ORDER
S. Kannan, Accountant Member
1. Since a common issue arises for consideration in these appeals, they were heard together and are disposed of by a common order.
2. The assessee-company manufactures and markets surgical cotton. Article 17 of the Articles of Association of the assessee-company reads as follows :
The Directors shall create a memorial fund called ‘Ramaraju Memorial Fund’ and set apart every year to the credit of that fund a sum not exceeding 3 per cent of the net profits of the Company subject to a minimum of Rs. 500 which minimum shall be a charge on the gross profit of the Company and the amount so credited be spent in granting scholarships, donations or aids for technical, industrial and general education either for all or any of the above mentioned purposes as may be decided by the Directors from time to time.
Pursuant to the provisions of the said Article, the assessee, it is common ground, set apart certain sums to the said fund. It is also common ground that such setting apart of sums was approved by the A.G.M.
In relation to the sur-tax assessments now before us the sums set apart are as follows :
Sur-tax Previous Date of Amount set apart Balance standing
Asst. yr. Yr. ending the towards Ramaraju to the
on relevant Memorial Fund credit of the
balance Fund
sheet
Rs. Rs.
1973-74 30-9-1972 30-9-1971 9,767 72,382
1974-75 30-9-1973 30-9-1972 14,678 37,130
1975-76 30-9-1974 30-9-1973 18,470 55,600
1980-81 30-9-1979 30-9-1978 20,832 1,02,714
1981-82 30-9-1980 30-9-1979 79,750 1,12,464
It is a matter of record first that the said sums were appropriated out of the net profits as per the relevant Profit and Loss Accounts; and secondly that the sums standing to the credit of Ramaraju Memorial Fund were displayed in the balance-sheets under the head ‘Current Liabilities and Provisions – B Provisions’.
3. In the sur-tax assessment for the assessment years 1973-74,1974-75, 1975-76 and 1980-81 as originally completed the assessee’s claim that the sums standing to the credit of the said fund must be treated as a reserve and on that basis treated as part of the capital base was negatived by the lower authorities. By their orders dated 29-8-1978 in STA Nos. 37 & 38 (Mds.)/1977-78 (assessment years 1973-74 & 1974-75) and 13-8-1985 in STA Nos. 14 & 15 (Mds.)/1984 (Assessment years 1975-76 and 1980-81), the ITAT remitted the matter for fresh consideration observing:
If the funds are the funds of the assessee, then we hold that on the basis of the decisions relied on by the learned counsel for the assessee they should be taken as part of the reserves. If on the other hand the materials show that the assessee has parted with its funds to a charity, then it would be only a liability and cannot form part of the reserves. With these observations we remit this issue back to the Appellate Assistant Commissioner.
4. Meanwhile in the sur-tax assessment for the assessment year 1981 -82 the Assessing Officer negatived the assessee’s claim on this issue. On his part, the CIT (Appeals) allowed the assessee’s claim observing as follows:
The short question involved in this case is whether the amount standing to the credit of Sri Ramaraju Memorial Fund forms part of capital for the purpose of Surtax Act. Every reserve has to be included in the capital provided the amount credited had not been allowed as deduction. Whether the amount set apart by virtue of the Articles of the Company towards the Fund which has not been really credited to any reserve and which is being appropriated towards charity should be held as a reserve or not has to be seen. Assessing Officer has, however, not given any reasons for including this item. Most probably, he thought that it is a liability towards charity. The argument before the Tribunal for earlier years seems to be that the amount should be included in the capital only if the monies kept in the Memorial Fund belong to the assessee and if the money had not gone out of its coffers for the purpose of Trust. In this case, the monies have not been divested by the assessee. They were debited to the Profit and Loss account and credited to the Fund account. From this Fund, various expenses are being met towards charity. The charity is mainly to wards P.A.C.R. Education Charity Trust. Sometimes, Subramanya Devasthanam, Tiruchendur has also been paid from out of this Fund. The charity is institutionalised. Therefore, the only inference that can be drawn in such circumstances if the amount set apart for charity so long it has not been spent, belongs only to the assessee. Therefore, it would form part of its capital or assets. Hence the amount has to be included in the capital of the assessee. I am satisfied on the basis of evidence tendered that the assessee has domain over the funds set apart for charity and is being used for charitable purposes. In view of this matter, the appeal on this point is allowed following the decision in 132 ITR 559, 107 ITR 241.
5. While considering afresh the matter in relation to the assessment for the assessment years 1973-74, 1974-75and 1980-81, in accordance with the directions of the I.T.A.T. referred to supra, the first appellate authority allowed the assessee’s claim. In this regard he agreed with the line of reasoning adopted by the first appellate authority in relation to the assessment for the assessment year 1981-82.
6. It is in these circumstances that the Department is now before us.
7. Shri L. Raghavan, the learned Departmental Representative, vehemently contended that the CIT(A) was not justified in allowing assessee’s claim on this issue. He contended first that in accordance with the provisions of Article 17 of the Articles of Association, the assessee-company was obligated to set apart sums towards Ramaraju Memorial Fund. Secondly, when the assessee-company did, in fact, set apart sums as provided for in the said Article, the assessee held the sums in question under a trust or other legal obligations to spend it for such charitable purposes as granting scholarships, donations or aids for technical, industrial and general educaton as stipulated in the said Article. This would mean that the ratio of the Supreme Court case of CIT v. Bijli Cotton Mills (P.) Ltd. [ 1979] 116 ITR 60 would squarely apply to the facts of the case before us. He, therefore, urged that the Department is entitled to succeed.
