ORDER
I.S. Nigam, Accountant Member
1. Against the consolidated order of the Commissioner (Appeals) relating to the assessment years 1977-78, 1978-79 and 1979-80, the revenue has come up in the present appeals, while the assessee-company has come up in cross objections. Both the appeals filed by the revenue and the assessee’s cross objections are, therefore, for the sake of convenience disposed of by a common order.
2. The first grievance common to the appeals filed by the revenue is against the direction of the Commissioner (Appeals) that in computing the chargeable profits under the First Schedule to the Companies (Profits) Surtax Act, 1964, the gross amount of the dividends instead of the net amount of the dividends shall be deducted from the total income. Here it will be necessary to point out that what the Income-tax Officer had done was to deduct from the total income the dividends included in the total income, i.e., the gross dividends after deducting therefrom the expenses for earning the dividend income and the deduction from the neb dividend admissible under Section 80M of the Income-tax Act, 1961.
3. The learned departmental representative, Shri Subramanian, cited before us the ruling of the Hon’ble Supreme Court in the case of Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120 wherein their Lordships, while interpreting Section 80M of the Income-tax Act, 1961, laid down that the income by way of dividends included in the gross total income refers not only to the nature of the income but also to the quantum thereof, which is included in the gross total income and consequently the deduction under Section 80M is admissible not on the gross amount of the dividends but only on the amount of the dividends which are included in the gross total income. He then referred to Sub-rule (viii) of Rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, which speaks of the exclusion from the total income of income by way of dividends in support of his contention that this refers not only to the nature of the income but also the quantum thereof, which is included in the total income, which alone can be excluded from the total income in working out the chargeable profits under the First Schedule to the Companies (Profits) Surtax Act, 1964. According to Shri Subramanian, the Explanation to Rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964 inserted by the Finance Act, 1981 with effect from 1-4-1981 was similar to Section 80AA of the Income-tax Act, 1961 inserted by the Finance (No. 2) Act, 1980 and was merely clarificatory of what was always understood to be the law. Proceeding further, Shri Subramanian submitted that the rules for computing the chargeable profits under the First Schedule to the Companies (Profits) Surtax Act, 1964 were rules of procedure and consequently like rule IBB of the Wealth-tax Rules, 1957 will be applicable to all pending assessments and appeals. On this basis it was claimed that the Explanation to Rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964 even though inserted by the Finance Act, 1981 with effect from 1-4-1981 will be applicable to all pending assessments and appeals on 1-4-1981 and will consequently apply to all the three assessments under consideration here, which were made after 1-4-1981. Summing up, Shri Subramanian vehemently argued that the Income-tax Officer while working out the chargeable profits under the First Schedule to the Companies (Profits) Surtax Act, 1964 rightly deducted from the total income only the dividends, which were included in the total income and the Commissioner (Appeals) wrongly directed that what should be deducted from the total income is the gross amount of the dividends.
4. On the other hand, the learned counsel for the assessee-company, Shri Pardiwala, submitted to us that the assessment years in the present appeals were the assessment years 1977-78, 1978-79 and 1979-80 and consequently the Explanation to Rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964 inserted by the Finance Act, 1981 with effect from 1-4-1981 will not be applicable to these assessment years. Proceeding further, he submitted that the issue before the Hon’ble Supreme Court in the case of Distributors (Baroda) (P.) Ltd. (supra) was whether the dividends entitled to deduction under Section 80M are the gross dividends or the gross dividends as reduced by the interest and the expenses under Section 57 of the Income-tax Act, 1961 for earning them and not whether they should be further reduced by the deduction admissible under Section 80M and, therefore, the claim now made before us that the gross dividend should not only be reduced by the expenses for earning the gross dividends but also by the deduction under Section 80M admissible did not arise out of the ruling of the Hon’ble Supreme Court in the case of Distributors (Baroda) (P.) Ltd. (supra). He then took us through the Sub-rule (viii) of Rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, which speaks of “income by way of dividends” and submitted to us that this expression as interpreted by the Hon’ble Supreme Court in the case of Distributors (Baroda) (P.) Ltd. (supra) means only the gross dividends as reduced by the interest and other expenses for earning the same and not the amount arrived at by further deducting therefrom the relief admissible under Section 80M. He then referred to the Explanation to Rule 1 inserted by the Finance Act, 1981 with effect from 1-4-1981 in support of his contention that the Explanation was not retrospective and could not be said to be clarificatory. Reference in this connection was made by him to an order of the Appellate Tribunal in the case of Brooke Bond India Ltd. v. IAC [1986] 15 ITD 508 (Cal.), wherein the Appellate Tribunal, while dealing with the jurisdiction of the Commissioner under Section 263 of the Income-tax Act, 1961, to revise an assessment made by the Income-tax Officer based on the directions issued by the Inspecting Assistant Commissioner under Section 144A or 144B, held that the Explanation inserted by the Taxation Laws (Amendment) Act, 1984 with effect from 1-4-1984 was not clarificatory and will, therefore, not be applicable to orders under Section 263(1) prior to 1-10-1984. Summing up, he justified the direction of the Commissioner (Appeals) that in working out the chargeable profits under the First Schedule to the Companies (Profits) Surtax Act, 1964 the gross dividends and not the net dividends should toe deducted from the total income.
