TMI Blog1992 (3) TMI 156X X X X Extracts X X X X X X X X Extracts X X X X ..... eciation) Rs. Rs. Rs. Rs. --------------------------------------------------------------------------------------------------------------------------------------------------- 31-3-1980 1980-1981 5,51,718 6,99,539 1,47,821 1,47,821 31-3-1981 1981-1982 5,43,089 10,02,276 4,59,187 6,07,008 31-3-1982 1982-1983 7,46,130 19,46,740 12,00,610 18,07,618 31-3-1983 1983-1984 14,02,243 37,52,385 23,50,142 41,57,760 --------------------------------------------------------------------------------------------------------------------------------------------------- 3. The surtax assessment for the assessment years 1982-83 and 1983-84 were completed on 9-5-1985. While computing the capital base under the Second Schedule to the Companies Profits (Surtax) Act, 1964, the assessing officer did not make any adjustment in respect of the excess depreciation allowed in the income-tax assessments over the depreciation actually booked. 4. In the Surtax assessment for the assessment year 1984-85, however, the assessing officer, following the Bombay High Court case of CIT v. Zenith Steel Pipes Ltd. [1978] 112 ITR 215 reduced the capital base by the aggregate excess depreciation allowed for purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment also in the assessment for the assessment year 1982-83. 9. The said directions were issued by the CIT by his common order in revision dated 7-3-1988. 10. Aggrieved not only by the aforesaid common order in revision, but also by the order dated 23-12-1988 of the CIT(A) (relating to the assessment year 1984-85), the assessee is now before us. 11. Shri G. Sarangan, the learned counsel for the assessee, took us through the facts and circumstances of the case and contended that the assessee was entitled to succeed. True, the assessee was following straight line method of charging depreciation. True again, as a result, the depreciation charge in the books of account was less than that allowed in the income-tax assessment. Had he charged in its books of account the depreciation allowed in the income-tax assessments, the distributable profits of the assessee would no doubt have got reduced pro tanto. But, contended Shri Sarangan, it does not follow that the said reduction must necessarily and straightway go to reduce the reserves of the assessee. The assessee had made various provisions, such as provision for taxation including surtax, provision for proposed dividend besides p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . One thing will be clear from the foregoing and that is that if the capital base is increased-inflated, if you like the statutory deduction will get increased or inflated pro tanto, and the surtax levied 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 ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 19. In its application to the latter type of cases (that is to say in cases where there has been a shortfall in the provision made for taxation and/or proposed dividends), the Rule brings in the concept of reasonableness. With the result, Rule 1A is not meant to be applied automatically in all cases where there has been a shortfall in the provision made towards taxation and/or proposed dividends. Where the provision made is reasonable, even if there be some shortfall, such shortfalls should be ignored. 20. The Department's case is that the straight line method of chargin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 10,00,000 Rs. 12,50,000 Transfer to General Reserve Rs. 20,32,500 Rs. 35,99,000 Rs. 59,59,000 Surplus carried forward Rs. 264 Rs. 527 Rs. 818 -------------------------- --------------------------- -------------------------------- Rs. 57,88,224 Rs. 99,79,837 Rs. 1,45,70,508 -------------------------- --------------------------- -------------------------------- Shortfall in depreciation charged Rs. 4,59,187 Rs. 12,00,610 Rs. 23,50,142 (or excess depreciation allowed in I.T. assts.) --------------------------------------------------------------------------------------------------------------------------------------------------- 22. Now the assessee's case is that the excess depreciation allowed in the income-tax assessments should not go to reduce the amount transferred to general reserve but should go to reduce provision for taxation/provision for proposed dividends/surplus earned forward. According to the assessee, it has the right to 'attribute' the excess depreciation allowed in the income-tax assessments to any one or more of the three heads referred to above. 23. Let us examine the assessee's claim, by taking each head at a time. 24. Provision for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts tax liability. In other words, it has no go but to make adequate provision towards taxation. This naturally flows from the mandate of section 211 of the Companies Act which makes it incumbent upon a company to give a true and fair view of its state of affairs at the end of the year of account concerned. 26. Thirdly, as pointed out earlier, we also have Rule 1A of the Second Schedule to the Surtax Act which brings the axe down in all cases where no provision is made in the balance-sheet towards taxation or where there is a short fall made in the provision for taxation. 27. Now, the assessee has set apart or appropriated certain sums as and by way of provision for taxation. The normal presumption, favourable to the assessee, is that the assessee has made proper provision for taxation. If the assessee were to have its way, namely that the excess depreciation allowed should go to reduce the provision for taxation, then the assessee would be not only transgressing the statutory obligations cast on it by the Companies Act but also will get caught, in the process, within the mischief of Rule 1A of the Second Schedule to the Surtax Act. It should, therefore, follow that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the dividend proposed by the Board of directors was approved by the annual general meeting. In any event, there is no evidence to the contrary in this case. It should, therefore, follow that 'Proposed dividends' is also out of bounds. 31. Surplus in the profit and loss A/c: The surplus in the profit and loss account is neither a provision nor a reserve. It is a mass of undistributed or unappropriated profits. And, under the law, it is entirely within the discretion of the Board of directors to decide what amount must be left as a surplus in the profit and loss account. Indeed, in the recent years, it is not uncommon for the companies to leave as surplus in profit and loss account an amount much larger than the amount transferred to the general reserve. This is a matter to be dealt with by the Board of directors and ultimately by the general body. It is one amongst the many events which are inter-related with the domestic or indoor management of a company. 32. Given the true legal character of 'Surplus in the Profit and Loss Account', we have no difficulty in agreeing with the learned counsel for the assessee when he says that the excess depreciation allowed in the income-tax a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment in excess of the book liability for income tax". As pointed out supra, the CIT took the line that the provision for taxation made in the books being less than the liability to taxation as determined in the income-tax assessment, Rule 1(iii) of the Second Schedule must be automatically applied and the capital base reduced pro tanto. Clearly, the CIT has overlooked the significant fact that it is Rue 1A that is applicable and that the said Rule incorporates an element of reasonableness. Following the order dated August 29, 1991 of the ITAT Madras Bench 'C' in the case of Lakshmi Mills Co. Ltd. v. IAC [1991] 39 ITD 389 we hold that the CIT was not justified in directing the assessing officer to reduce the capital base by Rs. 1,34,001 (Rs. 33,39,461 ---- Rs. 32,05,460). We, therefore, set aside the impugned order in revision of the CIT on this issue insofar as it relates to the assessment year 1982-83 and restore that of the assessing officer. 37. In the assessment for the assessment year 1984-85, the assessee's grievance is that the lower authorities were not justified in reducing the capital base by a sum of Rs. 1,07,281 being the 'investment allowance' allowed in excess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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