1979 (7) TMI 70 - HC - Income Tax

Capital Of Company, Computation Of Capital, Depreciation Reserve, Fixed Assets, General Reserve, Initial Depreciation, Written Down Value

Summary

Issues:
Interpretation of the Second Schedule of the C.(P.)S.T. Act, 1964 regarding treatment of excess provision for depreciation and initial depreciation reserve in computing the capital of a company for surtax purposes.

Detailed Analysis:

The judgment delivered by the High Court of ALLAHABAD involved the interpretation of the C.(P.)S.T. Act, 1964, specifically focusing on the provisions related to the computation of chargeable profits for surtax purposes. The case revolved around the treatment of an excess provision for depreciation and an initial depreciation reserve in determining the capital of a company. The court highlighted that the chargeable profits were to be calculated based on the income of the assessee under the I.T. Act, 1961, adjusted according to the provisions of the First Schedule of the C.(P.)S.T. Act, 1964.

Regarding the first issue raised in the case, the court referred to a previous decision and established that any excess amount of depreciation not set apart for future use cannot be treated as a reserve for the purpose of computing capital under the Second Schedule. In this case, the amount in question was an adjustment entry made to align the written down value of fixed assets with the Companies Act, 1956, and was subsequently transferred to a general reserve, indicating that it was not earmarked for future use.

Moving on to the second issue, the court delved into the specific provisions of the Second Schedule related to the treatment of reserves in computing a company's capital for surtax purposes. The court emphasized that before adding a reserve to the capital, it must be reduced by amounts credited to the reserve and allowed as deductions in computing the company's income. In this case, the initial depreciation reserve claimed by the assessee had already been allowed as a deduction while computing income, thus precluding its addition to the capital employed by the company.

Furthermore, the court addressed the argument put forth by the department's counsel regarding the applicability of the Explanation to the rule. However, based on the court's interpretation and findings related to the specific provisions of the Second Schedule, it was deemed unnecessary to delve further into the impact of the Explanation on the case.

In conclusion, the court answered both questions raised in the negative, favoring the department and ruling against the assessee. The department was awarded costs, with the counsel's fee assessed at a specified amount as per the judgment.