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Petitioner: SUHRID GEIGY LTD. VS Respondent: COMMISSIONER OF SUR TAX
Court Name: Gujarat High Court Judge(s): A. R. Dave, R. K. Abichandani Title: SUHRID GEIGY LTD. vs COMMISSIONER OF SUR TAX Case No.: I.T.R. No.4 of 1973 Date of Judgment:2000-09-10 Reported As: 2000 PTD 3147 Result: Order accordingly
JUDGMENT
JUDGMENT R. K. ABICHANDANI, J.---By this surtax reference which relates to the assessment years 1970-71 and 1972-73, the Income-tax Appellate Tribunal, Ahmedabad, has referred, for the opinion of this Court, the following question under section 18 of the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as the Act), read with section 256(2) of the Income Tax Act, 1961: "(1) Whether, on the facts and in the circumstances of the case,. The Tribunal was justified in law in holding that the Surtax Officer was well within his jurisdiction in passing the rectification orders for the assessm ent years 1970-71 and 1972-73?" (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the orders passed in the two assessment years were valid in law?" As regards the assessm ent year 1972-73, the assessee had filed a return of chargeable profits under the said Act on September 29, 1972, showing chargeable profits of rupees nil in respect of the accounting period from April 1, 1971, to March 31, 1912. The figure of general reserve for the said accounting year as on April 1, 1971, was admittedly Rs.2.74,00,912 as per the balance-sheet for the accounting year 1971-72 which is on. Record. In the said balance-sheet, admittedly, dividend amount of Rs.39 lakhs was deducted from the general reserve as on April 1, 1971. However, in the assessm ent order, dated September 24, 1975, the Surtax Officer, while deducting certain amounts which were not treated as reserve, omitted to deduct from the general reserve as on April 1971, the amount of dividend of Rs.39 lakhs which was proposed for the year 1970-71 and paid in the year 1971-72. The, Surtax Officer, noticing the mistake of not deducting the proposed dividend from the amount of general reserve as it stood as on April1, 1971, issued a notice under section 13 of the Act to the assessee for showing cause as to why the general reserve should not be reduced to the extent
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of Rs.40,04,000 on the first day of the accounting year before its inclusion in the computation of capital base. Contentions similar to those which were canvassed in response to the notice which was issued under section 13 in respect of the assessment year 1970-71 were also canvassed in response to this notice and, by a similarly worded order, for the same reasons which the Surtax Officer had given for rectifying the mistake in respect of the assessment year 1970-71, the. Surtax Officer, by his order passed on the same date, that is, on April 7, 1977, held that the proposed dividend which was required to be shown under the heading. "Current liabilities and provisions" in the statutory form of balance-sheet, was required to be reduced to the extent from the general reserve. He, however, proceeded to deduct the proposed dividend of Rs.40,04,000 as against the actual figure of Rs.39 lakhs which was the dividend proposed for the accounting year 1970-71 and paid in the accounting year 1971-72 as reflected from the balance-sheet of 1971-72 at page 20. We may again note that this discrepancy in the amount surfaced for the first time during the hearing of this reference and even according to learned counsel for the assessee, the amount which was deducted from the general reserve of Rs.2,74,00,912 which stood as on April 1, 1971, was of Rs.39.Lakhs being the amount of dividend which was proposed for the year ending March 31, 1971. In the appeal which was preferred by the assessee against the rectification order, the Commissioner of Income-tax (Appeals), on the ratio of Karamchand Premchand's case, by an identically worded order as he had made in respect of the assessment year 1970-71, dismissed the appeal on March 9,'1979. Against the two appellate orders by the Commissioner of Income-tax (Appeals) made in respect of the assessm ent years 1970-71 and 1971-72, the assessee appealed before the Tribunal under section 12 of the said - Act. Before the Tribunal the assessee raised, through its learned counsel the following contentions during the hearing of the appeals: (1) That the dividend proposed should form part of the general reserve and hence there was no mistake at all in the record. (2) In any case, even if there was a mistake, it was not one which could be rectified under section 13 of the said Act as the legal position was at best not clear, which would involve arguments and it was not possible to arrive at in a firm conclusion without a debate. Learned counsel had relied upon the decision of the Supreme Court in Volkart Brother's case (1971) 82 ITR 50 in support of his contention. , The contention raised for the Department was