COMMISSIONER OF INCOME TAX Vs. UNITED BREWERIES LIMITED

JUDGEMENT

(1.) THIS case arises out of a reference made by the Income-tax Appellate Tribunal, Bangalore Bench, Bangalore, under section 18 of the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as "the Act"), read with section 256(1) of the Income-tax Act, 1961. The assessee is M/s. United Breweries ltd., Bangalore. The assessment year is 1969-70. The assessee during the relevant assessment year held certain shares in some Indian companies. It transpired that during that assessment year, the assessee did not derive any income by way of dividend in respect of some of those shares, the cost of which to the assessee was Rs. 26,33,201.

(2.) IN the course of the assessment proceedings under the Act, the assessee claimed that while determining its capital base for purposes of computing the statutory deduction to which it was entitled under the Act, the aforesaid cost of the shares which had not yielded dividend, viz, Rs. 26,33,201, should not be deducted under rule 2 of the Second Schedule to the Act in other words, the contention of the assessee was that the said amount should also be treated as part of the capital for purposes of determining the statutory deduction to which it was entitled. The INcome-tax Officer rejected the contention of the assessee and excluded Rs. 26,33,201 under rule 2 of the Second Schedule of the Act from the capital base while determining the statutory deduction. Consequently, the amount of statutory deduction claimed by the assessee got correspondingly reduced. Aggrieved by the order of the INcome-tax Officer, the assessee filed an appeal before the Appellate Assistant Commissioner of INcome-tax. The Appellate Assistant Commissioner of INcome-tax upheld the plea of the assessee and included the cost of such shares of the INdian companies which had not yielded any income in the capital base for the purpose of determining the statutory deduction. The appeal filed by the department before the INcome-tax Appellate Tribunal, Bangalore Bench, was dismissed. The Tribunal was of the opinion that "the plain meaning of the expression "any assets the income from which in accordance with ..... clause (viii) of rule 1 of the First Schedule is required to be excluded from the chargeable profits

(3.) THE expression "chargeable profits" is defined by clause (5) of section 2 of the Act as 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 of the Act. Rule 1 of the First Schedule provides that the income, profits and gains and other sums falling within clauses (i) to (xii) thereof shall be excluded from the total income computed for that year under the Income-tax Act for purposes of determining the chargeable profits. Clause (viii), rule 1, of the First Schedule, requires "income by way of dividends from an Indian company or a company which had made the prescribed arrangements for the declaration and payment of dividends within India" to be excluded from the income computed for that year under the Income-tax Act. After the chargeable profits are determined, it is necessary to determine the statutory deduction for the purposes of computing the liability of the assessee under the Act. THE expression "statutory deduction" is defined in clause (8) of section 2 of the Act as 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. It is not necessary to refer to the two provisions found in section 2(8) of the Act for purposes of this case. THE Second Schedule of the Act lays down the rules for computing the capital of a company for the purposes of surtax. THE relevant part of rule 2 of the Second Schedule which arises for consideration in this case reads as follows :