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TMI Blog1977 (12) TMI 144X X X X Extracts X X X X X X X X Extracts X X X X ..... end of the accounting year was, as per actuarial valuation, ₹ 8,06,019. Towards that the assessee made a provision of ₹ 8,00,000. This too its claimed as a deduction. The irrigation department of the State Government was claiming water charges at the rate of ₹ 12.50 per 10,000 c.ft. for the water which was being supplied to the assessee's factory at Shahad, but the assessee was disputing the levy at that rate, contending that it was liable to pay only at the rate of ₹ 2 per 10,000 c. ft. In fact it had filed a Writ Petition in the High Court challenging the right of the Irrigation Department to charge it at a rate in excess of the rate admitted by it and had obtained a stay order against recovery of the disputed levy. It had actually paid as charges for the year under consideration only ₹ 8,370, that being the amount payable at the admitted rate. At the same time, however, it made in its accounts a provision of ₹ 1,96,189 being the balance in accordance with the claim of the Irrigation Department. The assessee claimed in its assessment deduction for this provision too as an admissible expenditure. It also claimed deduction, as a revenue expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he extra charges becomes due and ascertained, it will be allowed as a deduction in the year in which it so becomes due and ascertained'. 6. Regarding the payments for the process and design of the Cyanuric Chloride, the ITO was of the opinion that the expenditure incurred was in connection with the development of new processes for new products and was therefore to be treated only as of capital nature. He also provided due allowance on the same under section 35(1) of the Act. 7. The assessee took up the matter in appeal before the AAC. Pursuing its claim under section 80J, it was contended before that appellate authority that in determining under rule 19A of the Income-tax Rules, 1962, the capital employed in the new industrial undertakings, the ITO should not have deducted the fixed liabilities which had no connection whatever with the new projects. It was further argued that the amounts due from sundry debtors should have been included in the computation of capital as on 1-1-1969, the contention being that the same formed part of the current assets. The validity of the deduction of ₹ 2,14,157 made in the capital computation on account of self-assessment tax payable was als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion Department regarding the point in dispute with the State Government. The AAC was also furnished with a copy of the letter, dated 19-7-1974 received by the assessee from the State Government regarding the water charges as settled. The AAC hence directed the ITO 'to allow water charges on actual payment basis when the payments in respect of disputed water charges are paid by the appellant company'. 10. Before the AAC the assessee also raised the contention that after considering the amount of ₹ 1,52,392 incurred by the assessee for the cost of processes and designs for its production of Cyanuric Chloride as capital expenditure the ITO should have allowed development rebate thereon. The AAC rejected this claim observing thus : "It is understood from the learned representative of the appellant that the processes and designs connected with the development of production of Cyanuric Chloride has not been put to use by the appellant-company. Under section 33 of the Act, the development rebate is admissible in respect of plant if it is wholly used for the purpose of the business carried on by the assessee and if the plant is installed or is put to use. Since the designs co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant additional grounds, it felt that the earlier decision required reconsideration. That Bench hence placed the matter before the President for consideration whether a Special Bench need be constituted for going into the point de novo. 13. At that stage there came a request from the assessee that the question whether rule 19A(3) of the Income-tax Rules, 1962, which mandates deduction of borrowed moneys in computing capital for purposes of section 80J can legally have its full run in that manner, vis-a-vis, section 80J may also be taken up for reconsideration by a Special Bench. In July 1973, the 'C' Bench of the Tribunal in [IT Appeal No. 1654 (Bom.) of 1972-73] in the case of Sri A.T., Bombay, had held that what is prescribed in rule 19A(3) has the effect of whittling down the relief granted by section 80J and the rule conflicting, as thus it is, with the section must be ignored. This decision was however reconsidered by a Special Bench of this Tribunal, consisting of the learned President and two learned members in Emco Transformers Ltd. [IT Appeal No. 2473 (Bom.) of 1973-74], of and that Special Bench by its order, dated 26-9-1974 held that far from there being any conflict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration, and in none of them had the question whether it would be competent for an authority created under a statute to question the vires of a rule made under the self same statute arisen. The same is to be said about also the Bombay High Court's decision in Dhrangadhra Chemical Works Ltd. v. CIT [1975] 101 ITR 491. We have however the Full Bench decision of the Allahabad High Court in J.K. Manufacturers Ltd. v. STO [1970] 26 STC 310, wherein on the ratio of the aforequoted decisions of the Supreme Court it is decided that the question whether a rule framed under the Sales Tax Act is ultra vires or not cannot be entertained by the authorities constituted under that Act. Beg., J. (as he then was), after referring to the aforequoted Supreme Court decisions and some others said : "Although the Supreme Court had not specifically held in any case brought to our notice that an authority created by a statute cannot question the validity of even a rule purporting to be made under the statute, yet, after the pronouncements of the Supreme Court, in the wide terms indicated above, sales tax authorities could not be expected to decide whether a rule, purporting to be made under a statut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State Government under a delegated authority by virtue of section 96(1)(b) of the Act. We do not think that either the Employees State Insurance Court, the Tribunal constituted under the Act or the High Court exercising its appellate jurisdiction is precluded from considering the vires of the rules made under the Act, including rule 17. It cannot validly be argued that the Tribunal is the creature of the rules made under the Act, nor can it validly be contended that the appellate jurisdiction is being conferred on the High Court under any rules under the Act. The validity of the rules, therefore, can, in our opinion, be considered not only by the Employees Insurance Court but also by the High Court in the exercise of its appellate jurisdiction. No authority was brought to our notice, nor we are aware of any, which makes the principle laid down in Venkatraman's case applicable even to a case where the vires of rules made under the Act under which the Tribunals are constituted was challenged." No doubt this decision fully encourages the assessee in its contention that it is well open to us to go into the vires of rule 19A(3) by testing it with reference to section 80J and to st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stray and casual remarks even without which the matter before it stood disposed of by whatever had been stated earlier in that judgment and the same should not hence be taken as a binding decision on the point referred to therein. We have no doubt in our mind that a careful analysis of the facts of the matters dealt with in that decision can in no way support this extreme stand. The assessee in that case was a registered dealer under the UP Sales Tax Act, 1948 and carried on business in hydrogenated oil and washing soap. It also imported and distributed vanaspati as an agent of a company in Indore. It disclosed in the sales tax return filed for the year a gross as well as net turnover of ₹ 1,66,387.03 and paid along with that return ₹ 1,060.30 towards the tax due. In the assessment proceedings the assessee however admitted before the STO that its tax liability was ₹ 10,339.19 and also that in fact it had collected that amount from its purchasers. The assessing authority, on the basis of its best judgment determined the turnover of the assessee at ₹ 58,06,132.30 and determined its tax liability at ₹ 3,62,691.62 under section 3A of the Sales Tax Act. