1966 PLP 664 (PTD)

1,00,00,000 In support of its contention that the amounts laying in fixed deposit were necessary to be maintained for meeting certain firm commitments already entered into, the appellant filed a statement showing that it had entered into certain negotiations between 1950 and 1953 for the purchase of some six new ships. A reference to the statement, however, shows that the only firm commitments entered into during the relevant years were an agreement with ship-builders in Holland signed on the 24th of January 1951 and a negotiation for the purchase of a ship named "LAVADARA" which was taken delivery of on the 24th of December 1952.The agreement of the 24th of January 1951, was ultimately abandoned, as the ship-builders had raised the price and deferred the delivery by six years. The final cost of "ss LAVADARA" was Rs. 28,00,

000. This payment was made on the 27th of September 1952, i.e., after the relevant account years with which we are now concerned. The other negotiations, it appears, did not materialise and were abandoned. Thus the fixed deposits, for which now exemption is claimed, were never utilised in any one of these years. The appellant-company being aggrieved by the disallowance of exemption on these fixed deposits preferred an appeal before the Appellate Assistant Commissioner, who after fully considering the arguments advanced on behalf of the appellant dismissed the appeal. A further appeal before the Appellate Tribunal also failed. The Tribunal held that, "The amounts lying in fixed deposits were not earmarked for any specific purpose nor were they subsequently employed, utilised or used in connection 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 undertaking." As regards the commitments the Tribunal found:- "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 year of account." The appellant thereafter asked for the reference of the question of law for the opinion of the High Court and the Tribunal formulated the question, which has been set out earlier in this judgment and made a reference to the High Court. The High Court, after an elaborate consideration of the arguments advanced on behalf of the assessee, came to the conclusion 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." The High Court was also in agreement with the view of the Tribunal that:- "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 correlation between the two. When a part of the assessee's capital is not employed or used in the undertaking there is no question of airy 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." Learned counsel appearing in support of this appeal has reiterated the arguments that were advanced before the Tribunal and the High Court, and has contended that under this section "capital employed in the undertaking" does not mean capital in actual or active user nor is it necessary that there should be any correlation between profits and capital to bring the latter within the meaning of "capital employed". According to him, the words "capital employed in the undertaking should not be given a narrow or restricted meaning, for, a capital may well be employed even if it has earned no profits or if it has been kept in hand for meeting future commitments. It is urged that in order to determine the true connotation of the said words we must take into account the nature of the undertaking in which the assessee is engaged and if having regard to the nature of such an undertaking it is shown that the capital kept unused has some connection or nexus with negotiations entered into or commitments made during the relevant accounting years, then this capital should be treated as capital employed in the undertaking. Learned counsel maintains that a reference to the dictionary meaning of the word "employed" will show that it is reasonably capable of bearing a wider meaning than actual or active user and, therefore, urges that it should receive a beneficial construction favourable to the assessee; particularly, when used in a taxing statute. In support of this contention he has referred to the dictionary meanings of the word "employed" in the Shorter Oxford English Dictionary, Third Edition, where some of the meanings given are "to apply to a purpose, to use as a means or instrument, to make use of, to use the services of for some special business." Learned counsel has also relied on a decision of the House of Lords in England in the case of the Royal Insurance Company v. Watson ((1897) A C 1). In that case the question was as to whether a gross sum paid by way of commutation of salary to a manager whose services were taken over by the appellant-company when it acquired the undertaking of the Queen Insurance Company, by which the said manager was originally employed, was deductable from its profits for the purposes of Income-tax. The House of Lords held that the sum sought to be deducted from the profits and gains was in the nature of a payment of capital and must be debited to capital and could not, as such, be deduction from income. This decision has no relevance for our present purpose, for there the question was as to whether it was capital expenditure or revenue expenditure. The next decision relied upon by the learned counsel is in the case of The Commissioner of Inland Revenue v. The South Behar Railway Company Limited (12 T C 657=(1925) A C 476). The company was there held liable to corporation profits tax, which was leviable in respect -of profits including "the profits of a British company carrying on any trade or business or any undertaking of a similar character, including the holding of investments." The question that had to be considered there was whether the South Behar Railway Company was carrying on trade or business