COMMISSIONER OF INCOME-TAX VS HINDUSTAN TELEPRINTERS LTD.
2001 P T D 445
[239 I T R 60]
[Madras High Court (India)]
Before M. S. Janarthanam and P. Thangavel, JJ
COMMISSIONER OF INCOME‑TAX
versus
HINDUSTAN TELEPRINTERS LTD.
Tax Case No.983 of 1984 (Reference No.879 of 1984), decided on /01/.
nd
January, 1998. (a) Income‑tax‑‑‑
‑‑‑‑Reassessment‑‑‑ Information‑‑‑ Company‑‑‑ Surtax‑‑‑ Computation ‑of capital‑‑‑Audit party bringing to notice of Assessing Officer failure to apply R.4‑‑‑Is not opinion as to law‑‑‑Reassessment on basis thereof permissible‑‑‑Indian Companies (Profits) Surtax Act, 1964, S.8, Sched. 11, R.4‑‑‑Indian Income Tax Act, 1961, Ss. 10(28) & 280ZB.
That part alone of the note of an audit party which mentions the law which escaped the notice of the Income‑tax Officer constitutes "information" within the meaning of section 8(b) of the Companies (Profits) Surtax Act, 1964; the part which embodies the opinion of the audit party in regard to the application or interpretation of the law cannot be taken into account by the Income‑tax Officer.
The part of the income, profits and gains of a company not includible in its total income, as computed under Chapter III of the Income -tax Act can be taken into account for the purpose of diminishing the capital base under rule 4 of the. Second Schedule to the Companies (Profits) Surtax Act, 1964.
A reassessment was made on the assessee‑company for the assessment year 1972‑73, under section 8(b) of the Companies (Profits) Surtax Act, 1964, on the basis of information received in the form of a report from the audit party, which felt that the tax credit certificates to the extent of Rs.19,57,996 received by the company under section 280ZB of the Income Tax Act, 1961, should have been deleted from the capital base under .rule 4 of the Second Schedule to the Surtax Act, which authorises exclusion of proportionate capital in respect of exempted income. On appeal, the Commissioner of Income‑tax (Appeals), held that the tax credit certificate was not income, and thus, on the ground that there was no escapement, the Commissioner of Income‑tax (Appeals) cancelled the' assessment without entering into the question whether the reassessment was otherwise properly initiated. On appeal by the Department, the Tribunal held that, since the question whether the amount of tax credit certificate should be taken into account in computing the chargeable profit under the Companies (Profits) Surtax Act had not been concluded by any decision of a Court, an audit note giving an opinion of that question could not amount to "information" within the meaning of section 8(b) of that Act. The Tribunal confirmed the order of the Commissioner of Income‑tax (Appeals) without going into the merits. On a reference:
Held, that failure to take into account the tax credit certificates, issued in the original assessment, had the effect of under assessment of the net chargeable profits assessable to tax under the Surtax Act. The audit party drew the attention of the Assessing Officer to the omission of the consideration of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, which led to under assessment of the profits chargeable under the surtax Act. The audit party did not at all express any opinion as to the interpretation of, the said rule 4. The Income‑tax Officer had jurisdiction to initiate reassessment proceedings in the assessee's case for the assessment year 1972‑73.
CIT (Addl.) v. Bimetal Bearings Ltd. (1977) 110 ITR 131 (Mad.); Stumpp, Schuele and Somappa (P.) Ltd. v. ITO (Second) (1976) 102 ITR 320 (Kar.); Second ITO v. Stumpp, Schuele and Somappa (P.) Ltd. (1977) 106 ITR 399 (Kar.); Second ITO v. Stumpp, Schuele and Somappa (P.) Ltd. (1991) 187 ITR 108 (SC); Indian and Eastern Newspaper Society v. CIT (1979) 119 ITR 996 (SC) and International Instruments (P.) Ltd. v. CIT (1982) 133 ITR 283 (Kar.) ref.
