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Civil Reference No. 83 of 1959, decided on 29th November 1962.
Income‑tax Act (XI of 1922)------
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S. 15‑B read with r. 7, Income‑tax (Computation of Capital of Industrial Undertakings) Rules, 1948 -Amount comprising fixed deposits'‑Not covered by expression capital employed'‑Exemption available only on capital used in undertaking.
A I R 1937 Bom. 493 and Commissioner of Inland Revenue v. The South Bihar Railway Co. Ltd. 12 T C 678 ref.
By applications made under section 66(1) of the Act the assessee requires the Tribunal to state certain questions of law which are said to arise out of the Tribunal's order relating to its assessments for the charge years 1950‑51, 1951‑52 and 1952‑53 relevant to the financial years 1949, 1950 and 1951. Since the facts obtaining in all the years are identical, we propose to draw‑ up a consolidated statement of the ease.
2. The assessee is a public limited company (hereinafter called "the company") which is carrying on business as ship owners. The primary object for which the company is established is to purchase, charter, hire or otherwise acquire steamships or other vessels and to employ the same for tile conveyance of passengers, mails etc. The other objects contained in the Memo randum of Association include the carrying on of the business of ship‑builders, the business of acquiring and dealing in shares, stocks or securities in shipping company, air‑craft company, or in company carrying on or entitled to carry on business of building or manufacturing steamers, vessels etc. The Memorandum further authorises the company to carry on any other business which may seem to the company capable of being conveniently carried oil in connection with the other objects enumerated earlier or calculated directly or indirectly to enhance the value of or render profitable any of the company's property or rights. During the relevant years the company carried on the business of ship owners and in some of these years it also derived income from joint venture carried on in collaboration with East and West Steamship Company. In connection with the assessments for the relevant years the company claimed exemption envisaged in section 15‑B of the Income‑tax Act. The Income‑tax Officer granted the admissible relief but the company objected to the method of treatment on certain grounds to which we shall refer later. The assessee's contention centred round the computation of "capital employed" in the undertaking with reference to which the exemption was allowed. We would refer to the precise nature of the objection after we have set out the relevant provisions of the Act. Section 15‑B of the Act provides as follows;
"15‑B. Exemption from tax of newly‑established industrial undertaking‑
(1) Subject to the provisions of this section, there shall be exempt from the tax payable under this Act so much of the profits and gains derived from any industrial undertaking to which this section applies as do not exceed an amount computed with reference to the capital employed in the undertaking, as hereinafter provided.
(2) This section applies to an industrial undertaking falling under any of the classes specified hereunder, which has been set up or commenced in the territories of Pakistan between the 15th day of August 1947, and the 31st day of March 1958 (both dates inclusive, and which employs more than fifty persons in Pakistan and involves tile use of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal agency:
(a) * * * * *
(b) ship‑building and navigation ;
* * * * *
(3) The amount referred to in subsection (1) is a sum equal to five percent. of the capital employed in the undertaking, such capital being computed in accordance with rules made by the Central Government under this subsection. The said sum shall be subject to any adjustment where the profits and gains of the undertaking, computed for any year of assessment, cover a period which is less than or more than one year. The adjustment shall decrease or increase the said sum to an amount bearing the same proportion to the said sum as the said period bears to a period of one year.
* * * * * *
The relevant rules made by the Central Government in exercise of the powers conferred by subsection (3) of section 15‑B are to the following effect:
"2. The capital employed in any industrial undertaking to which section 15‑B of the Income‑tax Act, 1922, applies, shall be computed in accordance with the following rules:‑
* * * * * *
4. In respect of assets being the property of the assessee and ranking for depreciation, the capital employed shall be taken to be‑--
(a) in the case of assets acquired on or before the first day of the computation period and used in the undertaking through out the computation period‑the written down value of the assets on the first day of the said period ;
(b) in the case of assets acquired on or before the first day of the computation period and used in the undertaking for only a part of the computation period‑one half of the written down value of the assets on the first day of the said period ;
(c) in the case of assets acquired after the first day of the computation period and in use in the undertaking at the end of that period‑one half of the cost of the assets.
