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TMI Blog1976 (11) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 50,36,928 was deductible,? and (3) Whether, on the facts and in the circumstances of the case, the allowance of Rs. 95,21,000 granted by the Central Board of Revenue under s. 26(3)(a) of the EPT Act in determining the excess profits for the year ending 31-3-1945 was deductible from the opening capital of the company as on 31-3-1945 (1-4-1945) while computing the average amount of capital employed by the company in its business for the chargeable accounting period ending 31-3-1946 ? " Assessments in dispute are the assessments under the EPT Act, 1940. The assessee, which is a public limited company, is doing business in the manufacture of steel and the relevant chargeable accounting periods are the financial years ending 31-3-1942, 31-3-1943, 31-3-1944, 31-3-1945 and 31-3-1946. We shall deal with the facts pertaining to each one of these years separately. The first question relates to all the five chargeable accounting periods and the facts giving rise to the question may be stated : The assessee-company had borrowed considerable amount in connection with its scheme of extension of the plant and it had paid interest amounting to Rs. 39,97,000 on the borrowings during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is any difference indicated in the provisions of the EPT Act on the question as to whether such depreciation by reason of capitalization of interest should not be allowed as a deduction in determining the excess profits and, therefore, it will be necessary to consider the scheme of the relevant provisions of the EPT Act and the rules made in Sch. I to that Act for the purpose of determining the excess profits. Before we go to the provisions of the Act, we might refer to a decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, where the question of allowing such depreciation for the purpose of income-tax was considered by that court. In that case, the Supreme Court after considering the meaning of the expression " actual cost" occurring in s. 10(5) of the Indian I.T. Act, 1922, has taken the view that interest paid before the commencement of production on amounts borrowed by the assessee for the acquisition and installation of plant and machinery formed part of the " actual cost " of the assets to the assessee within the meaning of the expression in s. 10(5) of the 1922 Act and that the assessee would be entitled to depreciation allowance and develo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heme of s. 6 has been explained by this court in Killick Nixon Co.'s case [1945] 13 ITR 445 (Bom) as to compare the average amount of capital during the standard period with the average amount of capital during the chargeable accounting period and make adjustments in the standard profits on the footing of the increase in the capital during the chargeable accounting period and that for this purpose the figure that is relevant is the average amount of capital for the standard period and not the amount of capital ascertained as in issue on the last date of the standard period. For the purpose of considering the first question it will now be necessary to consider rr. 1 and 3 of Sch. I to the Act, which deal with the manner of computation of excess profits for the purpose of the Act. Under r. 1 it is provided that the profits of a business during the standard period, or during any chargeable accounting period shall be separately computed, and shall, subject to the provisions of this Schedule, be computed on the principles on which the profits of a business are computed for the purposes of income-tax under s. 10 of the Indian I.T. Act, 1922. Now the question is whether there is anything ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the excess profits which were liable to excess profits tax. Sch. II of the Act contains rules according to which the capital employed in the business had to be computed and the broad principle was that out of the assets of the business, debts had to be deducted and these, debts included debts incurred in respect of the business for income-tax, super-tax or excess profits tax or for advance payment of income-tax or for any further sum payable in relation to excess profits tax under s. 2 of the EPT Ordinance of 1943. The liabilities in respect of these taxes were to be treated as debts with effect from the dates given in the proviso to r. 2(1) of Sch.II to the EPT act. It appears that under the Ordinance the assessee was bound to deposit in addition to excess profits a further amount which was refundable after the war and this amount was payable as required by the notice of the EPTO along with the excess profits tax dues. This was a sort of compulsory deposit under the EPT Ordinance, 1943. However, prior to the said Ordinance, under the Indian Finance Act of 1942, s. 10, there was already a provision for voluntary deposit almost on the same lines and it is in respect of this deposit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s he held that the voluntary deposits made under the Finance Act, 1942, were also required to be treated as debts and, therefore, deductible. The matter was carried further by the assessee-company to the Tribunal and it was contended on behalf of the assessee that the voluntary deposits made under s. 10 of the Finance Act, 1942, were clearly distinguishable from the compulsory deposits that were to be made under the Ordinance of 1943, that the voluntary deposits could not be regarded as any liability or debt, for, after all there could be no liability in respect of voluntary deposits and, therefore, the amount of Rs. 50,36,923 was not deductible while calculating the average capital employed in the business in each of the aforesaid chargeable accounting periods. On behalf of the revenue, a two-fold contention was urged. In the first place, it was urged that no distinction should be made between the voluntary deposits and compulsory deposits and, therefore, the order of the AAC was sought to be justified and in the alternative, it was urged that in any case the aforesaid amount locked up in the voluntary deposits was not money used for the purpose of the business or could be regarde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had been deposited by the assessee-company on May 11, 1943, under s. 10 of the Finance Act, 1942, under the voluntary deposit scheme and it is difficult to accept the proposition that when such deposit is voluntarily made, the same could be said to be in respect of any liability or made in discharge of any debt. The deposit being voluntary there cannot arise in favour of anybody a right to receive it so that there is no basis for creation of a debt. In our view, therefore, the Tribunal was right in rejecting the contention of the revenue that voluntary deposits made under s. 10 of the Finance Act 1942, as well as compulsory deposits made under the Ordinance of 1943, would be on par. On that account the aforesaid amount is clearly not deductible while arriving at the average capital employed by the assessee in its business during the relevant chargeable accounting periods. Mr. Joshi, however, pressed for our acceptance the alternative contention that was urged before the Tribunal. He contended that if the aforesaid amount of Rs. 50,36,923 was not deductible as a debt from capital computation for the purpose of computing capital employed by the assessee in its business, then, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be said to be monies not required for the purpose of business of the assessee-company. On the other hand, the deposit could be regarded as monies as having been utilised for the purpose of ensuring to the assessee-company the future benefits in the matter of excess profits tax as indicated in the aforesaid provision. That being so, in our view, the Tribunal was right in coming to the conclusion that the said amount of Rs. 50,36,923 which had been deposited under the voluntary deposit scheme was not deductible in computing the capital employed in the business of the assessee-company in the chargeable accounting periods ending March 31, 1945, and March 31, 1946. The second question, therefore, is answered in the negative in favour of the assessee. Coming to the third question, it could be said that the same is confined to the chargeable accounting period ending March 31, 1946, and that also relates to the computation of capital employed in the business and the item in dispute is the amount of Rs. 95,21,000 which had been granted as special allowance to the assessee-company by the CBR under s. 26(3)(a) of the Act while computing the profits for the chargeable accounting perio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the chargeable accounting period ending March 31, 1946. The matter was carried to the Tribunal by the assessee and it was contended on its behalf that the allowance of Rs. 95,21,000 was a concessional allowance made with a view to ensure that the assessee did not suffer for postponing renewals and repairs which had to be postponed due to continuance of hostility; it was pointed out that the allowance did not reduce the actual profit earned by the company nor did it reduce the actual capital employed in the business. On behalf of the revenue it was contended that the amount in question had gone to reduce the company's profits liable to excess profits tax and it must necessarily go to reduce its capital. It was also contended in the alternative that the allowance was just like an allowance on account of accrued liabilities and, therefore, like other accrued liabilities, it should be deducted while determining the capital employed in the business for the chargeable accounting period ending March 31, 1946. The Tribunal rejected the contention urged on behalf of the revenue and accepted the contention of the assessee, and ultimately held that the amount of Rs. 95,21,000 was also not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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