(b) Income‑tax‑‑‑
‑‑‑‑Surtax‑‑‑Company‑‑‑Computation of capital‑‑‑Tax credit certificate‑‑ Income exempt under Chap. III of Income‑tax Act‑‑‑Capital to be diminished proportionately‑‑‑Indian Companies (Profits) Surtax Act, 1964, Sched. II, R.4‑‑‑Indian Income Tax Act, 1961, Ss.10(28) & 280ZB,
S.V. Subramaniam for the Commissioner.
R. Venkataraman for the Assessee.
JUDGMENT
M. S. JANARTHANAM, J.‑‑‑This reference relatable to the assessment year 1972‑73 concerning the assessee, Hindustan Teleprinters Ltd., Madras, raises two questions of law for our opinion, as below:
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the Income‑tax Officer has no valid jurisdiction to initiate the reassessment proceedings in the assessee's case for the assessment year 1972‑73?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was within its powers to go into the question of validity of reopening of the assessment?"
The assessee is a company. For the assessment year 1972‑73, the original assessment to surtax was completed on November 23, 1972. Subse quently, a reassessment was made on January 31, 1977, under section 8(b) of the Companies (Profits) Surtax Act, 1964 (Act No.VII of 1964)‑‑‑for short (the "Surtax Act"), on the basis of the information received in the form of a report from the audit party, which felt that the tax credit certificates to the extent of Rs.19,57,996 received by the company under section 280ZB of the Income Tax Act, 1961 (Act No.43 of 1961 for short "the Income‑tax Act"), should have been deleted from the capital base under rule 4 of the Second Schedule to the Surtax Act, which authorises exclusion of proportionate capital in respect of exempt income.
On appeal, the Commissioner of Income‑tax (Appeals‑II), Madras 34, held that the tax credit certificate was not an income at all and hence there was no question of it being part of the total income so as to require the recomputation of the capital on the ground that it was exempt from income‑tax. Thus, on the ground that there was no escapement, the Commissioner of Income‑tax (Appeals‑II) cancelled the assessment without entering into the question whether the reassessment was otherwise properly initiated.
The Revenue appealed to the Tribunal. It was contended on behalf of the Revenue that the view of the Commissioner of Income‑tax (Appeals‑II) that the tax credit certificates could not be regarded as income was not correct and, therefore, the reassessment made by the Income‑tax Officer should be restored.
On the contrary, it was contended on behalf of the assessee that the Commissioner of Income‑tax (Appeals‑II), was right in holding that the amount of tax credit certificates could not be the income of the assessee and was irrelevant in computing the chargeable profits for the purpose of the Income‑tax Act and that in any event, the assessment was ab initio void, as the audit note cannot furnish .information as to the matter of law to the Income‑tax Officer, placing reliance on the decision of the Supreme Court in the case of Indian and Eastern Newspaper Society v. CIT (1979) 119 ITR 996.
The Tribunal ultimately dismissed the appeal. The reasoning or rationale provided by the Tribunal for the dismissal of the appeal is couched in paragraph 3 of its order, which reads as under:
"(3) On a careful consideration of the rival submission, we are of the opinion that in view of the Supreme Court decision cited on behalf of the assessee, the reassessment has to be cancelled. The question whether the amount of tax credit certificate should be taken into account in computing the chargeable profit under the Companies (Profits) Surtax Act has not been concluded by any decision of a Court. In these circumstances, an audit note giving an opinion on that question cannot amount to an 'information' within the meaning of section 8(b) of that Act (corresponding to section 147(b) of the Income Tax Act, 1961), as has been held by the Supreme Court. Hence, the Income‑tax Officer did not lave valid jurisdiction to initiate the reassessment proceedings and, accordingly, the reassessment has to be cancelled. In this view, we uphold the order of the Commissioner of Income‑tax (Appeals) without expressing any opinion on the merits of the case. "
At the instance of the Revenue, this Court, issued a direction to the Tribunal to refer the questions, as set out above for the opinion of this Court.
Arguments of Mr. S.V. Subramaniam, learned senior standing counsel for income‑tax cases .representing the Revenue, and Mr. R. Venkataraman, learned counsel appearing for the assessee were heard.