that, in the assessee's own case for the assessment years 1965-66, 1966-67 and 1967-68, the Income-tax Tribunal had, following the decision of the Gujarat High Court in Karamcand Premchand (Pvt.) Ltd., held that the proposed dividend could not form part of reserves. It was contended that rule 1 of the Second Schedule to the said Act specifically provided that such proposed dividend should not be treated as a reserve. It was contented on behalf of the Department that the decision in Karamchand Pemchand's case, was given by the High Court on December 13, 1976, while the STO had passed his orders under section 13 on April 7, 1977, and that such rectification orders could be passed in keeping with the decision of the jurisdictional High Court. The Department had also relied upon the decision of this Court in Parshuram Pottery Works Co. Ltd. v. D.R. Trivedi, WTO (1975) 100 ITR 651 and Padmavati Jaykrishna v. CWT (1976) 105 ITR 115 in support of these contentions. Learned counsel for the assessee had in reply urged that the matter appeared to be debatable in spite of some decisions and that whether proposed dividend would form a part of the reserve or would be a mere provision was the subject- matter of controversy in respect of which two opinions were possible. We have narrated the contentions raised before the Tribunal by the rival parties in details with a view of focus upon the exact nature of controversy which the Tribunal was called upon to decide. This has become necessary because, as will be seen later on, the scope of contentions raised before, this Court on behalf of the assessee was much wider, and went beyond the controversy
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which actually was raised before the Tribunal and which the Tribunal decided in para, 8 of its order in their following terms: "In our view, after the decision of their Lordships of the Gujarat High Court in the case of Karamchand Premchand at least as far as this charge is concerned it cannot be treated as a question not settled. The position has been explained in Padmavati Jaykrishna's case (1976) 105 ITR 115. After the decision of their Lordships a rectification order passed in keeping with the same is, according to us, valid and, therefore, the STO was well within his jurisdiction when he passed the rectification orders. We dismiss the assessee's appeal." When the hearing commenced, learned counsel appearing for the assessee had strongly contended that there was no mistake apparent on record in the making of the original order in respect of those two assessm ent orders requiring any rectification under section 13 of the Act. It was contended that at the stage when dividend is proposed there was no "debt owed" till the company in its general body meeting accepts the recommendation in respect of the proposed dividend. It was, therefore contended that, since it could not be known whether the recommendation would be accepted or not in respect of the dividend proposed out of the profits at the end of the accounting year, there being no liability arising as on the first day of the previous year immediately following such accounting year for which the dividend is proposed, the amount of proposed dividend could not be deducted from the general reserve as on the first day of the previous year. Learned counsel read the decisions of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT (1981) 132 ITR 559 and in CIT v Mysore Electrical Industries Ltd. (1971) 80 ITR 566 and proceeded to contend that at the time when the original orders of assessment under the said Act were made in respect of these two years, the point was highly debatable and the subsequent decision of this Court which settled the point was not available at the stage when the original assessm ent orders were made. After such detailed arguments on this point, learned counsel submitted that he would not pursue the question as to whether the point was debatable and that he would confine his challenge to the following two contentions: (1) That the Tribunal had fallen into an error in upholding the jurisdiction of the STO in spite of the fact that there was no mistake in the assessment order, dated August 28, 1974, for the assessment year 1970-71 and, dated September 24, 1975, for the assessment year 1972-73. (2) In absence of any mistake which is a prerequisite condition for initiating proceedings under section 13 of the said Act, the rectification orders for both the years were trot followed in law. Elaborating these contentions, learned counsel submitted that for the assessment year 1970-71 the relevant previous year would be 1969-70 covering the accounting period from April 1, 1969 to March, 31, 1970, and, therefore, the balance-sheet as on March 31, 1970, was relevant and any recommendation of dividend made in relation to the balance-sheet on March 31, 1970, would be deductible from the profits as on March 31, 1970, and, therefore, could be deducted from the general reserve as on