5. In respect of land or any fixed assets being the property of the assessee and not ranking for depreciation, the capital employed shall be taken to be‑
(a) In the case of assets acquired on or before the first day of the computation period and used in the undertaking throughout the computation period‑the cost of the assets ;
(b) in the case of assets acquired on or before the first day of the computation period and used in the undertaking for only a part of that period one half of the cost of the assets ;
(c) in the case of assets acquired after the first day of the computation period and in use in the undertaking at the end of that period‑‑one half of the cost of the assets.
6. In respect of trading stock and stock of raw materials and the capital employed shall be taken to be the mean of the values of such stock or materials at the beginning and at the end of the computation period.
7. In respect of capital outlay other than that provided for in the foregoing rules, and not consisting of borrowed money, the capital employed shall be taken to be such sum representing the average amount of the capital used in the undertaking as the Income‑tax Officer may determine."
In the present case we are concerned with the manner of computa tion for the purpose of giving effect to rule 7 of the rules framed under subsection (3) of section 15‑B. We are not here concerned with the method of computation envisaged in rules 4, 5 and 6. For the purpose of granting exemption envisaged in subsection (1) of section 15‑B the Income‑tax Officer included the averages of cash‑in‑hand and cash in current account in the computation of "capital employed" but did not include the money set apart in fixed deposits with the bank. The assessee appealed to the Appellate Assistant Commissioner and contended that the whole of the amount remaining intact in the fixed deposits for all the years should have been included in the capital computation inasmuch as such sums should be deemed to have been employed' in the undertaking. The Appellate Assistant Commissioner over‑ruled the assessee's objection in this behalf. He then went on to point out that the Income‑tax Officer's action in including the cash‑in‑hand and cash in current account in the capital computation without making any proper investigation whether they were actually employed or used was open to objection. He, therefore, directed the Income‑tax Officer to make the necessary investigation on certain lines indicated in the order. The Income‑tax Officer thereupon completed the assessment and, on an investigation as suggested by the Appellate Assistant Commissioner, the decision went in favour of the assessee so far as the cash‑in‑hand and cash in current account were concerned. He found that with respect to all the years the fluctuation in some of the months of the year had been violent thereby implying that the cash‑in‑hand and the cash in current account were being utilised or employed for the purpose of the undertaking off and on. The Tribunal was no longer con cerned in the appeals with this aspect of the matter, the controversy centred round the point whether the capital computation as envisaged in section 15‑B, read with the rules framed by the Central Government, the amount kept in the fixed deposits, which remained undisturbed throughout the year should have been included.
3. The position as regards the fixed deposits in respect of the relevant year is as follows:
| Year | Fixed deposit. |
|
| Rs. |
| Calendar year ending the 31st December, 1949 (relevant to the assessment year 1950‑51) | 65,00,000 |
| Calendar year ending the 31st December, 1950 (relevant to the assessment year 1951‑52) | 70,06,565 |
| Calendar year ending the 31st December, 1951 (relevant to the assessment year 1952‑53) | 1,00,00,000 |
The assessee's contention before the Tribunal, inter alia was that the amount covered by the fixed deposits should be treated as capital employed' in the undertaking although it may have remained in deposit with the bank, and that in any case an enquiry be made as to how much of such money was required to meet forward contracts or agreements to purchase ships etc.
4. The company's objections were over‑ruled by the Tribunal. Our findings are summed up in paragraph 4, which for the sake of easy reference, is quoted below :
"We now revert to the first ground of objection. We agree with the finding of the Appellate Assistant Commissioner that the amount covered by the fixed deposits, which remains intact and was not taken out for the purpose of the business, cannot be treated as capital employed or used in the under taking. The company may have surplus amount lying in deposit with the banks which it can utilise for the purpose of any business which it is authorised to carry on. Such deposits may not necessarily be taken to be sums required for the immediate use in a particular undertaking in respect whereof the assessee is entitled to the exemption, For aught we know, the assessee might have drawn the whole amount and invested it in the joint venture which it was carrying on in collaboration with the East and West Steamship Company. It might as well have been utilised in the purchase of shares and securities. So long as the amount is not actually withdrawn and utilised in one way or the other, it cannot be said to have been used for the purpose of any business, much less employed in an industrial undertaking to which the section applies. It is pointed out that money kept ready at hand should be deemed to be money employed in the business. The whole scheme of the section is to exempt so much of the profits and gains derived from any industrial undertaking (to which the section applies) as do not exceed an amount computed with reference to the capital computation, The measure of such profits and gains is the amount of capital employed in the undertaking. There is co‑relation between the two. When a part of the assessee's capital is not employed or used in the undertaking there is no question of any profits or gains arising thereform and, therefore, in determining the quantum of profits and gains which is to be exempted, the computation of any such capital does not come in the picture at all. The assessee filed before us certain statements showing that it had certain .commitments to meet, as for example, it had made agreements to purchase certain steamships. The fact remains that these commitments were not redeemed nor were any steamships purchased out of the amount lying in the fixed deposits during the relevant years of account. The company may have met its commitments, by drawing on other funds or not at all. The amounts lying in fixed deposits were not ear‑marked for any specific purpose nor were they subsequently employed, utilised or used in connec tion with the particular industrial undertaking. It is not enough for the company to show that certain amounts were used in the business generally or kept ready for such use but in order to claim the benefit of section 15‑B it had to be shown further that the amount was in fact employed in the particular under taking which attracted the operation of section 15‑B."