and held investments. The company was formed to enter into a contract with the Secretary of State for India-in-Council relating to the construction of a railway in India and to carry the same into effect' subject to such modifications as might be agreed upon between the Secretary of State and the Company. An agreement was duly entered into with the Secretary of State for India which inter alia, provided that the company would only supply funds and materials required for the construction of the railway, although the land would be supplied by the Secretary of State. The construction was to be undertaken by the Secretary of State as also the maintenance and working of the railway was to be carried on by the Secretary of State. The Secretary of State was also empowered to terminate the contract by giving the company in England 12 months' notice. Thereafter, the Secretary of State could also purchase the undertaking by paying to the company a fixed amount. This contract was terminated on the 11th of December 1906 and a further agreement was entered into between the Secretary of State and the Company by which it was agreed that the Secretary of State would pay to the Company in London annually a sum of ?30,000 and that when the Secretary of State purchased the railway he would pay a further sum of ?6,84,580 to the company. After the termination of the contract the company maintained no office in India but had an office in England with three directors and a secretary. It received the annuity payable from the Secretary of State and after paying the interest on the company's debentures held general meetings and declared dividends. It had also a sum of ? 6,000 invested in the war loan. In these circumstances, the company contended that it was no longer carrying on any trade or business and1ad become a mere annuitant. It was, therefore; not liable to pay any corporation profits tax. The House of Lords repelled this contention and held that the company was still carrying on business and was liable to pay the corporation profits tax, as it was regularly receiving its fixed annuity payable by the Secretary of State which constituted its earning and was thus getting moneys in return for the capital embarked in the line. As one of the Noble Lords observed, the concern was "still a going concern, though a very quiet one." This decision is also of no help for our present purposes. It is unnecessary here to investigate into the general meaning of the words "capital employed" or to ascertain as to how these words have come to be construed in other statutes, for, the position under section 15-B is that a certain exemption from tax is granted in respect of the profits and gains derived from industrial undertakings of a certain kind during a certain period in the manner specified in the statute. It is necessary, therefore, to see as to what are the specific provisions of the statute under consideration. The provisions of section 15-B relevant for our present purposes are as follows-.- "15-B.-(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 the use of electrical energy or any other form of energy which is mechanically transmitted and is not generated by human or animal agency: (a) The manufacture of goods or materials, or the subjection of goods or materials to any process; (b) ship-building and navigation; (c) electricity and hydraulic power undertaking; (d) the working of any mine, oil-well or other source of mineral deposits; (e) any other industrial undertaking to which the prescribed authority declares this section to be applicable. ?................................................................................................... (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 Board of Revenue under this subsection. The said sum shall be subject to an 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. (4)............................................................................................. It will be observed from the above that the exemption is to be granted in respect of so much of the profits and gains as do not exceed an amount computed with reference to the capital employed in the undertaking in the manner provided in subsection (3). The exemption under subsection (1) is subject to the other provisions of this section and subsection (3) provides that the amount referred to in subsection (1) is to be equal to 5% of such capital employed in the undertaking as is computed in accordance with the rules framed by the Central Board of Revenue under that subsection. To claim the exemption it is, necessary, therefore, for the assessee to show:- (a) that it is carrying on an undertaking of any of the classes specified in subsection (2), (b) that it has earned profits and gains from such an undertaking, and (c) that the amount which is claimed to be exempted does not exceed a fixed percentage of the capital employed which is to be computed in accordance with the rules made under subsection (3). The rules were made on the 7th of May 1948. Rule 2 states that the capital employed in an undertaking, to which section 15-B of the Income-tax Act, 1922, applies, shall be computed in accordance with the rules. Rule 3 gives some definitions, Rule 4 deals with assets ranking for depreciation. Rule 5 deals with land and fixed assets not ranking for depreciation. Rule 6 deals with trading stock and stock of raw-materials and rule 7 deals with capital outlay. We are concerned in the present case with rule

7. It prescribes as follows:- "