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e findings there given would in no way have afforded the answer to the first contention which alone would dispose of the reference. The Supreme Court first took up the last two contentions and for reasons stated in para 8 of its judgment rejected them. Thereafter it took up for consideration the first, evidently for the reason that by that alone could the appeal arising out of the reference be disposed of. In rejecting that contention and dismissing that reference appeal, the Court gave three reasons : (i) Under section 9(1) of the Sales Tax Act read with rule 41(2) of the Sales Tax Rules, the appeal against the assessment had to be accompanied by proof of payment of the amount of tax admitted to be due and insofar as there was the admission that the tax due was ₹ 10,339.19, by the deposit of ₹ 1,600 which alone had been made in the appeal, the assessee had not complied with the mandatory requirement. In that context, the Court rejected the contention that 'tax admitted' was only the tax admitted in the memorandum of appeal. (ii) The stand taken by the appellant before the Appellate Judge that it was not to be brought within the scope of section 3A and the rate applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pra) that the Supreme Court by the pronouncements in wide terms made in Venkatraman's case and in the others that followed it intended to cover not only the sections of the statute but also the rules framed thereunder. 20. Then arises the question as to what the Tribunal, powerless as it is to pronounce on the vires of the provisions of the statute of which it is the creature and even the rules framed thereunder, is to do in cases where in reality a rule framed by the rule making authority in exercise of the delegated authority vested in it is either in conflict with the relevant provision in the statute, or cribs, cabins whittles or nullifies it. Is the Tribunal to shut its eyes and leave unnoticed a rule framed even in excess of the delegated authority vested in the rule making authority ? We do not think such questions need present any difficulty. What is delegated by section 295 of the Act to the rule making authority is the power to make rules for carrying out the purposes of the Act. It is taking note of this that the Supreme Court in CIT v. Taj Mahal Hotel [1971] 82 ITR 44 made it clear that rules framed under such authority cannot be permitted to take away what is conferre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd for certain purposes, including for purposes of construction, are to be treated as if contained in the Act, does not in any way detract from the position that they continue to be rules subordinate to the Act, as pointed out by the Supreme Court in Chief Inspector of Mines v. Karam Chand Thapar AIR 1961 SC 838 and Kerala State Electricity Board v. Indian Aluminium Co. [1976] 1 SCR 552. It is this that the Bombay High Court also in CIT v. Abdul Hussein Essaji Arsiwalla [1968] 69 ITR 38 made clear when it observed that it is the main statute which will govern the rules made by the rule making powers given under the Act and not vice versa, and that if the interpretation of the provision of the statute is clear, a rule framed under the rule making power given under the statute cannot affect it. In other words, no exercise of the rule-making power can affect or derogate from the full operative effect of the provisions of the statute. In Central Bank of India v. Their Workmen AIR 1960 SC 12 this was made further clear by the Supreme Court when it said that if a rule goes beyond what the section contemplates, the rule must yield to the statute. 21. If this be the legal position, a Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rule from the statute book, and it would still be open to the competent authority to cure its defect by necessary amendment to make it consonant with the parent section and effect. Or with the necessary amendment to the parent section too, the rule can once again be invigorated. Once the defect is cured and it is brought in line with the statute, it becomes effective again. In the former case the declaration erases the provision completely out of the book. In the latter case it is only silenced so long as it utters against the parent statute. That the Tribunal, even as a creature of the statute, has not only the right to do the latter but is even bound to do it is amply made clear by the Supreme Court in Venkatraman's case (supra) when it observed that an authority created by a statute bound to act under the statute would be acting outside the statute if it acts on the basis of a provision that is ultra vires. In other words, it would be the duty of the Tribunal to uphold and act under the statute by ignoring any rule framed in delegated legislation which strikes a contrary or repugnant note to the statute. Besides, when this very issue was raised before the Allahabad High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of deduction contemplated by the section is a percentage of "the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be, computed in the prescribed manner in respect of the previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section referred to as the relevant amount of capital employed during the previous year)." It is the manner of computation of capital thus left by the Parliament to the rule making authority to prescribe that is framed by the latter in rule 19A. If the criticism is that in thus leaving everything to the rule making body without defining the ambit, there has been by the section an excessive delegation far beyond the legal limits referred to and defined by the Supreme Court In re. Delhi Laws Act [1951] SCR 747 the answer must be that it is a challenge offered to the statute itself and for that reason alone beyond our competence to entertain. 25. What is then contended before us in short is-its elaborate details we shall refer to later-that when rule 19A(3) excludes in the computation of 'capital employed' borrowed capital it, by its such prescription of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the capital employed must be out of the money belonging to the assessee and therefore borrowed money, if it is employed as capital in a new industrial undertaking is entitled to a place in the computation of capital. We were told by Shri Dastur in the course of the hearing that a Bench of the Madras High Court too has, in a recent decision not yet reported, following the decision in the case of Century Enka (supra), struck down the rule as ultra vires section 19A. A copy of the said decision was not made available to us at that stage, but we have since seen a copy of the said decision which is the decision of Madras Industrial Linings Ltd. v. ITO [WP No. 446 of 1977]. Since, these decisions are not binding precedents outside the territorial limits of the respective High Courts, it cannot be said that by their reason the rule now stands erased to put us in no further need to go into the question here debated. We hasten to add that by this we are not to be understood that the reasons given by the learned Judges in those two decisions for finding conflict and irreconcilability between the parent section 80J and the subordinate rule 19A should not have any persuasive value and eff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay state that the Madras High Court have also taken a view against the department and while doing so has had occasion to consider and reject a few of the arguments which were advanced before us on behalf of the department. However, both the High Courts, with respect, have not had occasion to deal with all the aspects which were urged before us. Be that as it may, we have decided the merits of the issue having regard to the able assistance received by us from the learned representatives of both sides. 29. The area of the conflict between the section and the rule which the assessee wishes to bring out in the instant case is limited. The scheme of rule 19A(3) is broadly that the capital is determined by deducting from the total amount of the value of the assets the amount of the borrowed moneys or liabilities. According to the assessee there is no scope for deducting the amount of the loans or the liabilities from the value of the assets. This is the stand because according to the assessee, the section requires that we must determine ". . . . .the capital employed in the industrial undertaking. . ." and the stand is that such capital includes the borrowed capital of the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... realises all his assets and pays off all his dues. 33. When it comes, however to the capital of an undertaking, the entrepreneur or his financier does not think in terms of what he himself invests in the undertaking. If the project requires a total outlay, of say ₹ 10 lakhs, the proprietor who may be the promoter, may put in ₹ 6 lakhs and borrow the balance of ₹ 4 lakhs. All the concerned persons understand the capital of the undertaking to be ₹ 10 lakhs, whereas the capital of the proprietor invested in the undertaking would be only ₹ 6 lakhs. 