5. In the application for reference the assesses has formulated three questions, but at the hearing the parties have agreed that only one comprehensive question may be referred to the Hon'ble High Court. Before we state the question that we have formu lated, we would like to refer to question No. III in the application for reference which stands as under:
"Whether in the further alternative the Bench was correct in law in holding that such capital as aforesaid should not be treated as capital employed in the business:
(a) to the extent of the applicant company's specific com mitments in relation to the building or purchase of vessels, or
(b) to the extent of the appropriations made to the fleet reserve fund in the company's accounts.
The objection underlying question III (b) was not raised before the Tribunal and for this reason it had no occasion to deal with it in the appellate order. The assessee has since given up this question and, therefore, we are not called upon to state the facts connected with this part of the question.
6. Under section 66 (1) of the Act we, therefore, refer the following question to the Hon'ble High Court:
"Whether, in the facts and circumstances of the case, the Tribunal was justified in holding that the amounts covered by the fixed deposits or any part thereof (to the extent of the assessee's alleged commitments) was not "capital employed" in the assessee's industrial undertaking within the meaning of section 15‑B of the Income‑tax Act; read with rule 7 of the Income‑tax (Computation of Capital of Industrial Undertakings) Rules, 1948 "
(The question will hold good for all the three years 1950‑51, 1951‑52 and 1952‑53).
[Documents mentioned in the Appendix will form part of the paper‑book].
Fazlur Rehman for Appellant.
Noorul Arifin for Respondent.
Date of hearing : 22nd November 1962.
.‑Under section 66 (1) of the Income‑tax Act, 1922, the Income‑tax Appellate Tribunal Pakistan, Lahore, has referred the following question for the opinion of this Court:
"Whether, in the facts and circumstances of the case, the Tribunal was justified in holding that the amounts covered by the fixed deposits or any part thereof (to the extent of the assessee's alleged commitments) was not capital employed' in industrial undertaking within the meaning of section f 5‑B of the Income‑tax Act, read with rule 7 of the Income‑tax (Computation of Capital of Industrial Undertakings) Rules, 1948
The assessee at whose instance the reference has been made is a public limited company which was carrying on business as ship owners and in point of fact it still is. The primary object for which the Company was established was to purchase, charter, hire or otherwise acquire steamships or other vessels and to employ the same for the conveyance of passengers, mails etc. The other objects contained in the Memorandum of Association include the carrying on of the business of ship‑builders, acquiring and dealing in shares, stocks or securities in shipping company, air craft company, or any company carrying on or entitled to carry on business of building or manufacturing steamers, vessels etc. The Memorandum further authorises the company to carry on any other business which might seem to it capable of being conveniently carried on in connection which the other objects enumerated earlier or calculated directly or indirectly to enhance the value of or render profitable any of the Company's pro perties or rights. During the relevant charge years, the assess ment of which is in question viz., 1950‑51, 1951‑52 and 1952‑53, the Company carried on the business of ship‑owners. In some of these years it also derived income from the joint venture carried on in collaboration with East and West Steamship Company. These facts are stated in the statement of case and are not in dispute.