5. We have carefully considered the rival submissions. The Hon’ble Supreme Court in the case of Distributors (Baroda) (P.) Ltd. (supra) followed their earlier decision in the case of Carnbay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 and laid down that three important steps are required to be taken first whether the income of the required description is, at all, included in the total income or the gross total income, as the case may be, secondly what is the quantum of that income, which is included in the total income or the gross total income, as the case may be, and then only on that quantum of income of the required description, which is included in the total income or the gross total income, the deduction under Section 80M or 80E can be given. Viewed in this context, it is found that income of the description of dividend from an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividend within India is included in the total income of the assessee-company, the quantum of such income, which is included in the total income, is the gross dividends as reduced by the expenses and interest for earning the dividend income and the deduction admissible under Section 80M of the Income-tax Act, 1961. It follows, therefore, that it is only the amount so included in the total income, which has to be deducted thereform in computing the chargeable profits. Even otherwise what can be excluded from the total income is what has already been included and nothing else. The Income-tax Officer, therefore, in our view, was perfectly justified in holding that in working out the chargeable profits under the First Schedule to the Companies (Profits) Surtax Act, 1964 what will be deducted from the total income will be the amount of dividends included in the total income and not the gross dividends. The direction of the Commissioner (Appeals) on this issue, therefore, does not appear to be correct. On this issue, therefore, the order of the Commissioner (Appeals) is reversed, while what was done by the Income-tax Officer is restored.
6. The next grievance again common to all the three appeals filed by the revenue is against the direction of the Commissioner (Appeals) that the capital worked out under Rules 1 to 3 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 shall not be proportionately diminished having regard to the deductions under Chapter VIA of the Income-tax Act, 1961. Both the learned departmental representative, Shri Subramanian, as well as the learned counsel for the assessee-company, Shri Pardiwala, submitted to us that the identical issue cropped up before the Hon’ble High Court of Bombay in the cases of CIT v. Century Spg. & Mfg. Co. Ltd. [1978] 111 ITR 6 and CST v. Ballarpur Industries Ltd. [1979] 116 ITR 528 and the arguments of both the sides were the same as were before their Lordships of the Hon’ble High Court of Bombay in these cases.
7. We have carefully considered the rival submissions. Following, with respect, the rulings of the Hon’ble High Court of Bombay in the cases of Century Spg. & Mfg. Co. Ltd. {supra) and Ballarpur Industries Ltd. (supra) we hold that the expression “not includible” in Rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 means incomes, which are not to be included in the total income, mention of which is made in Chapter III of the Income-tax Act, 1961, and not incomes mentioned in Chapter VIA of the Income-tax Act, 1961, which formed part of the gross total income but from which deductions are admissible in computing the total income. The direction of the Commissioner (Appeals), therefore, that the capital computed under Rules 1 to 3 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 is not to be proportionately diminished having regard to the deductions admissible under Chapter VIA of the Income-tax Act, 1961, therefore, in our view, was perfectly justified and is upheld.
8. We now deal with the issue common to all the three cross objections filed by the assessee-company that the Income-tax Officer as well as the Commissioner (Appeals) erred in holding that the provision for doubtful debts amounting to Rs. 1,42,792 for the assessment year 1977-78 and Rs. 1,25,584 for the assessment years 1978-79 and 1979-80, do not constitute reserves in the computation of capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964. The learned counsel for the assessee-company, Shri Pardiwala, submitted to us that these amounts had not been allowed as a deduction in working out the total income of the assessee-company and consequently these amounts have to be treated as reserves. Reference in this connection was made by him to Sub-rule (iii) of Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, which talks of other reserves as reduced by the amounts credited to such reserves as have been allowed as deduction in computing the income of the company in the assessments under the Income-tax Act. He, therefore, submitted that the claim of the assessee-company of these amounts being treated as reserves and consequently included in the capital computation under the Second Schedule to the Companies (Profits) Surtax Act, 1964 was admissible and was wrongly not allowed by the revenue authorities.