April 1, 1970 and not April 1, 1969. He argued that for deducting any proposed dividend from the general reserve as it stood on April 1, 1969, the relevant balance-- sheet would be as on March 31, 1969, and only the dividend proposed for 1968-69 which was to be paid out of the profits worked out at the end of that year, i.e., on March 31, 1969, could be deducted from the general reserve as on April 1, 1969. He submitted that since the dividend of Rs.16,38,000 proposed as per the directors' report, dated October 8, 1970, for the accounting year 1969-70 could be paid only in the next accounting year 1970-71; it was deductible, if at all, only from the profits worked out at the end of the year, that is, on March 31, 1970, and, therefore, from the general reserve as on April 1. 1970, if the profits without deduction thereof are transferred to the general reserve as on April 1, 1970, and not from the general reserve as on April 1, 1969. It was submitted that in respect of the first day of the previous year of the accounting year 1969-70, the relevant date was April 1, 1969, and from
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the reserve as it stood on April 1, 1969,. The dividend proposed to be paid in that accounting year of 1969-70 would be for the preceding previous year for which it was proposed. In other words, the dividend which was proposed for the accounting year 1968-69 and which admittedly as per the assessee's balance-sheet was Rs.29,25,000 was relatable to the first day of the previous year 1969- 70 and not the proposed dividend of Rs.16,38,000 which was recommended for the accounting year 1969-70 and could be paid only from the profits at the end of that accounting year as on March 31, 1970, which, if transferred to the general reserve, would warrant deduction from the general reserve as on April 1, 1970. It was, therefore, contended that, by not deducting the said amount of Rs.16,38,000, the STO did not commit any mistake. As regards the assessm ent year 1972-73, learned counsel contended in the same vein that the amount of Rs.40,04,000 recommended by the directors as the proposed dividend for the accounting year 1971-72 was payable only from the profits standing at the end of the said accounting year, i.e., as on March 31, 1972, and if profits are transferred to the general reserve, then from such general reserve as on April 1, 1972, and the said amount of Rs.40,04,000 could, not have been deducted from the general reserve as on the first day of the previous year, i.e., as on April 1, 1971. He pointed out from page 20 of the balance-sheet in respect of the accounting year 1971-72 that the dividend which was proposed for the year ending March 31, 1971, was Rs.39 lakhs which was relatable to the first day of the previous year, i.e., April 1, 1971, and not the sum of Rs.40,04,000 which was relatable only to April 1, 1972. It was, therefore, contended that in the original assessment order, the STO did not commit any mistake when he did not deduct any proposed dividend from the general reserve as on April 1, 1971. It was submitted that thus, in the rectification order a wrong basis has been adopted by making deduction of the proposed dividend of Rs.16,38,000 as on April 1, 1969, being the first day of the previous year of 1969-70 and similarly a. Wrong basis even for the accounting year 1971-72 by deducting the proposed dividend amount of Rs.40,04,000 from the general reserve as on April 1, 1971. It was, therefore, contended that the rectification orders were bad on the ground that a wrong basis of deduction was chosen as the amounts which were not deductible as proposed dividends from the general reserves as on the first day of the previous years were sought to be deducted while purporting to rectify the original orders. Learned counsel appearing for the Revenue contended that at no point of time till the midst of the reference did it occur to anyone that the figures taken of the proposed dividend in respect of the two relevant years were not correct. It was submitted that the real issue involved before the Tribunal on which contentions were canvassed by both the sides was only whether there was a debatable point calling for no rectification since it could not be considered as a mistake and only an erroneous view out of the two possible views, or whether, in view of the clear provisions of rule 1 read with its Explanation contained in the Second Schedule to the Act and the decision of this Court, proposed dividend was required to be deducted from the general reserve as it stands on the first day of the previous year. It was contended that the grounds which are now sought to be raised after jettisoning the main question as to whether there was a debatable issue involved- and, therefore, no mistake, were never raised before any authority so far, and they do not arise from the decision of .The Tribunal which was rendered only on the points which were argued before it. It was also submitted that even if there is any error in taking the correct figure of the proposed dividend for reducing the same from the general reserve as it stood on the first day of the relevant previous year in respect of the assessm ent year 1970-71, that could be corrected by giving a direction to that effect to the tribunal so that the assessee may not get the undue benefit of a deduction of a much lesser amount of proposed dividend, namely, of Rs.16,38,000 as against the actual amount of dividend of Rs.29,25,000 which was paid for the year 1968-69 in the accounting year 1969-70 and was deductible from the general reserve as on April 1, 1969. He also submitted that merely because erroneous figures are taken for the purpose of deduction; it would not show that there was no
