Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: MOLINS OF INDIA LTD., CALCUTTA VS Respondent: COMMISSIONER OF INCOME-TAX WEST JUDGMENT
Court Name: Calcutta High Court Judge(s): Sabyasachi Mukharji, Subas Chandra Sen Title:MOLINS OF INDIA LTD., CALCUTTA vs COMMISSIONER OF INCOME-TAX WEST
JUDGMENT
Reported As: 1985 PTD 630 Result: Answered in affirmative Judgment JUDGMENT ' ASLAMS CHANDRA SEN, .1.-Moins of India Limited, Calcutta is the assessee in this case. The relevant assessm ent year is 1974-75. The corresponding accounting period ended on 31st December, 1973. The accounts of the assessee company were maintained on mercantile system. 2. During the relevant previous year the assessee-company was engaged In the manufacture of cigarette making and packing machineries. Net profit as per profit and loss account was Rs, 58,77,411. Income disclosed by the assessee was Rs, 62,98,280 but the Income-tax Officer computed the total income at Rs, 66,91,550. 3. The assessee preferred an appeal against the assessment order. Before the Appellate Assistant Commissioner the assessee filed an additional ground stating that the Income-tax Officer should have allowed the Sur-tax liability of the assessee company as a deduction. In support of of its claim, the assessee relied upon a decision of the D-Bench of the Appellate Tribunal, Bombay Benches in I.T.A. Nos. 3068 and 3097 (Bom.) of 1972-73 dated 24th February, 1975. Being not satisfied with the delay in raising the additional ground, the Appellate Assistant Commissioner refused to admit the same. 4. The assessee appealed to the Appellate Tribunal which decided the issue with the following observation :- "We have heard both sides. This is purely a legal contention and in our opinion, the Appellate Assistant Commissioner should have admitted the appeal and disposed of the same. However, with the approval of the parties before us and considering the nature of the issue, instead of asking
---
## Page 2
the Appellate Assistant Commissioner to admit the point and to decide thereon, we prefer to dispose of the appeal on merits ourselves here in this order. ' Before us, we have a copy of the order dated 1st December, 1977 in I. T. A. No, 3643 (Boni) of 1974-75 for the assessm ent year 197071 in the case of Messrs Amor Dye Chem Ltd. Bombay v. Income-tax Officer, Company Circle II (3), Bombay, passed by the Special Bench of the Appellate Tribunal, Bombay Bench 'Ir. A similar point which was raised there, was decided by the Special Bench against the assessee and the same was discussed in paragraphs 101 to 131 of the aforesaid order. The disallowance was obviously made under section 40 (a)(ii) of the Act. Respectfully following the said decision, we reject the assessee's contention that the Sur-tax liability under the Companies (Profits) Sur-tax Act, 1964 for the relevant year should be deducted in arriving at the total income under the Income-tax Act, 1961." 5.At the instance of the assessee-company the Tribunal has referred the following question of law to this Court under section 256(1) of the Income-tax Act, 1961, arising out of the Tribunal's order dated 9th February, 1978. "Whether, on the facts and in the circumstances of the case and on a correct interpretation of the provisions of the Income-tax Act, 1961, the Tribunal was right in holding that the surtax liability under the Companies (Profits) Sur-tax Act, 1964, for the relevant year should not be deducted in arriving at the total income under the Income-tax Act, 1961 ?" 6. The first argument of the assessee before us is that the Sur-tax liability under the Companies (Profits) Sur-tax Act, 1964 is a statutory charge on the income of the company. Therefore, the income of the assessee has been statutorily diverted at source. The real income of the assessee, therefore, must be taken to be reduced by the quantum of the Sur-tax liability, It has been argued that the Income-tax Act also imposes a liability on the income of the assessee and that liability would have been deductible from the total income of the assessee on the principle of real income. Because of the provisions of section 40 (a) (ii), income-tax is not allowable as a deduction for the purpose of computation of taxable profits. ' It has further been argued that there are significant changes in the phraseology of section 40 (a) (ii) of the 1961 Act from the language used in section 10 (4) of the 1922 Act. Because of these changes, it cannot be said that the sur-tax liability comes within the mischief of section 40 (a)(ii). ' Therefore, the Revenue will not be able to rely on section 40 (a)(ii) aud disallow the deduction that has been claimed in this case, 7. It has further been argued that in any event the Sur-tax liability under the Companies (Profits) Sur-tax Act should be allowed as deduction as business expenditure under section 37 of the Income-tax Act. It has been argued that section 40 (a) (ii) has been incorporated only for the purpose of 'excluding the liability of income-tax and, the liability for sur-tax should be allowed as expenditure wholly and exclusively laid out for the purpose of business. 