8. On his part, Shri R. Vijayaraghavan, the learned counsel for the assessee strongly supported the impugned orders of the first appellate authority v. He first contended that even though the assessee was obligated to spend the sums in question for charitable purposes of the types referred to above, yet there is no existing liability to do so. It is at best a contingent liability. Therefore, the sums set apart are very much a reserve.
Secondly, no revenue deduction was either claimed or allowed in the income-tax proceedings.
Thirdly, the said article of the Articles of Association could be amended any time.
At this stage, to a specific query in this regard from the Bench, Shri Vijayaraghavan fairly conceded not only that no retrospective amendment was possible but also that as on date the article is very much there in the Articles of Association.
9. We have looked into the facts of the case. We have considered the rival submissions.
10. As we see it, the Department is entitled to succeed on this issue. As already pointed out, the amounts standing to the credit of Ramaraju Memorial Fund are displayed in the balance-sheets under the head ‘Current Liabilities and provisions – B Provision’.
Now, Explanation to Rule 1 of the Second Schedule to the Companies (Profits) Sur-tax Act, 1964 declares, for removal of doubts, inter alia, 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 assessment year which is of the nature 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 of the Companies Act, 1956 (1 of 1956), shall not be regarded as a reserve for the purposes of computation of capital of a company under the provisions of this Schedule”.
The clear and unambiguous provision of the said declaratory Explanation is sufficient to decide the issue in favour of the Department. Obviously, the first appellate authority failed to take note of the said declaratory Explanation.
11. Normally, the matter should have rested there. Even so, by approaching the issue on first principles we will show how even de hors the Explanation the sums standing to the credit of Ramaraju Memorial Fund cannot enter into the computation of the capital base for purposes of surtax.
Under the scheme of the Companies (Profits) Sur-tax Act, 1964, capital base is essentially what in corporate accounting phraseology is called “shareholders’ fund”. Now, when pursuant to the provisions of Article 17 of the Articles of Association the company sets apart certain sums towards the fund, the sums set apart, conceptually speaking, ceased to belong to the company, and becomes property of another entity, namely Ramaraju Memorial Fund. May be, actually there is no cash flow from out of the coffers of the company in the sums thus set apart. But that does not mean that the sums belong to the assessee-company. It belongs to the Fund. Vis-a-vis the Fund, therefore, the assessee-company is holding the funds on trust or other legal obligations to apply the sums in question to charitable purposes as stipulated in Article 17 of the Articles of Association. It would, therefore, follow that the sums in question cannot be regarded as forming part of the shareholders’ fund.
12. Secondly, as we see it, the fact that there has been no cash flow out of the coffers of the company to the extent of the sums standing to the credit of the Fund and the related fact that the assessee retained domain and control over the fund in question, is neither here nor there. In relation to the Fund, the position of the company is very much that of a debtor. For a fact, this was precisely the reason why the assessee had credited the sums is question to the account of Ramaraju Memorial Fund.
If, in relation to the Fund, the assessee’s position is essentially that of a debtor, the sums owed by the company to the Fund could, with equal justification, be displayed under the head “Current Liabilities and Provisions A. Liability for other Finances”. In that event also the sums in question cannot be regarded as part and parcel of the shareholders’ fund for the simple reason that basically the sums owed by the assessee to the Fund would partake the characteristics of borrowed fund. And with the deletion of Clauses (iv) and (v) of Rule 1 by the Finance Act, 1976 w.e.f. 1-4-1977 borrowed funds do not at all enter into the computation of capital base for the purpose of sur-tax.
13. In view of the foregoing, therefore, we hold that the first appellate authority was not justified in allowing the assessee’s claim on this issue. We, therefore, set aside the impugned orders of the first appellate authority on this issue and restore those of the Assessing Officer.
14. That leaves for consideration on an issue that relates to the assessment year 1981-82 only. In the relevant income-tax assessment the assessee had been allowed the benefit of deduction under Section 80-G of the Act. The Assessing Officer took the line that the provisions of Rule 4 of the Second Schedule to the Companies (Profits) Sur-tax Act warranted a proportionate deduction in the capital base for purposes of sur-tax. He accordingly reduced the capital base by Rs. 36,636. This issue was one of the subject matters of appeals filed by the assessee before the first appellate authority. Relying on the decision of the jurisdictional High Court in the case of Addl. CIT v. Bimetal Bearings Ltd. [1977] 110 ITR 131 (Mad.), the first appellate authority allowed the assessee’s appeal on this issue. The Department is now before us objecting to the said decision of the CIT(A).
15. We find that the matter stands decided, against the Department, by the Supreme Court case of Second ITO v. Stumpp Schuele & Somappa (P.) Ltd. [1991] 187 ITR 108. It may here be highlighted that, in the said case, the decision of the Madras High Court in the case of Bimetal Bearings Ltd. (supra) was approved by the Supreme Court.
16. In view of the foregoing, therefore, we decline to interfere in the matter and dismiss the related grounds.
17. In the result, the departmental appeal for the assessment year 1981-82 is partly allowed, and the appeals relating to the other four assessment years are allowed in toto.