KILLICK NIXON AND CO Vs. COMMISSIONER OF INCOME-TAX

JUDGEMENT

(1.) THIS is a reference made by the Income-tax Appellate Tribunal under Section 66 (1) of the Indian Income-tax Act, and the question referred for our opinion is in these terms: Whether, in the circumstances of the case, the profits of the assesses company liable to excess profits tax have been rightly computed by taking into account the average of the bank overdraft and debenture loans during the standard period, viz,. Rs. 12,31,008, under Rule 5, Schedule I, read with a. 6 of the Excess Profits Tax Act ?

(2.) THE question appears to have come for consideration by the Tribunal in respect of three charging periods, namely, from September 1, 1939, to December 31, 1939 and the calendar years 1940 and 1941. In the statement of case it is observed that the agreed facts are as follows: THE average of the bank overdraft and debentures for the standard period Rs. 12,31,008 Total of the bank overdraft and the debentures loan on the last date of the standard period, i. e. , December 31, 1938, is. . Rs. 5,29,313 Average of the bank overdraft and debenture loans for the 1st chargeable accounting period (September 1, 1939, to December 31,1939 ). . . , Rs. 10,61,661 Average of the bank overdraft and debenture loans for the 2nd chargeable accounting period (January 1, 1940, to December 31, 1940),. . . Rs. 19,18,586 Average of the bank overdraft and debenture loans for the 3rd chargeable accounting period (January 1, 1941, to December 31, 1941 ). . . Rs. 48,58,880

(3.) THEREFORE, if this rule stood by itself, in ascertaining the increased capital, if any borrowings were found, they must be excluded. But the assessee in that event would contend that provision is made in Schedule I in respect of certain class of borrowings, and if these borrowings fell under that clause, such borrowings cannot be excluded. It is, therefore, next necessary to turn to Schedule I, Rule 5, which deals with this argument. That rule runs as follows : If at any time after the close of the standard period, any increase in the capital employed In a business has been effected by means of a loan from a bank carrying on a bona fide banking business, or by means of a public issue of debentures secured on the property of the company, the interest on so much of the loan or debentures as has been utilized in effecting the increase in the capital shall not be deducted in computing the profits for the purposes of excess profits tax and, notwithstanding the provisions of Rule 2 of Schedule II, that amount of such loan or debentures shall not be deducted in arriving at the amount of the capital employed in the business.