8. The concept of real income was explained by the Privy Council in the celebrated case of Raja Bejoy Singh Budhuria v. Commissioner of Income-tax (3). Lord Macmillan observed at page 138 (of 1. T. R ) : (at p, 147 of AIR) of the report :- "When the Act by 'section 3 subjects to charge all income of an individual, it is what reaches the individual as income which it is intended to charge. In the present case the decree of the Court by charging the appellant's whole reasources with a specific payment to his stepmother has to that extent diverted his income from him and has directed it to his stepmother, to that extent what he receives for her is not his income. It is not a case of the 4pplication by the appellant of part of his income in a particular way, it is rather -the allocation of a sum out of his revenue before it becomes income in his hands." ' As its name denotes, the Companies (Profits) Sur-tax Act is a tax on profits. It is an additional tax levied on the total income of a company after making various adjustments and deductions in
---
## Page 3
accordance with the provisions of the Act. But the levy of the Companies (Profits) Sur-tax Act is only attracted when the income it intends to charge reaches the assessee Payment of Sur-tax by an assessee cannot be described as an allocation of a sum out of his revenue before it becomes income in his hands. 9. The test laid down by the Privy Council in the case of Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax, has been applied by the Supreme Court in a number of cases. 10. In the case of Commissioner of Income-tax v. Sitaldas Tirthdas (2), the Supreme Court stated the principle of real income in the following terms (at p. 732) :- "In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive factor. Thete is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is {{FOOT NOTE}} (1) (1933) 1! T R 135 : AIR 1933 P C 145 (2) (1961) 411 T R 367: AIR 1961 SC 728 {{FOOT NOTE}} deductible, but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable." 11. When a tax is imposed on the income of the company the company will have to pay that tax but it cannot be said that a part of the income of the company was received for and on behalf of the Revenue. In the case of L. C. Ltd. v. B. G. 011ivant (1) varying a famous phrase of Lord Macnaghten, Viscount Simon L. C., observed "Excise profits tax, if, may be pardoned for saying so, is a tax on profits". The Companies (Profits) Sur-tax is also a tax on profits. Until and unless the profits are earned the liability to pay income-tax or sur-tax does not arise. It is only because the income has reached the assessee that the tax is being imposed. 12. The Income-tax Act imposes a charge on the total income of an assessee. The Companies (Profits) Sur-tax Act levies an additional tax on the total income of a company after certain adjustments in accordance with the principles laid down in that Act Income or profits on their coming into existence attract tax at that point, but if no profit or income was earned or received by an assessee, there will not be any question of imposition of income-tax or sur-tax. Charge of sur- tax pre-supposes existence of income ; it does not prevent accrual of income or receipt of income by diverting a portion of the income to the Revenue at source. 13. The assessee's total income has been computed by the Income-tax Officer under the provisions of the Income-tax Act to be Rs, 66,91,550. The Revenue cannot claim any part of the company's total income of Rs, 66,91,550 as its own even before it reached the assessee. It has not got any overriding title to his income or any portion of it. What the Revenue, however, can do is to levy a tax on this total income under the Income-tax Act. The Revenue can also levy an additional tax on this income after some adjustments and deductions under the Companies (Profits) Sur-tax Act. But both under the Income-tax Act and the Companies (Profits) Sur-tax Act it is the income of the assessee that is brought to the charge of taxation. What is taxed is the entirety of the income. The Revenue cannot be heard to say that any portion of the amount of Rs, 66,91,550 was its own
---
