reserve in question was not eligible to be included in the capital base of the company, then under Rule 2(ii) of the Second Schedule of the Companies (Profits) Surtax Act, the reserve in question must be deducted from the cost of investment the income from which is excluded from the chargeable profits of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is that development allowance reserve is not mentioned in Rule 1(ii), and consequently there is no question of bringing it under the pale of the said Rule. We, therefore, reject this argument. 10. The question that then arises for consideration is whether development allowance reserve could be brought under the pale of Rule 1(iii) on the ground that it is subsumed under the term 'Other reserves' occurring in the said Rule. This naturally entails the consideration of the question whether development allowance reserve is a reserve properly so called. Here two aspects are noteworthy. First, as we see it, being of the same genre as development rebate reserve and investment allowance reserve, development allowance reserve also is a reserve simpliciter. It will have to be taken into reckoning for computing the capital base of the assessee. 11. Secondly, the aforesaid reserve also satisfies the tests laid down by the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559. In the said case the Supreme Court enunciated the following principles : Provision Provision is a retention or appropriation of a sum designed to meet depreciation, renewals or dim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The situation here is quite the opposite of what happens when dividend is declared and paid. Declaration and payment of dividend, in a sense, involves release of the assets by the company to the shareholders; whereas a reserve has precisely the opposite effect, namely retention of the asset as capital of the company. It may be noted with interest in this regard that section 33A(3)(ii), which stipulates creation of development allowance reserve, goes on to stipulate further that during a period of eight years next following the previous year in which the reserve was created the amount credited to the reserve should not, inter alia, be used for distribution by way of dividend or profits. This statutory stipulation, as we see it, has had its genesis in the aforesaid distinction between creation of a reserve on the one hand, and on the other the declaration and payment of dividend. It should, therefore, follow that development allowance reserve is a reserve properly so called and will, on that basis, enter the capital base of the company through Rule 1(iii) route. 13. Shri Raghavan, the learned Departmental Representative, however, contends that if development allowance reserve i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mplates reduction of the capital base in the stipulated manner. It is, inter alia, provided that in cases where inter-corporate dividends are excluded from the total income by virtue of the provisions of Rule 1(viii) of the First Schedule, the cost to the assessee of the shares as exceeds aggregate of : (i) any moneys borrowed and remaining outstanding on the first date of the previous year; and (ii) the amount of any fund, any surplus and any such reserve as is not to be taken into account in computing the capital base of the company under Rule 1 of the Second Schedule, shall be deducted from the capital base as computed under Rule 1. 17. The assessee's case was first that the surplus in the P L A/c (Rs. 63,549) must be deducted from the cost of the shares because of the clear provisions of Rule 2(ii). Secondly, provision for taxation (Rs. 47,72,887) too must be deducted from the cost of the shares in question, because provision for taxation answers the description of 'any fund' occurring in Rule 2(ii). Reliance was placed in this regard on the Calcutta case of Duncan Brothers Co. Ltd. v. CIT [1978] 111 ITR 885. Since the cost to the assessee of the shares in questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtax Act, 1964, levies an additional tax on the total income of a company in the manner stipulated by the Act. Surtax is levied basically on the excess of the chargeable profits over the statutory deduction. 25. The First Schedule to the Act contains the Rules for computing the chargeable profits. Briefly stated, chargeable profits are computed by taking as the starting point the total income computed under the Income-tax Act and by adjusting it in the manner stipulated in the Schedule. Of relevance to the issue on hand is Rule 1(viii), which, in terms, stipulates that for purposes of computing the chargeable profits, inter-corporate dividends shall be excluded from the assessee's total income as computed under the Income-tax Act for the assessment year in question. 26. The Second Schedule contains Rules for computing the capital base of the company. Broadly stated, under the said Schedule, the capital base is more or less equal to what in corporate accounting phraseology is known as "shareholders' funds", subject to the stipulated adjustments. 27. Once the capital base is computed, the determination of 'statutory deduction' is merely an arithmetical exercise, because, by def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce; (ii) (a) interest derived from any security of the Central Government issued or declared to be tax-free; (b) interest derived from any security of a State Government issued income-tax free, the income-tax wherein is payable by the State Government; and (iii) inter-corporate dividends. Since the aforesaid items of income are left out of reckoning for the purposes of computing chargeable profits of the company, and since the capital base of the company is a function of various factors, including the income earned by the company, Parliament has stipulated that the capital base as computed under Rule 1 of the Second Schedule shall be correspondingly reduced by the cost to the assessee of the assets which yield the aforesaid three items of excluded income. It would at once be clear that the reduction in the size of the capital base entails a pro tanto increase in the surtax payable by the company. 