Question No. 1.‑‑‑There is no dale of controversy that in the original assessment proceedings, rule 4 of the Second Schedule to the Surtax Act was not at all taken into consideration, in the presence of computation of the capital of the assessee‑company and this aspect of the matter had been pointed out by the audit party. It was on that basis the Assessing Officer reopened the assessment entertaining the reasonable belief that chargeable profits had been underassessed.
Section 4 of Surtax Act is the charging provision. The said section read as under:
"(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. "
The section contained the methodology for computing surtax on every company. Such surtax shall be charged on every company for every assessment year commencing on and from the 1st day of April, 1964. "Chargeable profits" of the previous year, and "statutory deduction" have to be worked out and the "chargeable profits" exceeding "statutory deduction" are chargeable to tax, at the rate or rates specified in the Third Schedule.
"Chargeable profits" and "statutory deduction" have been respectively defined under clauses (5) and (8) of section 2 of the Surtax Act. The charging section 4 thereof which is of paramount importance to note, starts with the phraseology "subject to the provisions contained in this Act".
Clauses (5) and (8) of section 2 of the Surtax Act reads as under:‑‑
(2) Definitions.‑‑‑In this Act, unless the context otherwise requires‑‑‑
(5) 'chargeable profits' means the total income of an assessee computed under the Income Tax Act, 1961 (43 of 1961), for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule; ....
(8) 'statutory deduction' means an amount equal to ten per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of two hundred thousand rupees, whichever is greater:
Provided that where the previous year is longer or shorter than a period of twelve months, the aforesaid amount of ten per cent. or, as the case may be, or two hundred thousand rupees shall be increased or decreased proportionately:
Provided further that where a company has different previous years in respect of its income, profits and gains, the aforesaid increase or decrease, as she case may be, shall be calculated with reference to the length of the previous year of the longest duration; ...."
The First Schedule to the Surtax Act contains the rules for computing the "chargeable profits". Rule 4 of the Second Schedule provides the methodology for the computation of the capital of the company and it reads as under:
"(4) Where part of the income, profits and gains of a company is not includible in its total income as computed under the Income‑tax Act, its capital shall be the sum ascertained in accordance with rules 1, 2 and 3, diminished by an amount which bears to that sum the same proportion as the amount of the aforesaid income, profits and gains bears to the total amount of its income, profits and gains."
Section 10 figuring in Chapter III of the Income‑tax Act deals with 'incomes not included in total income'. Clause (28) of section 10, relevant for our present purpose, is couched in the following terms:
"(10) Incomes not included in total income.‑‑‑In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included‑‑‑
(28) any amount adjusted or paid in respect of a tax credit certificate under the provisions of Chapter XXIIB and any scheme made thereunder."
Chapter VIA of the Income‑tax Act contains provisions pertaining to deductions to be made in computing total income.
The question as to whether rule 4 of the Second Schedule to the Surtax Act takes in its fold, a part of the income, profits and gains of a company, riot includible in its total income, as computed under section 10 alone and also the deductions to be made in computing total income under Chapter VI‑A of the Income‑tax Act had been the subject of a vexed question before the superior Courts of jurisdictional High Courts and the apex Court. We may now refer to some of the decisions of the superior Courts of jurisdiction.
In Stumpp. Schuele and Somappa (P.) Ltd. v. ITO (Second) (1976) 102 ITR 320 (Kar.), E. S. Venkataramish, J. (as he then was) took the view that the expression in rule 4, "income, profits and gains of a company not includible in its total income as computed under the Income‑tax Act", refers only to those sums which are not includible in the total income, by the provisions of Chapter III of the Income‑tax Act and does not refer to any of the deductions claimable under Chapter VI‑A of the Income‑tax Act.