34. The kind of a situation discussed above arises because the industrial undertaking as such is not a person. In modern industrial development, various persons pool together their resources for setting up or acquiring and running, as the case may be, an industrial undertaking. The total outlay in the undertaking is commonly understood by all concerned as its capital. This capital may come in various forms giving different kinds of legal rights to the contributors. This diversity of the sources from which the capital comes in, does not affect the character of the capital employed in the undertaking. This is ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the value of the building is part of the capital of the undertaking. If the building is sold and the proceeds are invested in the undertaking, it is also undisputed that there is capital employed in the undertaking to that extent. If the building is mortgaged and the loan raised consequently is utilised in the undertaking, in the view canvassed by the department it is capital employed in the undertaking only if the moneys are brought into the undertaking as if they are concerned persons, own moneys. If, however, the building is mortgaged and the loan is entered in the books as owing to the creditor, in the view canvassed by the department it is not a part of the capital of the undertaking. It appears to us that in all these different kinds of situations, the extent of resources plonghed into the undertaking are the same. The businessman finds it difficult to recognise that there is a distinction in the amount of capital employed in the undertaking in the last kind of the case on the one hand and the three other kinds of cases on the other hand. 37. We may consider another illustration of a person having a certain amount of resources or capital of his own. Let us say, thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at has to be identified and it is not the capital of any particular person, even if he is the owner, that is employed or invested in the undertaking that is to be ascertained. The source of the capital is immaterial,whereas what is material is the channel in which it is ploughed. If the latter is an industrial undertaking, one does not look further to find out how and from whom it has come. Indeed, from the various illustrations set down earlier, it is manifest that the initial source of the capital may change from time to time. For example, the proprietor may take away a certain part of his original investment and this may necessitate the introduction of an equal amount by way of loan capital. So far as the undertaking is concerned, there is no change. From the above discussion, it is clear that from the limited angle of an understanding of the relevant expression in the world of business and in common parlance, there is no scope for excluding any amount utilised in the undertaking having regard to its source. 40. The Madras High Court has also held that the ordinary meaning of the expression 'capital employed in the industrial undertaking' is the same as stated by us above. 41 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the capital employed in the undertaking, the separate identity of the new undertaking should not be recognised. We put it to the learned departmental representative whether in a given case,where the concerned assessee may have no source of income other than the newly established undertaking and the capital of the assessee exceeded his investment in the undertaking it could be said that the relief under section 80J had to be calculated in relation to the concerned assessee's capital. It is not surprising that we have not received any clear answer. We come back to this that the plain meaning of the language in the section as it may be understood by a businessman or a common man is such that the capital employed in the undertaking has to be determined focusing attention on the undertaking and regardless of its source. 42. The next step or the second angle from which the matter may be examined is from the point of view of accountancy. We are doing this for more than one reason. Firstly, 'capital' is a term used in accountancy. Secondly, it is a term prominently used in the balance sheet which is commonly the basis for determination of the amount of capital as at any particular d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ption and that the relevant amount happens to be the surplus of the assets over the loans shown in the balance sheet that one of the equations understood in accountancy is that capital represents 'the net worth'. As we shall discuss a little later, this does not mean that capital does not have any meaning or sense other than net worth. The hypothetical case stated above is intended to bring out how in respect of the business the total resources which are necessary for its commencement and continuation need not be represented by the personal contribution of the proprietor. The personal contribution is the capital of the proprietor invested in the said business whereas at the same time, the borrowed capital is also invested in the business. The attempt of the accountant is to present the picture in such a way as to give an analysis of the sources of the various kinds of capital employed in the business and this need not mean that in translating the abstract idea of the capital in the concrete form of the accounts what is described as borrowed or loan capital has been excluded from the category of the capital of the business (as distinguished from the capital invested by the propriet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts should have been kept in only one set, the possibility is that attention may be diverted to the source of the investment in each activity and if one of the sources is borrowed or loan capital, the temptation may be to say that the capital employed in the business or the industrial undertaking is reduced to that extent. It is manifest that such an understanding of the accounts is fallacious. If the amount which is to be ascertained is the capital employed in the undertaking, the separate set of accounts and the corresponding balance sheet set apart for this purpose is a surer guideline. The hypothetical case discussed above shows how confusion can be caused because of the practice adopted in accounts of displaying the personal resources of a person as his capital as distinct from the capital employed in an undertaking whatever may be its source. 44. The confusion or the debate in this regard arises perhaps because the word 'capital' has been used in different senses on different occasions to describe somewhat different conceptions. This has been recognised for example in L.C.B. Grower's The Principles of Modern Company Law, where it is stated as below : "...Unhappily 'ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness and the sources from which it is derived (e.g., capital provided by the proprietors,loan capital, retained profits etc.), and on the other, the form in which such capital is employed, i.e., the unexpired expenditure, at the date of the balance sheet, on the various assets by which the total capital fund is represented." (p. 20) In this treatise also there is a recognition of the principle that the capital employed in a business has to be determined regardless of its source. 47. The learned departmental representative relied upon the observations in J.R. Batliboi's Advanced Accounting, 26th Edition (Revised) which are as below : The word 'capital' means : "The capital introduced by a trader in his business is credited to his Capital Account. The amounts withdrawn by him out of his business for his personal use, from time to time, are debited to a separate account called the Drawing Account. As these drawings go to reduce the original capital as brought in the debit balance of the Drawing Account is transferred to the debit of the Capital Account at the time of balancing." (p. 24) While analysing balance-sheet, he says : "Capital is the excess of a t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Madras Industrial Linings Ltd. (supra) has also after considering the matter from the angle of accountancy come to the view which have taken above. 51. All said and done, however, in adjudicating upon the point at issue, we have to interpret the provisions of section 80J(1) in accordance with accepted principles which are relevant in this regard. We have dwelt at length upon the manner in which capital of a person and the capital of a business or an undertaking as the case may be is understood in common parlance by a businessman and by an accountant because, it is well settled that in interpreting the legal provision, the plain meaning of the words used should be the primary guide. Now the learned representative of both sides referred us to the meaning of the word 'capital' as stated in dictionaries like Chambers Twentieth Century Dictionary and the Shorter Oxford English Dictionary and they also referred us to the meaning of the word according to Stroud's Judicial Dictionary and Osporn's Concise Law Dictionary. It is not surprising that in these dictionaries, the meaning stated at various stages is not uniform. This is so because the word 'capital' as noticed in the extract fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsecured creditor. Therefore, the amounts contributed towards the capital of the undertaking by the groups comprising the two kinds of creditors, may be conveniently displayed separately in the balance sheet. Both, however, fall in the common category of borrowed capital. The rights of this category are different from the rights of those who have proprietary interest in the undertaking. This is one of the reasons for showing under different categories the various kinds of resources used in the undertaking depending upon the source of each. Another reason for doing so is that the concerned persons such as the proprietors, the shareholders in the case of a company, the Government