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." This rule clearly contemplates that only the "capital used in the undertaking", is to be taken into account. The Income-tax Authorities have computed the capital employed in accordance with these rules. They have given exemption in respect of assets ranking for depreciation, in respect of lands and other fixed assets not ranking for depreciation, trading stock and stocks of raw-materials in accordance with rules 4, 5 and 6 but in respect of the capital outlay under rule 7 they have only included sundry debts due from agents, deposits and advances, cash in hand and bank balances in current account. The only items that they have excluded are capital invested in investments and fixed deposits as being capital outlay not used in the undertaking. Learned counsel contends that in so far as rule 7 purports to restrict "capital employed in an undertaking" to "capital used in the undertaking" the rule itself must be held to be ultra vires as being in excess of the powers given by subsection (3). It is argued that subsection (3) of section 15-B merely authorises the Central Board of Revenue to frame rules for the computation of capital and not to define what is capital employed in the undertaking. We are, however, unable to accept these contentions, for, if the intention of the Legislature was that the rule was merely for prescribing the procedure of computation anti nothing more it would have been sufficient in subsection (3) to say that the amount referred to in subsection (1) is a sum equal to 5% of the capital employed in the undertaking. The words "such capital being computed in accordance with the rules made by the Central Board of Revenue under this subsection" would have been wholly unnecessary and redundant. But since it is a well established rule of interpretation of statutes that no words in a statute are to be treated as surplusage or redundant we cannot ignore these words. It seems to us that for ascertaining the true intendment of section 15-B it must be read as a whole giving every part thereof its ordinary grammatical sense. Read in this why it would appear that the intention of this section is to grant a special exemption from tax to a special category of assessee for a specified period in respect of such portion of their profits and gains as is equal to five percent of the capital employed which is computed in according with the rules framed in that behalf. This does not exempt 5% of the entire capital of the undertaking or even of the capital set apart but only of such capital employed as is ascertained or computed in the prescribed manner. Until this computation has taken place of quantum of the exemption cannot be determined. This computation appears to be a condition precedent to the availability of the exemption. Provisions granting exemptions or privileges have to be construed strictly against the person claiming .the exemption or, the privilege. , It is for him to show that he is entitled to the: exemption. By applying this strict rule of construction it seems to us that the only interpretation that can be given to the words of subsection (1) of section 15-B is that the exemption is to be granted by excluding a sum not exceeding an amount with reference to the capital employed in the undertaking which has been ascertained in accordance with the rules framed under sub section (3). Thus if the rules do not refer to an item of capital, there can be no exemption with regard to it. In this view of the matter there is no need, in our opinion, to look for any correlation between the profits and gains and the capital contributing to such profits and gains. But we cannot agree that every item of asset of a trade or business also forms part of the capital employed in such trade or business. A distinction has, in our view, to be made between the assets of a company and assets employed in its trade or business or undertaking in order to give a meaning to the words "employed in the undertaking". The use of the word "employed" in the past tense necessarily connotes that this refers to something, which has already been done and does not include the capital that is available for being employed in the future or all the assets of the company. By the use of the said words in this restricted sense it could not have been the intention of the Legislature to include all the capital as capital employed simply because the assessee thought, and may be thought with good reason, that it would want to extend its business in the future by acquiring more ships and other assets. If this could be the true intention, then even the uncalled capital of the company would have to be treated as capital employed in the company. The widest connotation that can possibly be given to these words is that they represent capital, which has already been put into the business, of course, during the relevant accounting years. Even applying this definition we cannot say that fixed deposits partake of this form. Learned counsel has not referred to some other cases which might have been more helpful for our present purpose. One of them is that of Liberty & Company Limited v. The Commissioners of Inland Revenue (12 T C 630) reported in the same volume of Tax Cases to- which reference has already been made. In that case while computing the capital employed in the business for the purposes of excess profits duty in England it was held that an investment of capital in Government securities pending ,requirement of moneys financing rebuilding of business premises was not capital employed in a business. Rowlatt, J., there observed as follows:- "I think that this money which was put into this fund, first ?5,000 which became ?25,000, put on deposit to await a building scheme, and for the security of the other party to the building scheme, was not yet, while it remained in that position, capital employed in the business; and as to the rest of the fund it was simply there because they thought, and