TMI Blog1992 (4) TMI 99X X X X Extracts X X X X X X X X Extracts X X X X ..... Steel Capital is reduced by the amount of depreciation allowed in the assessment in excess of book depreciation in the asst. years up to 80-81 Rs. 2,88,427 ----------------------------- Rs. 50,94,785 Less: Reduction under Rule 4 of the Second Schedule Rs. 50,94,785 x 3000 Rs. 2,790 ------------------------------------- = ------------------------------ Rs. 54,73,870 x 3000 Capital : Rs. 50,91,995 ----------------------------- On the aforesaid basis the Assessing Officer computed the excess of chargeable profit over the statutory deduction at Rs. 9,70,615 and levied surtax thereon. 3. Thereafter, the assessee submitted a petition under section 13 of the Companies (Profits) Surtax Act, 1964, contending that the capital employed as on 1-7-1979 should be increased by a sum of Rs. 8,84,773. The assessee's arguments in this regard ran as follows. In its books of account relating to the year of accounting ending on 30-6-1979, the assessee had charged to revenue an aggregate sum of Rs. 11,05,965 being the cost of six N.M.M. spinning frames. In the income-tax assessment relating to the assessment year 1980-81 the Assessing Officer held that the said aggregate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee initiated appeal proceedings relating to the surtax assessment proper. In the said appeal also it raised the plea that the capital base should be augmented by the sum of Rs. 8,84,773. The CIT(A) dismissed the assessee's appeal. 9. It is in these circumstances that the assessee is now before us. 10. Reiterating the arguments that had earlier been advanced unsuccessfully before the lower authorities, Shri. R. Vijayaraghavan, the learned counsel for the assessee, contended that the capital base of the assessee required to be augmented by the sum of Rs. 8,84,773. According to him, such augmentation is warranted by Rule 1(iii) of the Second Schedule to the Surtax Act. In this regard he contended that the ratio of the following cases would support the assessee's claim : (1) United Nilgiri Tea Estates Co. Ltd. v. CIT [1974] 96 ITR 734 (Mad.) and (2) CIT v. Zenith Steel Pipes Ltd. [1978] 112 ITR 215 (Bom.). 11. On his part, Shri M.F. Alam, the learned Departmental Representative, strongly supported the impugned order of the CIT(A). He particularly urged that Rule 1(iii), which is designed to reduce the reserves in the circumstances stipulated therein, cannot avail the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vied will in the process get reduced. The paid up share capital of the company, which is one of the components of the capital base being fixed, does not afford any scope for manoeuvring. Reserves, on the contrary, afford large scope for manoeuvring for more than one reason. Firstly, the Companies (Profits) Surtax Act does not contain any definition of the term 'Reserve'. Secondly, even the Companies Act, 1956 contains a negative definition of the said term. Thirdly, there is the anxiety of the taxpayer to enlarge the capital base by bringing under its pale as many items as possible under the head 'Reserves'. Fourthly, the question whether a particular sum set apart by the company is a 'provision' or a 'reserve' was a bone of contention till the Supreme Court handed down its decision in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559. 17. Parliament has, therefore, built into the Surtax Act certain provisions with a view to ensuring that the capital base does not get inflated. The first safeguard is built into Rule 1 of the Second Schedule--the very rule which lays down the mode and mechanics of computing the capital base. As already pointed out, under the sche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct from 1-4-1975, may thus be stated. Particularly, as respects provision for taxation and provision for proposed dividends, the legislative intent was that they are provisions simpliciter and not are serve and that consequently they should not be taken into reckoning for purposes of computing the capital base. It was, however, noticed that some of the companies were not showing provision for taxation or provision for proposed dividends in the balance-sheet, but were taking the sums required on both the counts to 'general reserves', thereby inflating the capital base for purposes of surtax. In order to curb this mischief, the Finance Act, 1976 inserted Rule 1A under the Second Schedule, with retrospective effect from 1-4-1975. The Rule brings the axe down in all cases where no provision is made in the balance-sheet either towards taxation or towards proposed dividends and reduces the reserve by the amounts which ought to have been provided for in the appropriation accounts towards taxation and dividends. It also applies to cases where there is a shortfall in the provision made for taxation and/or proposed dividends. 20. In its application to the latter type of cases (that is to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eral reserve Rs. 16,00,000 (3) Development Rebate Reserve Rs. 5,52,893 (4) Invesunent Allowance Reserve Rs. 2,21,119 -------------------------- Rs. 53,83,212 -------------------------- 24. Now, the assessee's case is that the sum of Rs. 44,96,449 which, according to the Annual Report, was available for various appropriations, and which was appropriated in the manner detailed, was arrived at by charging to revenue account the aggregate sum of Rs. 11,05,965 being the cost of six N.M.M. spinning frames. For income-tax purposes the Assessing Officer had treated the said sum of Rs. 11,05,965 as capital expenditure. With the result, the profit available for appropriation got augmented in the first instance by the said sum. Since the Assessing Officer had allowed depreciation at Rs. 2,22,192, the net augmentation would be Rs. 8,84,773. This incremental sum, according to the assessee, must necessarily go to augment the general reserve, which, as on 30-6-1979 stood at Rs. 16,00,000. In other words, the general reserve will get revised upwards to Rs. 24,84,773. Consequently, the standard deduction will get augmented pro tanto and in the process the surtax payable will get reduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld first decide whether a retention or appropriation is a 'provision'. If it is not a provision, one should thereafter decide its true nature and character, having regard to the host of factors, such as, intention, surrounding circumstances etc." 27. The aforesaid principles enunciated by the Supreme Court, as we see it, go counter to the assessee's claim that the incremental sum of Rs. 8,84,773 should automatically be treated as reserve. No doubt, it will go to augment the amount available for appropriation, but it will remain only a mass of undistributed profits. 28. In the case before us, as pointed out earlier, a sum of Rs. 5,24,873 has been left as surplus in the balance-sheet to be carried forward to the subsequent year. Interestingly, the said surplus is more than the sum of Rs. 4,03,165, which was transferred to general reserve. In the circumstances, therefore, an that can be said-is that the incremental sum of Rs. 8,84,773 will go to augment the surplus carried to balance-sheet. 29. We then have Explanation to Rule 1 of the Second Schedule to the Surtax Act, which as pointed out earlier, lays down the surplus, i.e., balance in the Profit Loss A/c after providing f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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