officials such as the officers of the Company Law Board, Income-tax Department, etc., can readily get at a general picture of the financial affairs of the undertaking. These and other reasons may require an analysis of the source of the capital employed in an undertaking but they cannot in the process change the character of the total capital employed in the undertaking. As discussed earlier, the plain meaning of the expression 'the capital employed in the industrial undertaking' is a totality of the res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction between the capital employed in a business on the one hand and the capital of the proprietor of the business on the other hand. It is true that the controversy in this matter which related to the levy of excess profits duty in the UK revolved round the question whether the value of a certain chose-in-action in which the proprietor of a business had acquired a right was includible in the computation of the capital of the business as an asset of the business. While holding that it was not an asset of the business, the learned Law Lords have recognised on more than one occasion the distinction between the capital of the business on the one hand and the capital of the proprietor of the business on the other hand. We may extract some of the relevant observations hereafter : "My lords, it is plain on the face of this sub-para (1) that, 'capital employed' means assets employed. For the capital is something which consists of money or consists of assets of various kinds. Then by a slight twist the value of the assets becomes the 'amount' of the capital...." "....My lords I do not think that the words 'capital employed in a trade or business' bear any significant diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a hotel, to which this section applies, there shall... be allowed, in computing the total income of the assessee, a deduction from such profits and gains... of so much of the amount thereof as does not exceed the amount calculated at the rate of 6 per cent per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be,...." 59. One of the arguments advanced by the learned departmental representative is that since the deduction is from the profits of the undertaking which are included in the total income and gross total income of the assessee, the corresponding deduction must be also understood to be from the capital of the assessee employed in the said undertaking . The suggestion is that after all it is the assessee who is the proprietor of the undertaking who gets the benefit of the deduction and the amount of the deduction has also to be in proportion to his capital employed in the undertaking. It is clear, however, that the relief is conferred on a new industrial undertaking rather than on the proprietor of the undertaking. The relief is given in reality to encourage establishment of new industrial undertakings and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cription of the procedure to be adopted in giving the relief. The two aspects operate in different spheres. For example, if the rate to be applied to the capital for determining the amount of relief is varied, there is no need at all to amend or vary the earlier part of the section. Even if the scheme of determining the amount of relief is varied, by laying down for example, that it shall be a certain proportion of the profits of the undertaking, the earlier part of the section need not be amended. The scheme of the other sections like sections 80M and 80L placed in Chapter VI-A also is similar, i.e., the measure of the relief does not have any relationship with the conditions prescribed for qualifying for the relief. 62. It must be stressed, however, that it is not suggested that the provisions of section 80J should be interpreted in a certain manner having regard to the provisions of those sections. The other sections were referred to merely to highlight the point that the measure of relief need not have a relationship with the conditions in which the relief is to be allowed. The learned departmental representative, however, relied upon the provisions of section 80K. The reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l of the industrial undertaking shall be computed in accordance with the method commonly called 'the net worth' method as this is the method prescribed under the relevant rule 19A. The first difficulty about accepting this argument is that it means that the Legislature left in the sphere of uncertainty even the character of what it described as the capital employed in the industrial undertaking. If the prescription under the rule should vary, the character of the capital would also vary. To take an extreme case, if it should be prescribed under the rule that the capital shall be Re. 1, can we say that the capital employed in the industrial undertaking shall be Re. 1? The very fact that the rule making authority has from time to time made amendments to rule 19A making material variations in the computation of the capital even within the board framework the net worth method, shows that such an interpretation frustrates the basic scheme of the provision. Another important point is that the expression used in the section refers to the capital employed not only in the industrial undertaking but also in a ship. In the case of a ship, even the rule making authority has prescribed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pression. The learned representatives of the assessee have advanced further arguments which support the abovementioned view. The attempt is to contrast the use of certain other expressions or devices employed in other legislation. Reference was made to section 7 of the Wealth-tax Act in which the expression used is 'subject to any rules made in this behalf...'. The suggestion is that it is arguable that when the Legislature had used this expression in 1957, it could have as well used the same expression in section 80J which was introduced later instead of the expression 'in the prescribed manner' if the intention was to leave to the rule making authority any scope for varying the meaning of the expression 'the capital employed in the industrial undertaking'. 66. The Madras High Court in the decision in the case of Madras Industrial Linings Ltd. (supra) has specifically considered whether the use of the expression '....in the prescribed manner...' makes any difference and has come to the conclusion that it does not make any difference. 67. It is significant perhaps that the main thrust of the arguments advanced by the learned departmental representatives was not so much to assis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 36,000 for a period of 12 months, the standard deduction was allowable in the sum of ₹ 36,000 for a period of 12 months. The scheme shows that the object was to mop up the bulk of the profits arising from the inflationary conditions prevailing during the period of war. We suggested this to the learned departmental representatives and they have not controverted it. 70. The computation of capital under the Excess Profits Tax Act, has to be made in accordance with the provisions of Schedule II which formed part of the Act. The broad scheme in the first instance, i.e., up to 31-3-1941 was that the total amount of the liabilities was deducted from the total value of the assets. From 1-4-1941 the borrowed capital was not so deducted. There were also other exceptions provided in the rules entered in Schedule II which made a departure from time to time from the abovementioned broad scheme. The point is that even the net worth method was not rigidly followed throughout the seven chargeable accounting periods. 71.The Business Profits Tax Act, 1947, which was an Act to impose a special tax on a certain class of income came into force in April 1947. There was similarity between t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... portion of unusual profits of business and the object was not to give a boost to industry or to any other sector not covered by the charge of these Acts. These Acts created a tax burden over and above the income-tax payable by the concerned assessees, whereas section 80J reduces the burden of income-tax payable by the concerned assesses.They have not controverted that such was the case. We also put it to the learned departmental representatives that in all the abovementioned Acts, the Legislature itself had laid down the scheme and even the provisions for the determination of the capital and not left it to the rule making authorities to do so, that there were departures from time to time from the strict scheme of determining the net worth and that there was nothing to show that these pieces of legislation had any relevance when it came to the matter of determining the amount of capital employed in an industrial undertaking the legislation in respect of which was designate to give a boost to growth of new industry. This was also not controverted by them except for vaguely saying that the yardstick in all cases is in the same. 74. The legislation preceding the introduction of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alled the Bhoothalingam Committee for suggesting measures for Rationalisation and Simplification of the Tax Structure. It submitted an interim report which included recommendations for substituting the rebates allowed under the Act by corresponding straight deduction in the computation of total income. One of the provisions which was affected by this recommendation was section 84. Legislation as a consequence of the recommendation was brought in by the Finance (No. 2) Act, 1967. The relevant speech of the Finance Minister shows that the object was simplification of the law. Section 84 was deleted and section 80J was introduced with effect from 1-4-1968. The straight deduction as discussed earlier is an amount not exceeding 6 per cent on the capital employed in the industrial undertaking 'computed in the prescribed manner'. The corresponding rule is rule 19A which became operative instead of rule 19. The scheme of the rule once again is that the total amount of liabilities is deducted from the total value of the assets. Rule 19A(3) specially provides for deduction of 'borrowed moneys and debts'. The rule itself has been amended from time to time but there is no need to take notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be determined. It is only the corresponding rules that prescribe the method of computation of capital and it is true that under these rules liabilities and borrowed moneys are not includible in the capital. 