## Page 4
income and the company received it for and on behalf of the Revenue. The Revenue is entitled to levy sur-tax on the income only because the entire amount is the income of the assessee. What comes within the net of assessm ent is the totality of the income of the assessee. 14. The case of Poona Electric Supply Co. Ltd. v. Commissioner of Income-tax (2) also does not support the contention of the assessee. In that case under an Act the Company's profit could not exceed a stated {{FOOT NOTE}} (1) (1945) 13 I T R (Suppl.) 23 (2) (1965) 57 I T R 521: AIR 1966 SC 30 {{FOOT NOTE}} amount. The excess realization had to be credited to a fund known as "Consumers Benefit Reserve Account". This amount had to be refunded to the subscribers by way of rebate. There the Supreme Court observed "The real profit of a business cannot obviously include the amounts returned by him by way of rebate to the consumers under statutory compulsion. It is as if he received only from the consumers the original amount minus the amount he returned to them. The amount returned is not a part of the profits at all." 15. In the case before us it cannot be said that the Company's profits could not exceed a stated amount in view of the Companies (Profits) Sur-tax Act. The sur-tax is leviable only upon the profits of the Company. The question of payment of sur-tax arises only after the profits have been ascertained. The Supreme Court quoted with approval the observation of Halsbury L. C. In the case of Gresham Life Assurance Society v. Styles (1). 'The word 'profits' I think is to be understood in its natural and proper sense-in a sense which no commercial man would misunderstand. But when once an individual or a company has in that proper sense ascertained what are the profits of his business or his trade, the destination of those profits or the charge which has been made on those profits by previous agreement or otherwise is perfectly immaterial. The tax is payable upon the profits realized, and the meaning to my mind is rendered plain by the words 'payable out of profits'. 16. In the case of Murlidhar Himatsingka v. Commissioner of Income-tax, Calcutta (2) the question was whether the interest of a sub-partnership in the profits received from the main partnership was of such a nature as to divert the income from the original partner to the sub-partnership. 17. The Supreme Court held that in the case of a sub-partnership, the sub-partnership created a superior title and diverted the income from the main firm before it became the income of the partner. In other words, the partner in the main firm received the income not only on his own behalf but on behalf of the partners of the sub-partnership. This case, in our opinion, does not throw any light on the problem before us. 18. In the case of Commissioner of Income-tax, Kerala v. I -arancore Sugars and Chemicals Ltd. (3), the promoters of the assessee company entered into an agreement with the Government of Travancore whereby the assets of a sugar company and a distillery and a tincture factory run by the Government were agreed to be sold to a company to be floated for that purpose. Apart from cash consideration it was provided that the Government shall be further entitled to 20% of the annual net profit up to a maximum of Rs, 40,000 after providing for depreciation and remuneration of the Secretaries and Treasurers. The Supreme Court held that the amount paid was either a revenue expenditure or diverted by an overriding charge or an expenditure laid out wholly or exclusively for the purposes of trading. {{FOOT NOTE}} (1) (1892) 3 Tax Cas. 185, 188, 189 (2)(1966)62 ITR 323 ;AIR 1967 SC383 (3) (1973) 88 ITR I; 19731 L R 159 (SC) {{FOOT NOTE}}
---
## Page 5
19. In the case of Official Trustee of West Bengal v. Commissioner of Income-tax, West Bengal II (I) the principle was stated in the following language : "The true test to determine whether in a particular case, a payment is on account of an overriding charge or is mere application of income, must be to find out in the background of the obligations imposed whether the amount in question reaches the assessee as an income." 20. There are cases of diversion of income by an overriding title before it reaches the assessee. But unless the income in question reaches the assessee as income, there cannot be any question of imposition of income-tax or sur-tax. Whatever income has reached the assessee has been brought under the pale of taxation under these two Acts. 21. An argument similar to what has been contended in this case was repelled in the well-known case of Ashton Gas Company v. Attorney-General (2). In that case it was statutorily provided that the profits of the Ashton Gas Company to be divided among the shareholders in any year should not exceed the rate of 10% per annum on the ordinary share capital. The Company distributed 10% as divided tax free. The argument on behalf of the Company was that the income-tax was a charge on the profits before distribution to the shareholders ; it was one of the charges which had been deducted before arriving at the profits