Oudh Sagar Mills Ltd. vs Commissioner of Income Tax

Dr. B.P. Saraf, J.—By this reference under s. 256(1) of the IT Act, 1961 r/w s. 18 of the Companies (Profits) Surtax Act, 1964, at the instance of the assessee, the Tribunal, Bombay ''C'' Bench, has referred the following three questions of law to this Court for opinion :

"1. Whether, on the facts and in the circumstances of the case and on a proper interpretation of Expln. 1 to r. 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the Tribunal was right in holding that the sum of Rs. 68,64,000 being the adjustment made in respect of excess depreciation charged in the earlier year could not be treated as part of the capital for the purpose of determining the statutory deduction under s. 2(8) of the said Act ?

Whether, on the facts and in the circumstances of the case and on a proper interpretation of r. 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the Tribunal was right in holding that the sum of Rs. 57,52,837 out of Rs. 68,64,000 is liable to be excluded from general reserves and could not be treated as part of the capital for the purpose of determining the statutory deduction under s. 2(8) of the said Act ?

Whether, on the facts and in the circumstances of the case and on a proper interpretation of Expln. 1 to r. 2 of the Second Schedule to Companies (Profits) Surtax Act, 1964, the Tribunal was right in holding that the sum of Rs. 11,11,163 could not be treated as part of the capital for the purpose of determining the statutory deduction under s. 2(8) of the said Act ?"

So far as question No. 2 is concerned, it is fairly stated by the counsel for the assessee that in view of the decision of this Court in Commissioner of Income Tax, Bombay City-III Vs. Zenith Steel Pipes Ltd., , this question has to be decided in favour of the Revenue. Accordingly, we answer question No. 2 in the affirmative and in favour of the Revenue.

We are now left only with question Nos. 1 and 3. We shall deal with question No. 1 first. The material facts relevant for determination of the same are as follows : The assessee is a limited company. Right from the inception of its business in the year 1932, it had been calculating depreciation on the "reducing balance method" which is a method recognised for the Income Tax assessment. However, in the previous year ending on 30th June, 1968 relevant to the asst. yr. 1969-70, the assessee-company decided to change the basis of accounting depreciation to "straight line method". This change of the basis of depreciation was sought to be made not for current year only but right from the inception of its business in the year 1932. As a result of this decision to switch over to the straight line method of depreciation with retrospective effect from the year 1932, the fixed assets of the company were revalued, thereby enhancing their value by Rs. 68,64,000. This amount of Rs. 68,64,000 was first credited to the P&L a/c and therefrom to the general reserve account. In other words, the depreciation calculated on the basis of the straight line method being less than the depreciation according to the reducing balance method, the excess of Rs. 68,64,000 calculated right from 1932 or so was credited to the general reserve account. The assessee''s contention before the ITO was that the entire balance of Rs. 1,41,09,000 standing to the credit of general reserve, which included the sum of Rs. 68,64,000 should be taken into account in computing its capital for the purpose of levy of surtax under the Companies (Profits) Surtax Act, 1964 ("Surtax Act"). This contention was negatived by the ITO, firstly, by relying on Expln. 1 to r. 2 of the Second Schedule and secondly, on the ground that it contravened r. 1(iii) of Second Schedule. This order of the ITO was affirmed by the AAC and also by the Tribunal. Hence, this reference at the instance of the assessee.

We have heard Mr. Toprani, learned counsel for the assessee. The uncontroverted factual position is that general reserve to the tune of Rs. 68,64,000 was created by the assessee-company in the previous year relevant to the assessment year under reference by revaluing its assets, by purportedly recalculating the depreciation for the last 55 years or so, on a method different from the one followed by it and accepted by the Revenue all those years. Obviously, it is a case of revaluation of assets of the company and the reserve in question has been brought into existence by such revaluation. The question for consideration is whether such reserve can be regarded as capital for computing the capital of the company for the purpose of Surtax Act. According to the learned counsel for the assessee, under Expln. 1 to r. 2 of the Second Schedule to the Surtax Act, only such reserve which is brought into existence by creating or increasing (by revaluation or otherwise) any "intangible assets" is not regarded as capital for the purposes of that Act. This submission is based on the interpretation of the expression "book assets" appearing in the said Explanation to mean "intangible assets". All the authorities under the Act rejected the above contention of the assessee and declined to interpret the expression "book assets" to mean only "intangible assets". The assessee now wants this Court to accept its interpretation and to hold that "book assets" referred to in Expln. 1 means only intangible assets and does not mean or include tangible assets.

To appreciate the controversy, it may be expedient to set out the scheme of the Surtax Act and the relevant provisions thereof. This Act was enacted for the purpose of imposing a special tax on the profits of certain companies. Sec. 4 of the Act, which is the charging section, provides :

"4. Charge of tax. - Subject to the provisions contained in this Act, there shall be charged on every company for every assessment year commencing on and from the 1st day of April, 1964, a tax (in this Act referred to as the surtax) 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."