33. Parliament has not allowed the matter to rest there. It has introduced a further sophistication in Rule 2. As already pointed out, (a) borrowed capital in its entirety and (b) three specified items viz. Item Nos. (5), (6) (7) figuring under the heading 'Reserves and Surplus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught to be made here on behalf of the assessee is that provision for taxation being a provision simpliciter and not a reserve will not enter the computation of capital base under Rule 1. Even so, in its character as a fund, it will be available under Rule 2 for set off against the cost to the assessee of the assets which yield income which are excluded from the chargeable profits under Rule 1 of the First Schedule to the Companies (Profits) Surtax Act. 36. We are unable to accept the said arguments. 37. Ex visceribus actus is one of the well-known rules of construction. The rationale behind this rule is that it is the most natural and genuine exposition of a statute to construct one part of a statute by another part of the same statute "for that best expresseth the meaning of the makers...."That is to say, the Act has to be read as a whole. As observed by the Gujarat High Court in CIT v. R.M. Amin [1971] 82 ITR 194 : "When the court is called upon to construe the terms any provision found in a statute, the court should not confine its attention only to the particular provision which falls for consideration but the court should also consider other parts of the statute which th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterpretation of the statutory provisions seeks "to promote general legislative purpose" by breaking the stranglehold of the dictionary. Re-emphasising the importance of purposive approach, Lord Diplock in Reg. v. Nat. Ins. Commr. [1972] AC 944 observed : "Meticulous linguistic analysis of words and phrases used in different contexts in particular sections of the Act should be subordinate to this purposive approach. It should not distract your Lordships from it." 38. As we seek it, if the provisions of Rule 2(ii) are interpreted in accordance with the aforesaid canons of construction, the terms "any surplus", "any fund" and "any such reserve" occurring therein can only refer to the three items, namely item Nos. (5), (6) and (7) under the heading "Reserves and Surplus" in the form of Balance-sheet in Part I of Schedule VI of the Companies Act, 1956, which have been specifically excluded from the capital base by the clarificatory Explanation to Rule 1. 39. Any other mode of construction of Rule 2(ii) would result in consequences not contemplated by Parliament. Provision for taxation is excluded from the capital base. If the arguments of the assessee on this issue are accepted, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 11,55,929 (Rs. 62,34,000 minus Rs. 50,78,071). Such a heavy reduction in the capital base will naturally entail a pro tanto increase in the surtax payable by the assessee. If the assessee's contentions were to be accepted, the cost of the shares, namely Rs. 50,78,071 (as assumed by us), will have to be first reduced by provision for taxation of Rs. 47,72,887 leaving a balance of Rs. 3,05,184, which alone would go to reduce the capital base. In that event the net capital base of the assessee would be Rs. 59,28,816. That, in the said process the provision for taxation has entered the capital base through the backdoor as it were, can be demonstrated by the following working : Capital base under Rule 1 : Rs. 62,34,000 Add: Provision for taxation : Rs. 47,72,887 ------------------------------- Rs. 110,06,887 Ded: Cost of shares : Rs. 50,78,071 ------------------------------- Net capital base Rs. 59,28,816 ------------------------------- As we see it, the arguments advanced on behalf of the assessee destroys the very basic scheme of the Surtax Act. We have, therefore, no hesitation in rejecting them as unsound. 41. There is yet another point which is noteworthy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 1964-65. Thereafter, the Department moved the Tribunal, which, agreeing with the assessee's counsel, held that the proposed dividend was a surplus and had to be deducted from the cost of investment in shares and it was only the balance which was to be deducted from the capital computation as laid down under Rule 2(ii) of the C.P.S.T. Act. Thereupon, the matter reached the High Court by way of reference, which held as follows : "The ordinary meaning of the expression 'surplus' is what remains after meeting the requirements. If, therefore, one goes by the ordinary meaning of the expression 'surplus', then in the context of the reality of a situation, where a dividend has already been proposed by the directors, the amount proposed as dividend cannot be considered to remain as a surplus with the company for any length of time to be taken into consideration. This view is corroborated by the form of the balance-sheet in Sch. VI to the Companies Act, 1956, which under the head 'Reserves and Surplus' states as follows : '(5) Surplus, i.e., balance in profit and loss account after providing for proposed allocation, namely, dividend, bonus or reserves.' Therefore, the surplus i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utious enough to distinguish the earlier case on the lines indicated above. 46. In view of the foregoing, therefore, with respect, we are unable to follow the Calcutta case of Duncan Brothers Co. Ltd.. Accordingly, we hold that provision for taxation cannot be deducted from the cost of investment under Rule 2(ii). 47. That leaves for consideration whether surplus, that is balance in the Profit Loss account, after providing for proposed allocations, namely, dividend, bonus or reserves, is available for being set off against the cost of the shares in question. Here, as pointed out earlier, the term "any surplus" occurring in Rule 2(ii) can only refer to item No. (5) under the heading 'Reserves and Surplus' of the form of balance-sheet given in Schedule VI of the Companies Act, 1956, which has in terms been excluded from the capital computation by the clarificatory Explanation to Rule 1. We, therefore, hold that the assessee is entitled to have the sum of Rs. 63,549 being the surplus in P L account set off against the cost of shares in question Rs. 5,78,071. The balance of the cost, namely Rs. 5,14,612 (Rs. 5,78,071 minus Rs. 63,459) would go to reduce the capital base of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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