78. Therefore, we find that it cannot be said that right from 1940 onwards, the meaning of 'the capital employed in a business or undertaking' was uniformly understood as the capital determined broadly by the net worth method and thereby, excluding the liabilities and the borrowed moneys. This being the factual position, there is an infirmity in the very foundation of the arguments advanced by the learned departmental representatives. Thus, there is a material distinction between the factual situation in which the principle of the decision in the case of Balakrishna Malhotra (supra), was pronounced and the case of the assessee. This is so because there was no dispute that a certain interpretation of section 34 of the 1922 Act had uniformly held the field for a period of over 25 years when it was suggested (but not accepted) in the case of Balakrishna Malhotra (supra), that a different interpretation should be adopted. 79. The second point of distinction is that the interpre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation like the Excess Profits Tax Act, Business Profits Tax Act (Super Profits Tax Act and Surtax Act), was quite different from the object of the legislation such as section 15C of the 1922 Act and section 84 and section 80J of the 1961 Act. There is only a superficial similarity in all these Acts in so far as a certain amount determined as a percentage of the capital is deducted from taxable profits. In the legislation relating to the industrial undertaking the object is to exempt from the rigours of taxation the new undertaking during its teething troubles and give a boost to the growth of new industry. In the other kind of legislation, the object is to take away a fair part of surplus profits. Thus, it should not be surprising if the manner in which capital is to be understood and determined in the different kinds of legislation should vary. Even in the Excess Profits Tax Act, itself, the Legislature amended the scheme for determining the capital (and correspondingly the chargeable profits) with effect from 1-4-1941 by including in the capital the borrowed capital and by including in the chargeable profits the corresponding interest. The Supreme Court in the decision in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is still more important is that when there was a change brought about with the introduction of section 80J(1), it was not merely to allow a straight deduction in respect of a rebate, but it was also simultaneously provided that the 'deficiency' in the profits of the undertaking as compared with an amount equal to 6 per cent of its capital shall be carried forward for giving a corresponding deduction in a later assessment year. In such a situation, it is manifest that the denial of the relief had a harsher consequence it terms of the amount of tax involved. There is force in this limb of the argument because it is understandable that taxpayers might not have considered it worthwhile agitating against a certain interpretation adopted by the Board if in terms of the liability for payment of tax the difference was not going to be substantial in any case. Be that as it may, the more important aspect is that it is well settled that the mere omission or failure to raise a dispute and the mere wrong understanding of an expression on the part of the taxing authorities for a period of time cannot give sanctity to something that is wrong. In the case of CIT v. Jwalaprasad Agarwala [1967] 66 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atives to persuade us that the Legislature had understood the meaning of the expression capital employed in the undertaking in the manner in which it was implemented under the rule corresponding to section 15C and as the said rule as well as rule 19 framed under section 84 had been placed on the table of the House of Parliament, it should be accepted that the repetition of the same expression in section 80J(1) was made with the intention of giving it the same meaning. Two points were highlighted in this connection. One of them is that the Indian Income-tax (Computation of Capital) Rules, 1949 had been made on 15-10-1949, whereas the Legislature introduced section 15C by an amendment of the 1922 Act only later in December 1949. The suggestion is that the Legislature was aware of the meaning given to the expression when it repeated the expression in section 15C as it had been used when the section was introduced by the earlier ordinance. The second point made is that the Bill was passed after it was looked into by the Select Committee and the Select Committee did not comment upon the section despite the existence of the corresponding rule which had been made earlier which shows that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnulment is not the same as the process of legislation and in particular it lacks the assent either of the President or the Governor of the State." Therefore, this limb of the argument advanced by the learned departmental representatives also does not advanced the case of the department. 88. Since, as discussed above, none of the various points made on behalf of the department is acceptable, we revert to the situation that the interpretation of section 80J(1) has to be adopted having regard to the plain meaning of the expressions used in the section and without introducing anything more in the language in the section. The construction of the section in accordance with these principles, as discussed earlier, requires that the crucial expression 'the capital employed in the industrial undertaking' should be interpreted to mean the total value of the assets of the undertaking and without excluding any amount having regard to its source. 89. At this stage, we may mention that the High Courts have uniformly expressed the opinion that an interpretation of a provision designed to provide an economic incentive or an incentative to an industry should be interpreted in a liberal mann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT [1967] 63 ITR 627 (SC) that the object of enacting section 15(1) of the 1922 Act is the encouragement of thrift and that the section should therefore be interpreted in such a manner as not to nullify that object. In our opinion, these observations also not only do not help the case of the department but perhaps help the case of the assessee. This is so because the object of the section which is to give a boost to new industry may not be promoted if the relief is to be denied merely because the undertaking depends upon borrowed capital. 92. The learned departmental representatives referred us to the decision in the case of CIT v. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443 (SC). Suffice it to state that it is difficult to appreciate how any useful guidance can be available from this decision which relates to the scope of the powers of an appellate authority. 93. The learned departmental representatives relied upon the decision in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC). The argument was that though it was held that the act of borrowing money was incidental to the carrying on of business, the loan obtained was not an asset of the business. In o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th respect , we are of opinion that the decision does not provide any guidance in deciding the issue before us. This is the situation because the controversy which the High Court had to consider was in a very narrow compass and proceeded on the footing that rule 19A had been framed in conformity with the provisions of section 80J. There was no occasion, therefore, for the Hon'ble High Court to consider the larger question which is before us. In this view of the matter, we do not find it necessary to deal with various comments made by the learned representatives of both sides on the observations of the High Court. 