2. In connection with the assessment of the years mentioned above, the company claimed exemption under section 15‑B of the Income‑tax Act on the profits and gains derived from its undertaking to the extent of 5% of the capital employed. In respect of the capital employed the company claimed the inclusion of certain fixed deposits during the relevant years. It was the contention of the company that these fixed deposits should also be treated as "capital employed" for purposes of the relief envisaged by section 15‑B of the Act. It would now be conve nient to reproduce section 15‑B and rule 7 of the Rules framed by the Central Government in exercise of the powers conferred by subsection (3) of section 15‑B;
"15‑B. Exemption from tax of newly established industrial undertaking‑
(1) Subject to the provisions of this section, there shall be exempt from the tax payable under this Act so much of the profits and gains derived from any industrial undertaking to which this section applies as do not exceed an amount computed with reference to the capital employed in the under taking, as hereinafter provided.
(2) This section applies to an industrial undertaking falling under any of the classes specified hereunder, which has been set up or commenced in the territories of Pakistan between the 15th day of August, 1947, and the 31st day of March, 1958 (both dates inclusive), and which employees more than fifty persons in Pakistan and involves the use of electrical energy or any other from of energy which is mechanically transmitted and is not generated by human or animal agency:
(a) * * * * * *
(b) Ship‑building and navigation
* * * * * *
(3) The amount referred to in subsection (1) is a sum equal to five per cent. of the capital employed in the undertaking, such capital being computed in accordance with rules made by the Central Government under this subsection. The said sum shall be subject to any adjustment where the profits and gains of the undertaking, computed for any year of assessment, cover a period which is less than or more than one year. The adjustment shall decrease or increase the said sum to an amount bearing the same proportion to the said sum as the said period bears to a period of one year."
* * * * * * *
"Rule 7. In respect of capital outlay other than that provided for in the foregoing rules, and not consisting of borrowed money, the capital employed shall be taken to be such sum representing the average amount of the capital used in the undertaking as the Income‑tax Officer may determine,"
The same contention was raised by the assessee before the Tribunal and was turned down. We may quote the following passage from the order of the Tribunal rejecting the appeal of the assessee:
"The whole scheme of the section is to exempt so much of the profits and gains derived from any industrial under taking (to which the section applies) as do not exceed an amount computed with reference to the capital computation. The measure of such profits and gains is the amount of capital employed in the undertaking. There is co‑relation between the two. When a part of the assessee's capital is not employed or used in the undertaking, there is no question of any profits or gains arising therefrom and, therefore, in determining the quantum of profits and gains which is to be exempted, the computation of any such capital does not come in the picture at all. The assessee filed before us certain statements showing that it had certain commitments to meet, as for example, it had made agreements to purchase certain steamships. The fact remains, that these commitments were not redeemed nor were any steamships purchased out of the amount lying in the fixed deposits during the relevant years of account. The company may have met its commitments by 'drawing on other funds or not at all. The amounts lying in fixed deposits were not ear‑marked for any specific purpose nor were they subsequently employed, utilised or used in connec tion with the particular industrial undertaking. It is not enough for the company to show that certain amounts were used in the business generally or kept ready for such use but in order to claim the benefit of section 15‑B it had to be shown further that the amount was in fact employed in the particular under taking which attracted the operation of section 15‑B."
3. The main contention of Mr. Fazlur Rahman, the learned counsel for the assessee, before us was that the word "employed" in section 15‑B should not be given a restricted meaning. It was urged that even if the capital was put passively for the purpose of use and if this was required from the nature of the under taking it would still amount to the employment of the capital for the purposes of section 15‑B of the Act. He further urged that having regard to the nature of the undertaking it might have suddenly become necessary for the company to spend a large sum of money for buying a ship or for some similar other purpose and, therefore, it was necessary for the company to maintain such fixed deposits. With regard to the words "capital used in the undertaking" in rule 7, Mr. Fazlur Rahman conceded that this had narrowed down the scope within which relief could be granted under section 15‑B of the Act but he urged that to this extent this rule was ultra vires. We, however, pointed out to him that this was not the question which had been referred to us and our inquiry must, therefore, be limited to the reference made.