thought with good reason; that they would want to extend their premises in the near future, and was not tied up in any sort of way." Again, there is an elaborate discussion concerning what is and what is not capital employed in a trade or business for the purposes of excess profits tax in the case of Birmingham Small Arms Company v. The Inland Revenue Commissioners ((1951) 2 A E R 296). It was held in that case, that a claim for compensation, for destruction and loss, during the war, of machines, plants and tools, under the War Damage Act, 1941, was not an asset, which formed part of the capital employed in the trade or business of the company. It was there contended on behalf of the assessee that the compensation was a debt due to them or at any rate represented the- value of assets, which had already been put into the business before being destroyed by enemy bombing during the war. The Revenue Commissioners held that it was neither a debt accruing within the relevant period nor an asset employed in the trade. ??????????? Lord Simonds observed in that case:- "My Lords, I see no valid reason for disregarding and giving no meaning to the word `employed'. It was suggested that, inasmuch as the section had to cover the case of an individual or firm as well as that of an incorporated company, it was necessary to use language, which would distinguish between the property of the individual or the partners in the firm, which was embarked on the trade and that which remained their private concern. This contention appears to me far-fetched and unconvincing. There is no more difficulty in ascertaining what are the capital or assets `of' a trade carried on by an individual or a partnership than of' a trade carried on by a company; there is just the same difficulty in ascertaining what for the purpose of the excess profits tax is the capital or are the assets `employed' in it. In either case some meaning must be given to the word `employed'. That at least is a cardinal rule of construction. It falls then to the commissioners to determine as a fact whether a right, which I will assume to be an asset belonging to a limited company, is an asset employed in its trade. It cannot be capital employed in its trade unless it is an asset so employed. In the present case, they have held that the right in question was not so employed, and I see no reason for disturbing their findings." Again Lord Normand said: - "The words "employed in" are not otiose, for it might be necessary to determine what capital was employed in one of two trades' or business carried on by the company, or what part of the capital of a partner was employed in the partnership business, or what part of the individual's capital was employed in his trade or business. The provisions of the paragraph deal with the assets of which the capital employed in the trade or business consists and it deals with them exhaustively." Lord Radcliffe, who was' inclined to give a wider meaning to these words and not to limit them to capital "actively or productively employed", went into the Legislative history of the said words and came to the following conclusion:- "Even without the advantage of authority, I should have concluded from these indications and the Legislative history of the words `capital employed' that they were used in the present Act without any reference to the actual use made of particular assets during a particular period, once it could be said of them that they were a form of capital which had been put into the business . . . . . My Lords, I do not think that the answer depends on any special meaning of the word `employed'. It seems to me that the appeal fails because the appellant' argument really amounts to the assertion that the mere fact that the company owns an asset involves the consequence that there is some capital of its business consisting of that asset. And that I regard as a fallacy. No doubt this claim is in a sense an asset, but that does not conclude the matter. For the purpose that we are dealing with, `capital' is an abstraction and an `asset' is a form in which it consists from time to time. Normally, an asset only belongs to a business because capital has been expended in acquiring it or creating it. That is as true of trade debts as of other kinds of asset. Of course capital may be put into a business in kind in the shape of an asset, which is directly contributed, but, if that is to be the way in which capital of a business is to be increased, I do not think that it can possibly be said to have happened until some actual form of property has been placed within the control of the business." Even if the reasoning of Lord Radcliffe is adopted it has to be shown that the capital "had been put into the business." For these reasons we are unable to agree that the mere intention to use a capital fund for future development or to meet future commitments will be sufficient to treat that capital fund as capital employed in the business or put into the business. In the present case the admitted position is that the fixed deposits were not earmarked for any purpose and were indeed not utilised for any purpose during the relevant accounting years' and, therefore, for the purposes of the exemption they were not capital employed in the undertaking within the meaning of section 15-B. There can be no manner of doubt that for the purposes of exemption under this section the capital must be one which is actively employed. We are in agreement, therefore with the High Court that the question referred to it had to be answered in the affirmative. This appeal is, accordingly, dismissed with costs. A. H???????????????????????????????????????????????????????????????????????????????????????????????????? Appeal dismissed.