97. As stated earlier, the decisions of the Calcutta High Court in the case of Century Enka (supra) and of the Madras High Court in the case of Madras Industrial Linings Ltd. (supra) support the view taken by us. Our attention has not been drawn to any decision in which a contrary view has been taken. As mentioned earlier, the Bombay High Court has taken the view that in interpreting the Income-tax Act which is applicable to the whole country, courts should adopt as far as possible a uniform interpretation. This is the view taken for example in the decisions in the cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in the order. It, therefore, considered it necessary to refer the matter to the Special Bench. It may be stated at the outset that the assessee's representative restricted the claim to the amount of surtax attributable to the income determined under the head 'Profits and gains of business or profession' and not to the amount referable to other income assessed. 102. The learned representative for the assessee, Shri Srinivasan, prefaced his submissions with the following propositions of the law referred to in Law and Practice of Income-tax by Kanga & Palkhivala, Seventh edition, Volume I, under the heading 'Profits and gains' and elsewhere for supporting the claim : (1) The charge of income is on profits and gains and not on gross receipts. (2) Profits to be assessed are real profits and not notional. (3) Profits for assessment have to be ascertained according to ordinary principles of commercial, trading and some of the accountancy principles are very material in this respect. (4) Where a deduction is proper or necessary to ascertain the true profits and gains, it has to be allowed unless there is a prohibition in the statute, and (5) Profit has to be computed after deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibly that in a conceivable case the chargeable profits can far exceed the total income assessed or assessable for income-tax. In particular he referred to the provisions of rule 3 of the First Schedule which require the amount calculated with reference to rule 2 to be increased by the aggregate amount of interest payable by a company in respect of debentures which are not redeemable before the expiry of seven years from the date of issue or moneys borrowed from various financial institutions referred to in clause (5) of rule 1 of the Second Schedule and contended that in cases where the rate of interest applicable to such loan is more than 10 per cent it has the effect of enhancing the chargeable profits so much so that it will not be anywhere near the total income computed for the purpose of income-tax. He, therefore, argued that the chargeable profits determined under the Surtax Act have nothing to do with the total income determined for the purpose of income-tax. In this connection, we were referred to the decision of the Madras High Court in Coimbatore Salem Transports Ltd. v. CIT [1974] 97 ITR 281 where it was held, in substance, that the determination of total income for inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereas, as already demonstrated by him with reference to the provisions of the Surtax Act, the chargeable profits for the purpose of surtax is totally different from the total income computed for the purpose of income-tax and even such chargeable profits are not fully taxed, there being a standard deduction allowed at a percentage of the capital employed. For the proposition that the provisions of this clause contemplate only profits and gains computed for the purpose of income-tax and not profits computed in any other manner, strong reliance was placed on the decision of the Supreme Court in Jaipuria Samla Amalgamated Collieries Ltd.v. CIT [1971] 82 ITR 580. Reliance was also placed on the decision of the Bombay High Court in Greaves Cotton & Crompton Parkinson Ltd. v. CIT [1968] 70 ITR 181. In particular, reference was made to the observations contained in last sentence as follows : "In other words, rate of tax levied on the profits or gains of any business, profession or vocation mentioned in the first part of section 10(4) meant the ascertained or computed profits under the head of 'Profits and gains' and the expression 'profits or gains' in the latter part of sub-section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... surtax is made through the same machinery, namely, the hierarchy of Income-tax Administration, following the almost identical procedure and administered by the same officers. It was further submitted that having regard to the scheme of the Surtax Act it is manifest that the levy arises only after income is earned and consequently it is very much tax on income, profits and gains. Referring to the charging provisions under the Act which is section 4 read with definition of 'chargeable profits' in section 2 it was argued that the contention that reference to the computation of total income under the Income-tax Act is made only for the purpose of calculation and does not refer to the income actually assessed under the said Act is not correct. it was pointed out that rule 2 of the First Schedule provides for exclusion from the total income arrived at by adjustment of sub-rule (1) the amount of income-tax payable by the company in respect of its total income under the provisions of the Income-tax Act, etc., which is an indication that the total income contemplated is the total income assessed as the tax payable can be determined only by reference to the demand notice under section 156 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orities relied on by the assessee's learned representatives, let us look at the scheme of this levy. The Companies (Profits) Surtax Act, 1964 is, undoubtedly, a Central Act and the authority for this levy is, as stated in Sampat Iyengar's 'Three New Taxes', Fourth edition, Volume II, '356 is the entry No. 82 of the Union List which is List (I) in the Seventh Schedule to the Constitution authorising the Parliament to legislate on 'taxes on income other than agricultural income'. The preamble states that it is an Act to impose a special tax on the profits of certain companies. The significance of the word 'certain' would be relevant when read in the context of section 26 which makes the Act inapplicable to a company which has no share capital. In other words, the Act applies only to the Companies limited by shares and having share capital and not to other companies such as those limited by guarantee. The charge under section 4 is on the chargeable profits as defined in section 2(5) which is the total income of an assessee computed under the Act for any previous year or years subject to adjustments contemplated by the provisions of First Schedule. In other words, the basis is the tot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its have to be computed, we shall not say assessed, in accordance with the provisions of the Income-tax Act and then adjusted. The fact that the entire profits determined for the purpose are not charged but only the amount exceeding the return of 10 per cent on the investment by way of capital computed according to the provisions in the Schedule show that it is sort of a levy on excess profits. The concept of tax on excess profits is not unknown in the history of Indian fiscal legislation as we have already had three predecessors to this enactment in the Excess Profits Tax Act, 1940, the Business Profits Tax Act, 1947 and the Super Profits Tax Act, 1963. The broad pattern of all these enactments is more or less the same. It is true that there is a difference between the Excess Profits tax and Business Profits Tax Acts on the one hand and the Super Profits Tax and Companies (Profits) Surtax Acts on the other hand in that the latter two enactments are applicable only to companies and not to other assessee. There is another difference which concerns determination of the profits chargeable under the two sets of enactments to which we shall advert later. But this feature and also the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computation of profits for the purpose of this particular levy and do not alter the character of the amount of chargeable profits arrived at thereby to anything other than the profits and gains of business. It is well settled that the income, profits and gains for the purpose of assessment to taxation under entry 82 of List I of the seventh Schedule to the Constitution do not have a restricted meaning but can include not only the income or profit which has actually been received or ordinarily understood in commercial or accountancy practice but also income which could be held to have been notionally received and the word 'income' has to be given the broadest connotation. The fact that only companies limited by shares and not other assessee are subjected to this levy does not also alter the position that the tax under the enactment concerned is one on profits and gains of business or on the basis of profits and gains, because it is equally well settled that in fiscal enactments the Legislature has a larger discretion in the matter of classification so long as there is no departure from the rule that persons included in the class are not singled out for the special treatment. In ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would only have been used carrying the general meaning of the word 'levy' or 