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TMI Blog2017 (10) TMI 421X X X X Extracts X X X X X X X X Extracts X X X X ..... rom year to year ? 3. Whether in upholding the deduction of the amount of depreciation differential from the capital, the Tribunal has omitted to consider relevant material ?" 2. Mr.Seth appearing on behalf of the assessee contended that the matter must really go back to the Tribunal. He would submit that the Tribunal has not decided the matter in accordance with the provisions of law and which were pressed into service in the backdrop of the facts. He would submit that the decision of this Court in the case of Commissioner of Income Tax, Bombay CityIII Vs. Zenith Steel Pipes Limited reported in (1978)112ITR215 (Bombay) was not concerned with that aspect of the matter, which was highlighted by the assessee. The Division Bench while deciding the Zenith Steel (supra) matter rested its conclusion on one aspect of the matter and that is with regard to the deduction for the purposes of charge of Surtax. Mr. Seth inviting our attention to the charging provision, would submit that Surtax Act states that subject to the provisions contained therein, there shall be charged on every company for every assessment year commencing on and from 1st April 1964 but before first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that the differential amount is credited to the reserves of the company. Alternatively, if the amount, instead of crediting to reserves, is already spent on dividends, then, the same will not form part of the reserves within the meaning of clause (iii) of Rule 1. Mr. Seth, therefore, attempted to distinguish the judgment in the case of Zenith Steel Pipes (supra). 6. On the other hand, Mr. Malhotra, learned counsel appearing on behalf of the revenue, would submit that the matter stands concluded in favour of revenue and against the assessee. If Mr. Seth's argument and request is accepted, that would mean adding something to the provision or reading into it something which is expressly not there. If the second schedule and the rules therein and particularly Rule 1(iii) are read, there is no scope for accepting the alternate argument of Mr.Seth as well. There is nothing in this rule which would unable the assessee to argue that the reserves, as depleted by payment of dividend, should be reduced. These are the words read into by the assessee and the Legislature has not provided for anything other than the words specifically inserted therein. For all these reasons he would submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that request was even refused, then he would submit that we must remand the case. 9. We are unable to agree with Mr. Seth for more than one reason. The charge of tax appearing in Section 4 means as under : "4. Charge of tax Subject to the provisions contained in this Act, there shall be charged on every company for every assessment year commencing on and from the first day of April, 1964 (but before the first day of April, 1988), a tax (in this Act referred to as the surtax) in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the third Schedule." Thus, there shall be charged on every company for every assessment year commencing on and from 1st April 1964 but before 1st April 1988 a tax which is referred to as the Surtax, in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the third schedule. The definitions are contained in Section 2 and we are concerned with terms `chargeable profits' and `statutory deductions'. The t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 1 says that subject to other provisions contained in the schedule namely Second Schedule, the capital of a company shall be the aggregate of the amounts, as on the first day of the previous year relevant to the assessment year of and for that purpose we reproduce Rule 1 with clauses thereof : "(i) its paidup share capital; (ii) its reserves, if any, created under the proviso (b) to clause (vib) of subsection (2) of section 10 of the Indian IncomeTax Act, 1922 (11 of 1922) or under subsection (4) of Section 32A, or subsection (3) of Section 34 of the Incometax Act, 1961 (43 of 1961); (iii) its other reserves as reduced by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the Indian Incometax Act, 1922 or the Incometax Act, 1961. (1A) Where a company has not made any credit in any account in its books as on the first day of the previous year relevant to the assessment year which is of the nature of item (8) or item (9) under the heading `Current Liabilities and Provisions' in the column relating to `Liabilities' in the `Form of Balance Sheet', ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation under the Incometax Act for the assessment years 196465 and 196566 could be said to have been allowed to the assessee as on the respective first day of the previous year concerned, even though, factually, its incometax assessments for the said assessment years were completed after the respective first day of the previous year ?" 14. The Hon'ble Division Bench noted the relevant facts. It held that two questions arise out of Surtax liability for the A.Y.196566 and 196667. The balance sheet and profit and loss account as prepared by the company in the manner noted by the Bench, were ultimately approved by the shareholders. The depreciation was worked out by same method namely straight line method. Income Tax Officer held that the company ought to have provided a sum of Rs. 17,39,255/ by way of depreciation and what has been actually provided was lesser than that which ought to have been provided. He took the view that the whole of the sum which was transferred to the general reserve was not liable to be taken into account in the computation of capital as on 1st May 1963. This was the view also for the A.Y.196667. However, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of clause (iii). The short question that we have to consider is whether in computation of capital the entire amount of "other reserves" is to be included or any deduction has to be made therefrom for the two respective years in view of the provisions contained in clause (iii). If regard be had to the very plain language used in clause (iii), it is very clear that the entire amount of other reserves is not to be included in the computation of capital but it is the balance of the amount of "other reserves" as subjected to the deductions therein provided which is to be included. The reduction has to be made "by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the Indian Incometax Act, 1922, or the Incometax Act, 1961. It is common ground and it cannot be disputed having regard to the facts determined by the taxing authorities and the Tribunal that the assessee, as it was following the straightline method of depreciation, provided depreciation at an amount lesser than that was permitted to it in its assessment under the Indian Incometax Act. For the year ending April 30, 1963, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ming part of the general reserve and actually the amounts that were credited to the general reserve included within its item such difference between the amount of depreciation allowed for the purposes of Incometax Act and the amount of depreciation actually provided in the books. Thus, on a plain interpretation of the language used in clause (iii) of rule 1 of the Second Schedule to the Act, it is quite apparent that if the amount of depreciation provided in the books of the assesseecompany for a particular year is less than the amount of depreciation actually allowed by the Incometax Officer for computation of the income, then the difference between these two amounts has to be deducted from the amount standing to the credit of "other reserves", namely, general reserve, so far as the facts of this case are concerned. Thus, the Appellate Assistant Commissioner was right in taking the view that for the first year a sum of Rs. 5,68,112 ought to be deducted from the amount of general reserve of Rs. 7,50,000 and a sum of Rs. 12,52,957 ought to have been deducted from the amount of general reserve of Rs. 37,00,000 for the second year. ... ... ... What is required to be conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, even on footing that the aggregate differential went to augment the general reserve, as long as the amount capitalised out of the general reserve is more than the amount represented by the aggregate differential, the department cannot insist on tracing the aggregate differential to general reserve alone. The alternate argument was that a part of the general reserve might well have been declared as dividend. In such case also the assessee could attribute such payments to the aggregate differential. The Tribunal then went on to refer to the law and equally to all other aspects but what it found that conditions and three in number as enumerated in Rule 1(iii) would have to be satisfied. Firstly there should be reserve; secondly amount should have been credited to such reserve, by conscious overt act on the part of Board of Directors. Thirdly, the amount credited to reserve must have been allowed as deduction in computing the income of the company for the purposes of income tax. The Tribunal found that in the case before it, these conditions have not been satisfied. In the case before the Tribunal in respect of differential, there is no reserve credited by the board of direct ..... X X X X Extracts X X X X X X X X Extracts X X X X
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