Surtax is thus chargeable only in respect of "so much of the chargeable profits of the previous year as exceed the statutory deduction". "Chargeable profits" have been defined by cl. (5) of s. 2 of the Act to mean "the total income of an assessee computed under the IT Act, 1961 for any previous year and adjusted in accordance with the provisions of First Schedule". The First Schedule to the Act lays down the rules for computing the chargeable profits. It lays down the adjustments that are to be made in the total income computed in that year under the IT Act for computing the chargeable profits. Rule 1 of the said Schedule specifies a number of items of income, profits and gains and other sums which are to be excluded from the total income. Rule 2 provides for certain deductions to be made from the income arrived at after making the exclusions mentioned in r. 1. Rule 3 provides that the net income calculated in accordance with r. 2 shall be increased by an aggregate of the amounts specified therein. The Second Schedule to the Act lays down the rules for computing the capital of the company for the purpose of Surtax. Rule 1 thereof provides that the capital of a company shall be the aggregate of the amounts specified therein, which includes the paid up share capital, reserve, etc. Expln. 1 to r. 2 clearly provides that a paid up share capital or reserve brought into existence by creating or increasing (by revaluation or otherwise) any book asset would not be capital for computing the capital of a company for the purposes of that Act. It read :

"Expln. 1. - A paid up share capital or reserve brought into existence by creating or increasing (by revaluation or otherwise) any book asset is not capital for computing the capital of a company for the purposes of this Act."

It is clear from the scheme and provisions of the Surtax Act that for the purpose of this Act, the chargeable profits is an amount different from the total income computed under the IT Act. In fact, a number of adjustments are to be made in the income computed under the IT Act for arriving at the chargeable profits under the Surtax Act. Similarly, the expression "capital" has also been given a special meaning for the purpose of the Surtax Act by specifying in the Second Schedule that the capital of the company shall include and exclude the amounts specified therein. It is thus abundantly clear that the ordinary meaning of the expressions "profits" and "capital" or even the meaning given to these expressions under the IT Act is not applicable in computing the "chargeable profits" or "capital" for the purposes of the Surtax Act. Expln. 1 to r. 2, which has been set out above, in clear terms provides that the paid up share capital or reserve brought into existence by creating or increasing (by revaluation or otherwise) any book asset would not be regarded as capital for computing the capital of a company for the purpose of this Act. The object of the Explanation, obviously, is to ensure that the chargeable profits on which surtax is payable are not reduced by artificially enhancing the value of the book assets by revaluation or otherwise. The language of Expln. 1 is clear and unambiguous and in the context and setting of the Surtax Act, the Second Schedule and the relevant Explanation the term "book assets" referred to therein means and includes all properties belonging to the assessee-company appearing in its books of account. It cannot be construed to mean only intangible assets.

"Asset" is a word of wide import. It is derived from the French "assess" meaning "sufficient" and originally signified a sufficiency of property to pay the decedent''s debts. As ordinarily used, it has a wide significance. In its common acceptation the term means property, real and personal, property owned, property rights. It represents something over which a man has domain and can transfer with or without consideration, and which may be reached by execution process. The term may be and has been used as referring to any property available to the payment of claims or expenses; property, real or personal, tangible or intangible, legal or equitable, which can be made available for, or may be appropriate to, the payment of debts, the funds, credit or proceeds arising from the disposition of real and personal property, the means which a party has as compared with his debts or liabilities. (See 6 Corpus Juris Secondum 1031). In particular connections, it has been held to include the entire property of a mercantile firm or trading corporation, a property interest which is left after prior encumbrances are satisfied; something belonging to a person but of an intangible nature; something that can be realised upon in cash within a reasonable time.

The expression "book asset" as used in Expln. 1 has to be interpreted in the light of the above interpretation of the term "asset". So interpreted, it would mean such assets of the company which are entered in its books of account or evidence of which consists of entries in its books.

There can possibly be no controversy in this regard. Controversy, if at all, may be raised only in a case where it is sought to be construed to mean not only the assets entered in the books but also assets belonging to the company in respect of which entries could be made in the ordinary course of its business but have not been made for one reason or the other. In the present case, we are not confronted with any such situation.

Though there is no direct authority on this point, in our opinion, the decision of the Court of Common Pleas rendered more than a hundred and twenty five years ago in Shipley vs. Marshall (1863) 14 CBNS 566, where the meaning of the term "book debts" came up for consideration, is of great assistance in interpreting the expression "book assets". In the above case, interpreting the term "book debts" as used in s. 137 of the Bankruptcy Act, 1863, Earle, C. J. said :

"By ''book debts'', the legislature doubtless intended to describe debts in some way connected with the trade of the bankrupt : and I am inclined to give the term a wider range. But it is enough to say that this was a debt connected with and growing out of the plaintiff''s trade."

Williams, J., said :

"The words of s. 137 are no doubt, as Mr. Griffiths has pointed out, authorising the assignees to sell the ''book debts due or growing due to the bankrupt, and the books relating thereto''. This, it is said, can only mean debts which are actually entered in some book kept by the bankrupt in the course of his trade. I cannot, however, accede to that construction. I think the meaning of the statute is, that the assignees shall dispose of all debts due to the bankrupt in respect of which entries could be made in the ordinary course of his business : otherwise, a debt by accident omitted to be entered would not pass by the assignment."