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mistake in the original orders made by the STO in which he had omitted to make any deduction of the proposed dividends from the general reserves as on the first day of the relevant previous year in respect of these two years. We may at the outset against emphasis that the controversy before the Tribunal which was raised by both the sides was entirely on the question as to whether the dividend proposed should form part of general reserve and that even if it did not, since the question was debatable at the relevant time when the assessm ent orders were made, it could not be said that there was a mistake committed by the STO which required to be rectified under section 13 of the said Act: The new dimension which is now given to the matter on behalf of the assessee in the midst of the hearing of this reference for the first time focuses on the erroneous figures taken by way. Of proposed dividend in the rectification orders for the purpose of making deductions from the general reserves standing on the first day of the relevant previous year. On the basis of these erroneous figures; it was argued that it should have been held that there was no mistake in the assessment orders because the Assessing Officer was not required to make deduction of such erroneous figures from the general reserves as on the first day of the relevant previous years and, therefore, there was no question of rectifying those orders on such ground. Under section 4 of the said Act, surtax was to be charged on every company for every assessment year commencing on and from April 1, 1964, in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate, or rates specified in the Third Schedule to the Act. The words "chargeable profits" are defined in section 2(5) of the Act so as to mean the total income of an assessee computed under the .Income Tax Act, 1961, for any previous year or years, as the case may be, and adjusted in accordance with the provisions -of the First Schedule. The expression "statutory deduction" as defined in section 2(8) means an amount equal to 10 percent. Of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of Rs.2,00,000 whichever is greater, subject to the provisos to that definition with which we are not concerned in the present proceedings. A return of chargeable profits was required to be furnished as provided by section 5 in the prescribed form before September 30 of the assessment year. Under section 6, the Income- tax Officer is required to make the assessment after taking into account the relevant material and assessee the chargeable profits and the amount of surtax payable on the basis of such assessm ent. Section 11 of the Act, inter alia, provides that an appeal lies to the Appellate Assistant Commissioner at the instance of any person objecting to the amount of surtax or who denies his liability or objecting to any penalty or fine imposed or objecting to an order refusing to allow the claim made by the assessee for rectification under section 13 or amendment under section 14 of the Act. As provided in subsection (4) of section 11, the Appellate Assistant Commissioner is empowered to hear and determine the appeal and subject to the provisions of the Act, pass such orders. As he thinks fit and such orders may include an order enhancing the assessment or penalty, provided that an order enhancing the assessment or penalty cannot be made unless the person affected thereby has been given a reasonable opportunity of showing cause against such enhancement. A person who is aggrieved. By an order of the Appellate Assistant Commissioner made under section 11 or by an order made by the Commissioner in exercise of his revisional jurisdiction under section 16 of the Act can appeal to the Appellate Tribunal as provided by section 12 of the said Act. Under subsection (2) of section 12, even the Commissioner,, if he objects to any order passed by the Appellate Assistant Commissioner under any provisions of the Act, may direct the Income-tax Officer to appeal to the Appellate' Tribunal against such order. As provided by subsection (7) of section 12, in hearing and making an order on any appeal under the said provision, the Appellate Tribunal is empowered to exercise the same powers and follow the same