'impost'. It cannot be disputed that the provision prohibiting deduction of tax as contained in section 10(4) of the 1922 Act is retained in the Act of 1961. In the absence of any contrary intention either in the enactment or in the context, therefore, it is not possible to accept the contention that 'tax' defined therein pertains only to income-tax as computed for income-tax purposes and not to any other tax. Another reason for our conclusion is that if the Legislature wanted to confine the scope of the word 'tax' to only the income-tax under the Income-tax Act, it could have or should have said so without leaving it to be implied with reference to the definition particularly in view of the fact that the identical provision as contained in section 10(4) has been incorporated in the Act and the term under those provisions of the 1922 Act had a wider and general meaning and not a restricted meaning under the definition in the 1961 Act. 114. Therefore, if, as we interpret it, the word 'tax' is not confined to the income-tax payable under the Income-tax Act, the question arises as to whether the surtax is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable to profits determined under section 10 and consequently, the levy did not fall under section 10(4). The further material observation of the Supreme Court in this case is that the whole purpose of enacting the sub-section (4) of section 10 appeared to be to exclude from the permissible educations under clauses (ix) and (xv) of sub-section (2) such cess, rate or tax which is levied on the profits or gains of any business, profession or vocation or is assessed at a proportion of or on the basis of such profits or gains. In other words, sub-section (4) was meant to exclude a tax or a cess or rate the assessment of which would follow the determination or assessment of profits or gains of any business, profession or vocation in accordance with the provisions of section 10. The reference made to the provisions of section 10 in this case is, in our view, a reference to the principles ingrained or embedded in the provision relating to the computation of profits and not necessarily to the exact quantum of income assessed according to the provisions. Otherwise we cannot contemplate a tax, if the word has to have a general meaning, levied by any other authority such as the State or Local ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance under the relevant section and any other levy such as on property of an assessee carrying on business within the municipal limit, etc., not depending upon earning of profit but calculated with reference to the profits where they are earned as one of the modes of determining the levy would be eligible for deduction. For in the absence of profits another basis or mode may be employed. In short, it appears to us that the levy to come within the prohibition must be conditional on the earning of profits. There can be no dispute that the surtax provisions provide a perfect machinery for the determination of the profits and the levy follows a determination or assessment of profit of any business in accordance with the provisions of the Income-tax Act. Clearly, therefore, the tax is hit by the prohibition contained in section 40(a)( ii). In the other cases cited before us where deduction was allowed in respect of a tax or levy, it would be seen from an examination of the facts involved that they were not cases of a tax on the profits or on the basis of such profits as we shall point out as and when we deal with them. 116. The other case relied on by the assessee in support of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mistaken view of the law, it does not prevent the correct computation even applying the provisions of Income-tax Act for the purpose of surtax because the two enactments are distinct and separate and the proceedings are also separate. That is far different from saying that the principles of computation of total income for the purpose of income-tax and principles of computation of total income as defined under the Surtax Act are not one and the same. 117. Even apart from the prohibition contained in section 40(a)( ii) which, according to us, applies to a claim for deduction of surtax, we hold that surtax is not deductible in computing the profits and gains of business on the well established principles stated by the authorities. Before we advert to these authorities and to general principles, we may state that there can be no dispute or quarrel about the propositions of law enumerated by the learned representatives for the assessee which are well recognised and established. The question is whether those principles could be applied to the case of claim for deduction of surtax. The principles stated by the representatives also form part of the reasoning in the order of the Tribunal a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a direct and intimate connection between the expenditure and business, that is to say, between the expenditure and the character of the assessee as a trader and not as a owner of the business even if they are assets of the business, the modification being that if the expenditure is laid out by the assessee as owner-cum-trader, the expenditure would be really incidental to the carrying on of the business and must be held to have been laid out by him as a trader and as incidental to his business. We fail to see how the principle of this decision can be said to support the contention of the assessee in this particular case. As we have earlier stated, there can be no dispute on the principles on which a deduction can be successfully claimed. The point which we want to emphasis is that this decision among others, relied on by the assessee is not an authority for the claim of a deduction of tax on the profits of a business carried on by the assessee or on the basis of such profits and gains. Wealth-tax is not a tax on profits but on the net value of the assets of a business. It was faintly suggested in this connection by the learned representative that the net wealth representing the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Madras Municipal Act. The tax was payable by companies and the amount dependent upon its paid-up capital or gross total income. It will be noticed from the discussion at page 189 of the report of the decision that the finding of the court in this respect is that the basis of the tax was the carrying on of the business without the municipal limit and though the tax was based on the gross income earned, the essence of the charge of the tax was to permit carrying on of the business by the companies within the municipal limits and the failure to pay tax involved the company in penal consequences and therefore it was in the nature of a payment required to be made for enabling the company to carry on the business within the City Municipal territory. It is further observed that it was not necessary that any income should be earned in order that the tax might be levied and that as soon as the business was started within the limits of the Municipal Corporation, even if Re. 1 was earned by the company, it would still be liable to pay the minimum tax, which was ₹ 25. The imposition of the tax, it was therefore held, was conditional on the company being allowed to carry on business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is levied. 124. The first case which has been strongly relied on by the revenue is the decision of the Patna High Court in Maharajadhiraj Sir Kameshwar Singh's case (supra). The claim by the assessee in that case was for deduction of interest on the overdraft taken by the assessee for advance payment of income-tax. It was held, rejecting the claim, that the well established proposition is that income-tax is not a deduction before arriving at the net profit of the assessee. Income-tax, as held in a decision pronounced in the U.K., represents the Crown's share of profit and is not an expenditure incurred for the purpose of earning the profit. On the contrary it was held that it is a case of application of profits after they have been earned and not an expenditure necessarily laid out to earn such profit. The observation of course refer to income-tax but, according to us, would equally apply to surtax. The case of Jeewanlal (1929) Ltd. (supra) was concerned with a claim for deduction from foreign income included in the total income business profits tax paid by the assessee under the laws of the foreign country. The foreign business profits tax was held to be not deductible either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration in this case also was a claim for deduction of Ceylon excess profits tax in computing the income for income-tax purposes. Rejecting the claim of the assessee in this connection it was held that the prohibition contained in section 10(4) of the 1922 Act, corresponding to section 40(a)( ii) of the 1961 Act, would apply to the Ceylon excess profits tax also, and specifically rejected as unsound was the view of the Tribunal in that case that the prohibition contained in section 10(4) can only relate to taxes levied in India. In this decision also a reference was made to the decision of Dowdall O'Mahoney & Co. Ltd.'s case (supra). 