9. On the other hand, the learned departmental representative, Shri Subramanian, submitted that Sub-rule (iii) of Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 speaks of the reserves and not provisions and if an amount was not a reserve, this Sub-rule will have no application to that amount. He then referred to Schedule VIII of the Balance Sheet of the assessee-company where against the sundry debtors an amount of Rs. 1,42,792 for the assessment year 1977-78 and an amount of Rs. 1,25,584 for the assessment years 1978-79 and 1979-80 were considered doubtful and the value of the sundry debtors was reduced by this amount by an entry under the head “Provision for doubtful debts” in order to arrive at the amount of sundry debtors considered good. On this basis, he submitted that these amounts of Rs. 1,42,792 for the assessment year 1977-78 and Rs. 1,25,584 for the assessment years 1978-79 and 1979-80 represented the diminution in the value of assets and could not be a reserve. Reference in this connection was made by him to the ruling of the Hon’ble Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559.
10. We have carefully considered the rival submissions. It is not under dispute that according to Schedule VIII of the Balance Sheet of the assessee-company, the sundry debtors were classified into “debts considered good” and “debts considered doubtful” and the total amount of the debts was reduced by the provision for doubtful debts, which was of the exactly identical amount which was considered by the management to represent debts considered doubtful. This means that the provision for doubtful debts represented what, according to the management of the company, was diminution in the value of the sundry debtors. This provision for doubtful debts, therefore cannot be a reserve in view of the ruling of the Hon’ble Supreme Court in the case of Vasir Sultan Tobacco Co. Ltd. (supra) in the computation of capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964.
11. The last grievance in the assessee’s cross objection relates only to the assessment year 1977-78 and is against the direction of the Commissioner (Appeals) not to treat the provision for additional sales tax as a reserve. The facts as found from the records and given to us at the time of hearing were that even though the assessee-company charges sales tax on the zinc oxide and zinc dust manufactured by it at 3%, it made an application for adjudication under Section 52 of the Bombay Sales Tax Act, 1959 to the Commissioner of Sales Tax whether the sales tax on these items should be charged at 3% or 10%. A sum of Rs. 2,40,244 was, therefore, provided in the accounts under the head “Provision for additional sales tax” so that in case the decision of the Commissioner of Sales Tax was against the assessee-company, the assessee-company could meet the liability arising from the order of the Commissioner of Sales Tax. The Commissioner of Sales Tax, however, by order dated 1-1-1976 held that the correct rate of sales tax on zinc oxide and zinc dust was 3% and not 10% . The entry for provision for additional sales tax created in the books for 1975-70 relevant to the assessment year 1977-78 was, therefore, reversed in the books of the subsequent years and the provision no longer existed in the subsequent years’ books. On this basis, the learned counsel for the assessee-company, Shri Pardiwala, submitted that even though the amount was by way of abundant caution described in the books as “Provision for additional sales tax”, the amount did not represent any sales tax liability and was in any case an amount in excess of what would be reasonably necessary for the purpose of the sales tax liability and, therefore, this amount should be treated as a reserve in view of the ruling of the Hon’ble Supreme Court in the case of Vazir Sultan Tabacco Co. Ltd. (supra). On the other hand, the learned departmental representative, Shri Subramanian, relied on the orders of the revenue authorities on this issue.
12. We have carefully considered the rival submissions. It is not under dispute that there was no known or existing liability for sales tax on zinc oxide and zinc dust @ 10% instead of @ 3% as provided by the assessee-company in its books and the extra provision of Rs. 2,40,244 in the books was by way of abundant caution in case such a liability arose if at all the order of the Commissioner of Sales Tax in the adjudication proceedings under Section 52 of the Sales Tax Act was against the assessee. It is further not under dispute that the ultimate order of the Commissioner of Sales Tax in the adjudication proceedings was in favour of the assessee. This means that the amount of Rs. 2,40,244 under the head “Provision for additional sales tax” was in excess of the amount reasonably necessary for this purpose. The ruling of the Hon’ble Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. (supra) will, therefore, be applicable here and this amount of Rs. 2,40,244 for the assessment year 1977-78 should be treated as a reserve. The assessee-company, therefore, succeeds on this issue before us.
13. The appeals filed by the revenue are partly allowed. The cross objection for the assessment year 1977-78 partly succeeds and is partly allowed, while the cross objections for the other two assessment years 1978-79 and 1979-80 fail and are hereby dismissed.