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procedure as it exercises and follows in hearing and making an order in any appeal under the Income-tax Act. Under section 13 of the said' Act, there is a provision made for rectification of mistakes and it, inter alia, lays down that, with a view to rectify any mistake apparent from the record, the Commissioner, the Income-- tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal may, of his or its own motion, or on an application by the assessed, amend any order passed by him or it in any proceedings under the Act within four years of the date on which such order was passed. An amendment which has the effect of enhancing the assessment or reducing a refund or otherwise increasing the liability of the assessee shall not be made under the said provision unless the authority concerned has given a notice to the assessee of its intention so to do and has allowed the assessee a reasonable opportunity of being heard. Under section 18 of the said Act, various provisions of the Income-tax Act which are enumerated therein including sections 254 to 262 are made applicable with such modifications as may be prescribed as if they are the provisions of the said Act and the rules made there under. As noted above, statutory deduction is to be computed in accordance with the provisions of the Second Schedule to the Act. The Second Schedule to the Act provides for rules for computing the capital of a company for the purposes of surtax. The said rule 1, to the extent that it is relevant for the purpose of the present reference, is reproduced hereunder: "(1) Subject to the other provisions contained in this Schedule, the capital of a company shall be the: aggregate of the amounts, as on the - first day of the previous year relevant to the assessment year of-... (ii) its reserves, if any, created under proviso (b) to clause (vib) of subsection (2) of section 10 of the Indian Income-tax Act, 1922 (11 of 1922), or under subsection (3) of section 34 of the Income Tax Act, 1961 (43 of 1961): (iii) its other reserves as reduced by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the Indian Income- tax Act, 1922 (11 of 1922), or the Income Tax Act, 1961 (43 of 1961); Explanation. --For the removal of doubts it is hereby declared that any amount standing to the credit of any account in the books of a company as on the first day of the previous year relevant to the assessm ent year which is of the nature of item (5) or item (6) or item (7) under the heading 'Reserves and surplus' or of any item under the heading 'current liabilities and provisions' in the column relating to 'liabilities' in the 'form of balance sheet' given in Part I of Schedule VI to the Companies Act, 1956 (1 of 1956), shall not be regarded as a reserve for the purposes of computation of the capital of a company under the provisions of this Schedule." One thing that clearly stares from the provisions of rule 1 read with the Explanation is that the proposed dividend can never be regarded as reserve. It, therefore, follows that when a dividend is proposed with a decision of the directors to pay it from the general reserve, then such proposed dividend cannot be regarded as a part of that general reserve as it stands on the first day of the previous year because it ought to have been paid out of the profits as worked out on the day immediately preceding that first day of the previous year. If this legal position is kept in mind and the original assessm ent orders made by the STO on August 28, 1974, in respect of the assessment year 1970-71 and on September 24, 1975, in respect of the assessment year 1972-73 are examined, it would become at once clear that from the figure of the general reserve of Rs.1,61,83,570 as it admittedly stood on the first day of the previous year, that is, April 1, 1969, as per the balance-sheet for the year 1969-70, no deduction whatsoever was made in the original order of the assessment, for the proposed dividend. As per the balance-sheet for the financial year, 1969-70, admittedly, 'an amount of Rs.29,25,000 was shown therein to have been deducted from the general reserve being the amount of dividend which was proposed for the year 1968-69 and which ought to have been
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paid at the end of that year out of the profits of the company as worked out on March 31, 1969. But, since the profits were transferred to the general reserve account with a rider that the proposed dividend of Rs.29,25,000 would be paid out of the general reserve, when accepted by the general meeting of the shareholders, the said amount of Rs.29,25,000 could never have been regarded as a part of the general reserve of Rs.1,61,83,570 as it stood as on April 1, 1969, in the balance-sheet. In the return which was required to be filed under the Act in the prescribed form being Form No. l…
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