CHESEBROUGH PONDS INC Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) IN this reference certain questions have been referred to us at the instance of the CIT and one of the questions has been referred to us at the instance of the assessee. Before setting out the questions the facts from which the reference arises may be noted. The assessee is a company incorporated in the United States under the laws of the State of New York. It maintains its accounts according to the calendar year, so that the calendar year would be the previous year for the purpose of its assessment under the IT Act, 1961. We are concerned in this reference with the asst. yrs. 1963 64, 1964 65 and 1965 66. For the asst. year 1963 64, the assessee was liable to pay super profits tax under the S. P. T. Act, 1963 ; for the two later assessment years similar liability of the assessee would be required to be considered for surtax under the C. (P.) S. T. Act, 1964. Certain amounts were being shown in the balance sheets of the assessee under the head "Earned Surplus". The assessee's contention was that these amounts shown in its balance sheets as on 1st Jan., 1962, as on 1st Jan., 1963, and as on 1st Jan., 1964, were eligible for being included as a "reserve" in computing the capital of the assessee company for the purpose of super profits tax and surtax under the respective statutory provisions for the asst. year 1963 64 (for super profits tax) and for the asst. yrs. 1964 65 and 1965 66 (for surtax). Before the ITO, Companies Circle, reliance was placed on behalf of the assessee on two decisions of the Supreme Court, viz., (1) First National City Bank vs. CIT (1961) 42 ITR 17 (SC), and (2) CIT vs. Standard Vacuum Oil Co. (1966) 59 ITR 685 (SC). The ITO held that these decisions were of no assistance to the assessee inasmuch as the assessee had led no evidence with regard to the accounting practice followed by it. Accordingly, he applied the ratio of the decision of the Supreme Court in the case of CIT vs. Century Spinning & Manufacturing Co. Ltd. (1953) 24 ITR 499 (SC), and excluded these balances under the heading "Earned surplus" from the computation of capital for super profits tax and surtax purposes. For the later two years, it may be noted that the ITO had adduced what he considered were further reasons for rejecting the contentions on behalf of the assessee, viz., that the two decisions relied on by the assessee were under the Business Profits Tax Act and not under the S. P. T. Act or the enactment providing for surtax. It is surprising to note that he distinguished the first two decisions without considering the very important factor whether the provisions of the enactments were in pari materia or not.

(2.) THE assessee carried the matter to the AAC, who upheld the conclusion of the ITO observing that the amounts in question had not been specifically allocated for any purposes. In his view, the unallocated profits of the earlier years could not be considered as reserves for the purposes of the above Act. In his further view, the decision of the Supreme Court in Standard Vacuum Oil Co.'s case (supra), was not available for assistance to the assessee since it was given under the Business Profits Tax Act. It is pertinent to note, as was pointed out by the Tribunal, that the AAC did not go into the question whether necessary evidence as to the accounting practice followed by the assessee was or was not led. In his somewhat naive view the two decisions were under different enactments and, therefore, could not be looked at. Accordingly, he applied the tests laid down in Century Spg. & Mfg. Co. Ltd.'s case (supra) and on these tests held against the assessee. The matter was carried in second appeal to the Tribunal by the assessee. The Tribunal has not passed a consolidated order in the several appeals, but has dealt with the question fully for the asst. year 1963 64, and in its other decisions for the two later years observed that the language of the C. (P.) S. T. Act, 1964, is almost identical but for the addition of the Explanation, which was required to be considered for the asst. yrs. 1964 65 and 1965 66.

(3.) THE Tribunal then dealt with the casual observation made by the ITO that no such practice had been proved before him. It noted that the AAC had not applied his mind and dealt with this aspect of the matter at all. The Tribunal which had carefully gone through the two decisions of the Supreme Court noted that the judgments themselves had exhaustively dealt with the accounting practice which was prevalent in the United States and the Tribunal accordingly accepted the argument of learned counsel who appeared on behalf of the assessee before it that the system of accounting which had been indicated in the two decisions was the generally prevalent system of accounting. In its opinion, it was not proper for the ITO to throw out the contentions of the assessee on the plea that the practice was not specifically proved before him. Accordingly, the Tribunal held that considering the generality of the observations made by the Supreme Court in regard to the practice prevalent in the United States they must be accepted as sufficient for the purpose of holding that the "Earned Surplus" shown in the balance sheets of the assessee company was similar in character to the "Earned Surplus" in the balance sheets of the Standard Vacuum Oil Company which was considered by the Supreme Court in (supra), and, accordingly, it held that the amounts must be regarded as reserves both under the S. P. T. Act and under the C. (P.) S. T. Act. For all the three years, therefore, the assessee's contentions were accepted. For the two later years, however, the Tribunal decided against the assessee on a limited point by applying the Explanation to r. 1 of the Second Schedule to the C. (P.) S. T. Act, 1964. In the view of the Tribunal, the legal position as enunciated by the Bombay High Court in CIT vs. Aryodaya Ginning & Manufacturing Co. Ltd. (1957) 31 ITR 145 (Bom) stood altered as a result of this Explanation. According to the Tribunal, in view of the clear language of the Explanation the amount which was required to be considered was the one which was shown as available under that head on the first day of the assessment year only. Thus, to this limited extent, the decision of the Tribunal went against the assessee. It is on this aspect of the matter that the question has been referred to us at the instance of the assessee for the asst. yrs. 1964 65 and 1965 66. It is in the background of these facts then that we are required to consider the following questions : For the asst. year 1963 64 :