In Second ITO v. Stumpp, Schuele and Somappa (Pvt.) Ltd. (1977) 106 ITR 399 (Kar.), a Division Bench of the Karnataka High Court, consisting of G.K. Govinda Bhat, C.J., and M. K. Srinivasa Iyengar, J., on appeal of the case cited in paragraph 16(i) (see above) confirmed the view of E.S. Venkataramiah, J. (as he then was) and the said Division Bench couched its view as below (headnote):
"Section 2(9) of the Act provides that the words and expressions used in the Act, but not defined in it and defined in the Income‑tax Act, shAl have the meanings respectively assigned to them in the Income‑tax Act. Therefore, when rule 4 of the Second Schedule refers to part of the income, profits and gains of a company not includible in its total income as computed, under the Income‑tax Act, the expression "not includible" should be understood and interpreted in the light of the provisions of the Income‑tax Act. Relief granted under sections 80‑I and 80J cannot be said to be income, profits or gains not includible in the total income. The basic material for the computation of surtax is the total income as computed under the Income‑tax Act. Adjustments in that total income have to be made as specified in Schedule I. There is no provision in Schedule I for making any adjustment in respect of relief under sections 80‑I and 80J. The expression; 'part of income, profits and gains not includible in the total Income' in rule 4 of the Second Schedule cannot be construed or understood as referring to deductions, allowances, etc., made under the Income‑tax Act for purposes of computation of total income. "
In Addl. CIT v. Bimetal Bearings Ltd. (1977) 110 ITR 131 (Mad.), a Division Bench of this Court consisting of Sethuraman and Balasumbramanyan, JJ. took the view as below (headnote):
"The part of the, profits of a company 'not includible in its total income' that is contemplated by rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, is what is not includible under the provisions of section 10 of the Income‑tax Act, 1961. As far as the deductions made under the provisions of Chapter VIA of the Income‑tax Act are concerned, the position is that up to the stage when we reach the computation for purposes of Chapter VIA, the amount which is. eligible to be considered under Chapter VIA forms part of or is included in the total income and the deduction is given only because of the inclusion. In such a case, the provisions of rule 4 do not have any scope for operation because it cannot be stated that the said profits were not at all includible in the total income of the company computed under the Income‑tax Act. In other words, in making the computation for the purpose of applying Chapter VIA the amount which is the subject of relief is included in the total income and, therefore, it cannot be treated to be a case of profits and gains of a company not being includible in the total income.
In International Instruments (P.) Ltd. v. CIT (1982) 133 ITR 283 (Kar.), a Division Bench of the Karnataka High Court consisting of M. Rama Jois and G.N. Sabhahit, JJ., expressed the view as below (headnote):
"A receipt which is income does not cease to be income even if exempted from tax, and a receipt which is not income does not become income just because it is exempted from tax.
The amount received by an assessee by way of refund of a portion of the tax payable in terms of section 280ZB of the Income Tax Act. 1961, in the form of tax credit certificates and subject to the conditions specified in the section cannot be regarded as income just because it is specified as an item of income exempt from tax under section 10(28). Further, the exemption provision has been inserted only by way of abundant caution, as, even without such a provision, the amount cannot be treated as income liable to tax under the Income-Tax Act.
Tax credit certificates, during every assessment year in which it is issued, is in respect of the 20 per cent. of the amount by which the tax payable for the succeeding year exceeds the tax payable for the base year in terms of section 280ZB. The amount comprised in the tax credit certificates are in the nature of refunds granted to the assessee, of a portion of the tax payable by it on its income assessed to tax, as an incentive for the manufacture or production of articles for the promotion of which section 280ZB has been inserted in the Income‑tax Act. They do not constitute income. The conditions imposed in the proviso to subsection (2) of section 280ZB to the effect that even after the issue of tax credit certificate, adjustment or refund shall be only to the extent of its use for the purposes specified therein also strengthens the view that the amount of the tax credit certificate cannot be regarded as income, for, if it were the income of the assessee, the assessee would be free to expend the amount for whatever purpose it intended. Therefore, tax credits under section 280ZB have no taint of 'income' and cannot be taken into account for purposes of diminishing the capital base under rule 4 of Sched. II to the Companies (Profits) Surtax Act, 1964."