126. A close study and analysis of these authorities reveals, according to us, the principles that: (1) the levy of a tax dependent upon the earning of the profit and on the basis of such profits is not an expenditure laid out wholly and exclusively for the purpose of the business; (2) the levy of any such tax amounts to application or appropriation of the profit after it is earned because the profit for the purpose of the tax is what is left after all the necessary expenses to earn such profit has been paid; and (3) any such tax levied by the Gove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those deductions would be the amount of tax payable in the first country. I see no way in which this circle could be broken...." (pp. 730-31) The complexity or the vicious circle referred to is also projected in the case of a claim for deduction of surtax in the following way. Under the provisions of Surtax Act and its Schedule the income-tax payable on the income computed for the purpose of or in accordance with the principles for computation of income for the purpose of income-tax is liable to be deducted to arrive at the chargeable profits liable to surtax. Now the claim is that surtax itself is required to be deducted in computing the profits for the purpose of income-tax. You cannot ascertain, however, the surtax without ascertaining the income-tax because the profits liable to surtax are arrived at after deducting income-tax. The claim thus appears to be patently absurd and unworkable if not impossible. Evidently, the fallacy or absurdity lies in the confusion that the tax which follows determination of the profits and is levied on the profits must itself go to reduce the identical profits. We would therefore consider that even apart from the express prohibition in se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovide that a company in which public are not substantially interested should distribute a minimum percentage of its profits after taxation as dividends and failure to do so would attract additional tax. It is obvious that for the purpose of distribution of dividend, a company can only take into account the profits or surplus available to it after the payment of income-tax. Therefore, certain outgoings which are not allowed or allowable in computing the income of the company for the purpose of income-tax for various reasons, such as certain expenditure in excess of prescribed limits, are deductible for the purpose of ascertaining the distributable income by virtue of section 109 of the Act. Since, surtax is a statutory appropriation to the State not available for the purpose of declaration as dividend, the Legislature has considered it necessary to provide this particular deduction in section 15 of the Surtax. Act particularly when section 109 does not in terms provide for deduction of surtax. 129. We shall, at this stage, examine the point from another angle taking into consideration the contention of the assessee that surtax being levied on the amount of total income which is lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd then only for the purposes of the incidence of the tax, undisbursed profits did not become the income of the shareholders. None-the-less, the position remains that what was taxed, undisbursed profits, was income. The net profits of the company were subject to tax. A provision for a further levy on undisbursed profits, which constituted a part of the net profits of the company would still be a statutory provision to tax income. Legislative power to provide for a further levy on the same income, the income of the company, could not be denied...." (pp. 119-20) The above observations, in our view, equally apply to the levy of surtax which is, even as the preamble says, the additional levy of tax on the income of certain companies. There can therefore be no doubt, in our view, that surtax is nothing but a levy if only an additional one and confined to certain classes or category of assessees, namely, the incorporated bodies, of a tax on income even as the additional tax on the undistributed income of a company in which public are not substantially interested in accordance with the provisions of Chapter IX-A is a levy. As a matter of fact, the Legislature has in fact been adopti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the various activities and earning the profits of the company. Since, the Companies (Profits) Surtax Act, 1964, is an Act to impose a special tax on the profits, it is held that if an assessee has to be a company for the purpose of carrying on business or any activity for earning profits, the liability for payment of the tax would be a liability incurred for the purpose of carrying on business or earning profits and, therefore, would be a permissible deduction. After careful thought and considerable deliberation we find ourselves unable, with respect, to accept the proposition thus stated. There does not seem to be, to our knowledge and in our understanding, any impediment legal or otherwise for any person carrying on the business in any form he or it chooses. As a matter of fact, the Income-tax Act itself recognises the various statutes of assessees depending upon whether the person carrying on the business is an individual or a partnership firm, or a limited company or a HUF and so on. The formation of a company is only a convenient method or mode of carrying on the business since it affords certain safeguards and legal protection, as for instance against unlimited liabilities, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , we have no hesitation in rejecting the assesse's claim that surtax should be deducted in computing the assessee's profits and gains. 132. The next point taken before us by way of an additional ground is that the assessee is entitled to development rebate at the rate of 35 percent as against 20 per cent in respect of not only Beta Naphthol plant but also in respect of other plants as well in view of the claim that the assesee is a priority industry mentioned in item 18 of the Fifth Schedule of the 1961 Act. It is common ground that this contention was not urged by the assessee before the ITO or the AAC and was raised before the Tribunal as an additional ground. An earlier Bench of the Tribunal has by its order, dated 19-1-1976, admitted the additional ground along with, other additional grounds regarding surtax liability and section 80J relief. In fact it has been mentioned in that order of the Tribunal which is dated 19-1-1976 that this very issue pertaining to earlier years was already under consideration before the ITO. In the circumstances, we consider it fair and reasonable that this issue should go bank to the ITO for examination and decision on merits according to law. 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee, the assessee's liability continued. The AAC has accepted that ultimately the dispute was settled with the Irrigation Department and the assessee was required to pay a certain sum accordingly. He has held that the relevant amount is allowable in the year in which the assessee may make the actual payment. As the method of accounting of the assessee is the mercantile method, we hold that it is proper to allow the assessee deduction in the year under consideration in respect of liability that was ultimately accepted by the assessee as a result of settlement. The assessee will thus be entitled to a further deduction of such amount. 135. The remaining grievance of the assessee is that the departmental authorities have not allowed development rebate on ₹ 1,52,392 being cost of process and design connected with production of Cynauric Chloride. On hearing the parties, we find that the process and design in question were not used in the production of Cynauric Chloride during the previous year. In fact, there was no production of Cynauric Chloride during the previous year. Once we come to the conclusion that the particular assets were not used in the business during th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n computing the income from the business under section 28 and/or sections 29 to 43A including section 37 because: (i) it is the Government's share of the profit after it is earned and is by way of application or appropriation of such profit; and (ii) its deduction is prohibited by section 40(a)( ii) of the Income-tax Act. (3) The issue regarding the assessee's increased claim for development rebate on the ground that it is a priority industry in respect of not only Beta Naphthol plant but also the other plants, is sent back to the Income-tax Officer for examination and reconsideration on merits in accordance with law. (4) Gratuity liability provided for in the year in accordance with actuarial valuation is to be allowed in full as we have held that the entire liability accrued to the assessee during the previous year. (5) The assessee is entitled to claim deduction in respect of water charges for the year under appeal on the basis of actual liabilities settled by it with the Irrigation Department and not on the basis of original levy, and (6) The process and design the cost of which comes to ₹ 1,52,392 in connection with the assessee's business of production of Cynauric ..... X X X X Extracts X X X X X X X X Extracts X X X X
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