4. We have carefully considered the contention raised before us by the learned counsel but have not found it possible to accede to it. It is necessary to look at the scheme of the whole section 15‑B and when this is done it would appear that the view taken by the Tribunal was correct and the reference must be answered accordingly. Section 15‑B was introduced to give an impetus to certain industry mentioned in that section. For that purpose a certain exemption was permitted on the profits and gains derived from the industry concerned. This exemption was to the extent of 5% of the capital employed in the undertaking. The computation of this capital is to be made in accordance with the rules made by the Central Government under subsec tion (3). Rule 7 lays down that the capital employed shall be taken to be such sum representing the average amount of the capital used in the undertaking as the Income‑tax Officer may determine. It would thus appear that the profits and gains of an industrial undertaking so as to justify exemption in terms of subsection (3) of section 15‑B must be related to the capital employed in the undertaking. The exemption envisaged in subsection (1) is to be equal to 5% of this capital. Therefore, in order that the assessee might claim the exemption under this section, it has to be established that such capital has, been used in the undertaking. Such 'a user cannot be established merely by keeping a certain sum passively' in a fixed deposit. The earning of profit by the use of capital is very much of an active process. It is of interest to note that the fixed deposit in this case rose from year to year during the relevant period.
5. Mr. Fazlur Rahman referred us to the interpretation of the expression "used for the purpose of the business" as given in the law Lexicon by P. Ramnatha Aiyar. This definition is based on a decision of the Bombay High Court reported in A I R 1937 Bom. 493. In that case a certain depreciation was being claimed by the assessee in view of the provision of section 10 (2) sub‑clauses (iv) and (vi) of the Income‑tax Act. This provided that the property in respect of which depreciation is allowed must have been used by the assessee for the purposes of his business. In that case the assessee, the owner of a ginning factory, by virtue of being a member of a pool was under an obligation to keep his gin and machinery thereof in good repair and condition and in working order at his own expense to entitle him to the share of profits made by the pool and the machinery was, to be kept ready for use at any moment by him. The question arose that if the machinery had not been actually used whether a depreciation could still be allowed in terms of the provision referred to above. It was on these facts that it was held that the machinery could be said to have been used for purposes of the business although it was not actually worked during the year of assessment. It was observed that the machinery which was kept idle may still depreciate and that the ultimate test was whether without the particular user of the machinery the profits made by the assessee could have been made. It was m this context that it was observed that the word "used" in section 10(2) (iv) of the Act was capable of having a wider meaning and it embraced passive as well as active user. This case is clearly distinguishable upon the short ground : firstly, that though a machinery may well depreciate by keeping idle the money does not necessarily do so. It may depreciate or appreciate according to the trends in the market but it is not this sort of depreciation which was contemplated under section 10(2), and secondly because in that case the assessee by virtue of his being a member of a pool was under an obligation to keep his machinery in good repair and in working order at his own expense before he could be entitled to share the profits made by the pool. Neither of these conditions apply to the case in hand. The keeping of a machinery in good repair for the purpose of immediate use cannot be compared with the keeping of money in fixed deposit.
6. Another case cited by Mr. Fazlur Rahman is that of Commissioner of Inland Revenue v. The South Bihar Railway Co. Ltd. (12TC678). The Judgment of the House of Lords appears at page 705. The question in that case was whether the company was no longer carrying on any trade or business within the meaning of section 52 of the Finance Act of 1920. It is not necessary to go into the facts of that case and it is enough to say that it was found in that case that the company in question was not intended to be a trading but a financial company and its main object was not to construct or work a railway but to provide funds for that purpose and as a reward for so doing to receive an yearly sum for a period and afterwards a lump sum by way of return of capital. Until 1906 the yearly sum receiv able by the Company (the assessee) was dependent on the gross earning of the railway but by an agreement of that year this fluctuating annuity was converted into a fixed annuity indepen dent of the earnings of the railway and the Company had to distribute such fixed annuity received by it to its share‑holders, It was upon these facts found that notwithstanding the agreement of 1906 the company was still doing business. It was observed that instead of taking its remuneration in the form of percentage of profit it agreed to take a fixed sum and this did not send the company out of its business and that it carried on business after 1906 precisely as it did before. We do not find any parallel between this case and the case in hand, which must be decided with reference to its own facts and which has already been stated. We repeat that within the meaning of the relevant provisions the profits and gains must be related to the use of capital before an amount equal to 5% of that capital is exempted from tax.
7. For the reasons given above our answer to the reference is in the affirmative. The assessee shall pay the costs of this reference to the department as incurred in this Court.
Reference answered in negative.
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