and calculating the dividend. The tax was charged upon the company and the company was entitled to adopt the principle upon which it had acted. Buckley, J. Observed as follows : ' The profits are not arrived at after deducting income-tax. The income-tax is part of the profits- namely such part as the Revenue is entitled to take out of the profits. A sum which is an expense, which must be borne whether profits, are earned or not, may no doubt be deducted before arriving at profit. But a proportionate part of the profits payable to the Revenue is not a deduction before arriving at, but a part of, the profits themselves." ' AttorneyeGeneral v. Ashton Gas Company (3), ' On further appeal Halsbury, L. C. Observed as follows : 'Profit is a plain English word ; that is what is charged with income-tax .The income-tax is a charge upon the profits, The thing which is taxed is the profit that is made, you must ascertain what is the profit that is made before you deduct the tax-you have no right to deduct the income-tax before you ascertain what the profit is. I cannot understand how you can make the income-tax part of the expenditure. I share Buckley, J.'s difficulty in understanding how so plain a matter has been discussed in all the Courts at such extravagant length." (1906 A C 10). {{FOOT NOTE}} (1) (1979) 116 I T It 2191 1919 Tait L ft 1026 (Cal.) (2) (1906) A C 10 (3) (1904) 2 Ch. D 621 {{FOOT NOTE}} 22-23. In the case before us it is total income of the company after some adjustment which is being charged with sue-tax. The thing which is being taxed is the profit that the company has made. 24. On behalf of the assessee strong reliance was placed on the following passage from the Valuation of Company Shares and Business by A. V. Adamson, 5th Edition, page 105. "Taxes on company income. An English legal interpretation of the nature of these taxes may be found in a decision of the House of Lords in the case of G. B. 011ivant and Company Limited (1942-2 All E R 528), which dealt with the question as to whether excess profits tax should be deducted in arriving at net profit. Lord Greene stated : "It is indisputable that for the purpose of drawing up the profit and loss account of a trading company excess profits tax must be deducted if ordinary commercial practice is to be
---
## Page 6
followed.........It is not merely common knowledge, but commonsense that the divisible profits of a trading company cannot properly be ascertained without first making that deduction." 25. That all statutory dues including taxes on income will have to be deducted from the income of a 'company for the purpose of computing its divisible profit for the purpose of distribution of dividend cannot be disputed. In the case of L. C. Limited v. G. B. 011ivant and Company Limited (1), the Court of Appeal was faced with the problem of construction of an agreement which provided for sale of property including the business of West African merchants formerly carried on by the vendor company. The agreement provided that the purchasers should pay by instalments of the purchasers ,..Should certify to be the profits of such financial year" without deduction for income- tax. ' Lord Greene, M. L. Observed at page 531 as follows : . The instruction to the auditors is that, in making their corn, putation of the profits of the purchasers for the purposes of this agreement, they are to start with and work upon the general principles of ordinary commercial practice in computing the profits of a trading company. That, however, does not quite answer the question, because it may still be asked computing the profits of a trading company for what purpose ? Now there again it seems to me that the answer is a clear answer for the ordinary purpose for which profits of a trading company are computed, namely, the profit and loss account of the company on the basis of which the profits are to be distributed, I can think of no other ordinary commercial practice in computing the profits of a trading company save the practice of computing such profits for such a purpose," 26. The dispute in the ease of G. B. 011ivant Limited was whether the profits that was to be computed and certified by the Auditors were the ordinary profits of the company or the divisible profits. Lord Greene, M. R., was of the view that calculation of profits in accordance with ordinary commercial practice under the agreement meant divisible {{FOOT NOTE}} (1) (1942) 2 All E R 528 {{FOOT NOTE}} profits, This view was also adopted in the House of Lords by Lord Thankerton, Lord Russel of Killowen and Lord Wright. As Lord Wright puts it "whether these profits are so divided or are used for developing the company's business or in other similar ways did not affect the position." 