Byles, J. said :

"It is said that ''book debts'' must mean debts which are entered in the trade books of the bankrupt. I agree with Williams, J., that they must be such debts as are commonly entered in books."

The following illustration was given by Byles, J. in support of his above opinion :

"Suppose the trader kept no books, or was blind and could not write, and did not choose to incur the expense of keeping a clerk or book-keeper, - upon the construction contended for by the defendant, there could be no book debts which could be made the subject of sale and assignment under s. 137 of the Bankruptcy Act, 1861. That surely would not be a very sensible construction to put upon the statute."

After about a century, in Independent Automatic Sales Ltd. vs. Knowles & Foster (1962) 3 All ER 27, Buckley, J. of the Chancery Division, quoted the above opinions with approval. It was aptly remarked by Buckley, J. (at p. 34 of the report) :

"So far as I am aware, no more precise definition of the meaning of the term "book debts" has ever been attempted judicially and I shall not attempt one. Shipley vs. Marshall (1863) 14 CBNS 566, I think establishes that, if it can be said of debt arising in the course of a business and due or growing due to the proprietor of that business that such a debt would or could in the ordinary course of such a business be entered in well kept books relating to that business, that debt can properly be called a book debt whether it is in fact entered in the books of the business or not."

In our opinion, the same can be said of "book assets". In any event, in the context of Expln. 1 of Second Schedule to the Surtax Act, "book assets" would certainly mean and include all assets, whether tangible or intangible, entered in the books of the company. By no process of reasoning or interpretation it can be interpreted to mean and include only intangible assets and not tangible assets.

In view of the foregoing discussion, we do not find any merit in the contention of the learned counsel for the assessee that the expression ''book asset'' should be read to mean "assets other than tangible assets". We are of the clear opinion that the term "asset" is wide enough to include all assets which go into forming the paid up share capital of a company or a reserve of the company. The expression "book" preceding the word ''asset'' can only be construed to mean assets which are entered in the books of account of the company. This is the only meaning that can reasonably be given to the word "book" preceding the term "asset". In any event, it is not possible to construe the word ''book asset'' to mean assets other than tangible assets.

The learned counsel for the assessee placed reliance on the decision of the Supreme Court in The Commissioner of Income Tax (Central), Calcutta Vs. Standard Vacuum Oil Company, in support of his contention that book assets would mean only intangible assets and no other assets. We have carefully perused the said decision. We do not find that the said decision supports the contention of the assessee. In our opinion, reliance on the same for the purpose of the present controversy is totally misplaced.

In view of the above, we are of the clear opinion that increase in the general reserve of Rs. 68,64,000 brought into existence by the assessee by revaluing the assets incorporated in its books of account by the purported recalculation of depreciation in respect of the same for the last 55 years, is not capital for the purpose of the Surtax Act. In view of the above, we answer the question No. 1 in the affirmative and in favour of the Revenue.

At this stage, the learned counsel for the assessee submits that in this case two views are possible and the view canvassed by the assessee being favourable to the assessee, the same should be accepted. He relies on the principle of beneficial interpretation often applied to interpretation of taxing statutes. There is no quarrel with the principle of beneficial interpretation which is often applied to interpretation of taxing statutes. But there are limitations to the application of this rule. It can be applied by the Courts to interpretation of taxing statutes only when there is an ambiguity or doubt about the meaning of the word or the language used therein. It cannot be applied to stretch or pervert the clear language of the enactment to give benefit to the assessee which is not intended by the legislature. The question of applying the principle of beneficial interpretation would arise only where in the opinion of the Court deciding the case two views are reasonably possible. But if, on a plain reading of the statutory provision, the Court is of the opinion that one and only one interpretation is reasonably possible which is against the assessee it cannot give an erroneous interpretation in favour of the assessee by resorting to the principle of beneficial interpretation. Commissioner of Income Tax Vs. New Shorrock Spg. and Mfg. Co. Ltd., . Moreover, as held by this Court in Commissioner of Income Tax Vs. Boots Company (I.) Limited, , the doubt as to the true meaning should be real, and not conjectural or fanciful. It is not for the Courts to invent fancied ambiguities and stretch or pervert the language of the enactment in favour of the taxpayer. In the instant case, it is clear from the foregoing discussion that the principle of beneficial interpretation has no application. The contention of the learned counsel based on principle of beneficial interpretation is also, therefore, rejected.

So far as question No. 3 is concerned, it is fairly stated by the learned counsel for the parties that in view of the answer to question No. 1 in favour of the Revenue, it is not necessary to answer the same. Question No. 3 is, therefore, returned unanswered.

To sum up, question Nos. 1 and 2 are answered in the affirmative and in favour of the Revenue and question No. 3 is returned unanswered.

In the facts and circumstances of the case, we make no order as to costs.