Pertinent it is to note that the Division Bench of the Karnataka High Court in the case of International Instruments (P.) Ltd. (1982) 133 ITR 283, decided in the year 1981, had not taken into consideration the earlier Division Bench decision on appeal of the same High Court in the case of Stumpp, Schuele and Somappa (P.) Ltd. (1977) 106 ITR 399 (Kar.), which affirms the earlier single Bench decision in the case of the same assessee. Further, the view, as expressed by the Division Bench of the Karnataka High Court in that case Stumpp, Schuele and Somappa (P.) Ltd. (1977) 106 ITR 399, as well as the view expressed by this Court in the case of Bimetal Bearings Ltd. (1977) 110 ITR 131, had been affirmed by the apex Court of this country in Second ITO v. Stumpp, Schuele and Somappa (P.) Ltd. (1991) 187 ITR 108, (on further appeal). Therefore, so much of a reliance, which had been placed by learned counsel appearing for the assessee on the case of International Instruments (P.) Ltd. (1982) 133 ITR 283 (Kar.), has to be brushed aside, as not having any binding effect, in the face of the decision of the apex Court in the case of Stumpp, Schuele and Somappa (P.) Ltd. (1991) 187 ITR 108.
In view of the discussions as above, we can safely come to the conclusion that a part of the income, profits and gains of a company not includible in its total income, as computed under Chapter III of the Income‑tax Act alone can be taken into account for the purpose of diminishing the capital base under rule 4 of the Second Schedule to the Surtax Act.
From the scheme of the Surtax Act, as reflected by its various provisions, such as clauses (5) and (8) of section 2, section 4, and Schedules I to III, with particular reference or rule 4 of the Second Schedule. It is rather crystal clear that the information, in not taking into account the tax credit certificates issued in the original assessment, has the effect of the underassessment of the net chargeable profits assessable to tax under the Surtax Act. The concomitant consequence flowing from such a conclusion would lead to the consideration of the question as to whether the internal report of the audit party would constitute information within the meaning of section 8(b) of the Surtax Act empowering the Assessing Officer to reopen the assessment. The answer to such a question cannot be any one, other than an emphatic "yes", on the facts and in the circumstances of the case.
As already adverted to, the audit party, drew the attention of the Assessing Officer as to the omission of the consideration of rule 4 of the Second Schedule to the Surtax Act, which led to underassessment of the profits chargeable under the Surtax Act. The audit party did not at all express any opinion as to the interpretation of the said rule 4. To put it otherwise, it cannot at all be stated that the audit party expressed any opinion as to the interpretation of rule 4, but merely brought to the notices of the Assessing Officer, the omission of the consideration of rule 4 in the computation of the income under the Surtax Act. In this context, we may refer to the decision of the apex Court of this country in the case of Indian and Eastern Newspaper Society v. CIT (1979) 119 ITR 996, wherein their Lordships of the Supreme Court said that part alone of the note of an audit party which mentions the law which escaped the notice of the Income‑tax Officer constitutes "information", within the meaning of section 147(b) (comparable provision to section 8(b) of the Surtax Act), the part which embodies the opinion of the audit party in regard to the application or interpretation of the law cannot at all be taken into account by the Income‑tax Officer. In every case, the Income‑tax Officer must determine for himself what is the effect and consequence of the law mentioned in the audit note and whether in consequence of the law which has now come to his notice he can reasonably believe that income has escaped assessment. The basis of. his belief must be the law of which he has now become aware. The opinion rendered by the audit party in regard to the law cannot, for the purpose of such belief, add to or colour the significance of such law. The true evaluation of the law in its bearing on the assessment must be made directly and solely by the Income -tax Officer.
No doubt, this decision had been cited before the Tribunal and the Tribunal wrongly applied the decision to the facts of the present case. In view of the discussions, as above, we are of the view that the Income‑tax Officer has valid jurisdiction to initiate reassessment proceedings in the assessee's case for the assessment year 1972‑73 and answer Question No. l accordingly.
Question No.2.‑‑This question does not at all arise for consideration, in view of our answer on Question No. l and we answer this Question No.2 accordingly.
The tax case (reference) is thus, disposed of. No costs.
M.B.A./195/FC
Reference answered.