27. There cannot be any two opinions about it that for the purpose of computation of distributable or divisible profits of a company, the sur-tax payable by the company will have to be deducted. In fact, there is a specific provision under the Companies (Profits) Sur-tax Act, 1964 to that. Effect. It has been provided under section 15 that in computing the distributable income of a company, for the purpose of Chapter XI-D of the Income-tax Act, the sur-tax payable by the company for any assessm ent year shall be deductible from the total income of the company assessable for that assessm ent year. . 28. But in the case before us the problem is not of computation of divisible profits. The question is what are the profits of the assessee company ? In that context the views of Viscount Simon L. C. And Lord Macmillan will be more helpful for our present purpose. Viscount Simon L. C. ' and Lord Macmillan were of the view that under the agreement profits did not mean the divisible profits of the company. 29. Viscount Simon, L. C., observed at page 26 of (1945) 13 I T R (Suppl.) 23 :- "The word "divisible" or "distributable" does not occur in the agreement from beginning to end, and to my mind, the profits of a trading company when ascertained in accordance with ordinary commercial practice are the profits before, and not after, deducting the direct taxation which has to be paid in respect of them. It is not to be disputed that this is the case with income-tax for income-tax, is not a deduction which has to be made in order to arrive at profits, it is the Crown's
---
## Page 7
share of the profits. All this has been explained once and for all in the well-known case of Ashton Gas Company v. Attorney-General (1906 A C 10), Counsel for the respondents admitted that this would be true whether the express provision excluding income-tax was in the agreement or not, ' Why is not the same thing true about excess profits tax ? Varying a famous phrase of Lord Macnaghten in London County Council v. Attorney-General (1901 A C 26), I venture to observe that excess profits tax, if I may be pardoned for saying so, is a tax on profits. It is a tax (very elaborately calculated it is true) on profits for it is a tax on excess profits-it skims the cream off profits so far as they are in excess of the standard profit." ' Lord Macmillan observed at page 34 of the report :- "It is enough for my purpose to emphasise that, as its name denotes, the tax on profits, namely the profits earned in excess of a fixed standard and that for the purpose of computing it the profits are, subject to certain special provisions, to ,include all such income arising from the trade or business as is chargeable to income-tax under Case I of Schedule rt" : see the Vinance (No, 2) Act, 1939, Schedule VII, para. 7. It is in short a super income-tax." 30. Sur-tax like excess profits tax is basically an additional taxi levied on the income of the company. It does not divert any portion of that income at source by an overriding title. It is a tax on so much of the chargeable profits of the previous year as exceed the statutory deduction at the rate specified in the Act. Chargeable profits has been defined to mean total income of an assessee as computed under the Income-tax Act and adjusted in accordance with the provisions of the First Schedule. The legislature by this Act has imposed an additional levy on the total income of a company. The subject-matter of the levy is the income of the company. That income does not cease to be the income of the company merely because an additional tax is imposed upon it. It is one thing to say that the Revenue is entitled to levy sur-tax on this income but it is quite another thing to say that the Revenue is entitled to get a portion of this income by an overriding title even before it reaches the company. 31. We shall now consider the argument that the liability for surtax must be allowed as business expenditure in computing the total income of the assessee under the Income-tax Act and the embargo contained in section 40 (a) (ii) of the Income-tax Act must be confined to income-tax only. 32. In order to appreciate this argument it .Is necessary to set out section 10(4) of the Indian Income-tax Act, 1922 and section 40 (a) (ii) and section 2 (43) of the Income-tax Act, 1961 : ' Indian Income-tax Act, 1922. "10 (4) Nothing in clause (vi) or clause (.0) of subsection (2) shall be deemed to authorise the allowance of any sum paid on account of any cess rate or tax levied on the the profits or gains of any business, profession or vocation or assessed at a proportion of or otherWise on the basis of any such profits or gains ' Income-tax Act, 1961. "40. Amounts not deductible- Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession. " (a) in the case of any…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.