TMI Blog2007 (4) TMI 225X X X X Extracts X X X X X X X X Extracts X X X X ..... t aside the assessment and restored it to the Assessing Officer to frame it afresh excluding similar reserves in the Indian accounts of the assessee from the computation of capital. The Assessing Officer reframed the assessment in accordance with the Commissioner's directions. The assessee's appeal against the reassessment was dismissed by the Commissioner (Appeals) on the ground of non-maintainability. The assessee had also preferred appeal before the Tribunal against the order of the Commissioner. The Tribunal in its consolidated order dated December 17, 1993 in STA Nos. 8, 9, 10 and 11/Bang/1988, reported at Eskayef Ltd. v. IAC [1994] 49 ITD 707 (Bang), allowed the appeal holding that the Commissioner had no jurisdiction to try to revise the assessment order by resorting to his powers under section 16(2) since the said order passed by the Assessing Officer could not be considered to have been erroneous and prejudicial to the interests of the Revenue. The Revenue thereafter in the light of an adverse order of the Tribunal, moved a reference application and the same was considered in terms of the reference made to us. The Tribunal has now framed the following two questions of la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passed and in the assessment order the amount of capital was taken as declared by the assessee. Subsequently, the Commissioner found that the capital so declared and accepted by the Assessing Officer was erroneous and prejudicial to the interest of the Revenue and in that view of the matter, he set aside the assessment order and directed the Assessing Officer to frame it afresh. The Assessing Officer reframed the assessment in accordance with the Commissioner's direction. When the said order was challenged before the Tribunal, the Tribunal has chosen to accept the case of the assessee. Let us see as to whether the Tribunal is justified in so far as this question is concerned in terms of its findings. From the facts it is seen that the Assessing Officer has chosen to rely on sub-clause (iii) of rule 1 of Second Schedule for the purpose of passing an adverse order against the assessee. When an appeal was filed, the appeal stood dismissed. The Tribunal in the second appeal would notice the issue of computation of capital base for the purpose of charging the assessee to Surtax. At this stage Schedule VI form of balance-sheet submitted by the assessee is to be seen. The assessee at page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l of a company. The authorities have, in the light of the Explanation chosen to reject the case of the assessee. The Tribunal in its order would notice the material facts for the purpose of consideration of the case of the assessee. When a notice was issued, the appellant has chosen to submit an explanation to the notice issued. In the explanation, the assessee would plead that although in India it is not possible to treat unappropriated mass of profit as a part of "reserve" for the purpose of computation of capital base, in the UK Companies Act and generally accepted UK accounting practice, the retained profit at the end of each year is carried forward as a reserve and that as the accumulated balance on the profit and loss account itself forms a part of the reserve, there is no requirement for a formal resolution of the directors or shareholders to transfer an amount to reserves in order for it to become "reserves". It has been stated that this treatment is similar to that adopted under USA generally accepted accounting practice whereby the undistributed profits of each year are added to "reserves" and are carried forward from year to year within reserves. The learned Tribunal aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een properly explained the Tribunal has to consider the case and pass appropriate orders for consideration in terms of rule 1(iii) of the Explanation. We accept the finding of the Tribunal. The Supreme Court in the case of First National City Bank v. CIT [1961] 42 ITR 17 has considered a similar issue and ultimately ruled as under: "The creation and maintenance of the item known as 'Undivided Profits' was a requirement of the Treasury Rules which were made under the statute and, therefore, it could not be said that the amount of 'Undivided Profits' in the balance-sheet was not allocated as a result of either a resolution of the directors, accepted by the shareholders, or on account of the requirements of the law. Therefore, the amount designated as 'Undivided Profits' was a part of the reserves and had to be taken into account when computing the capital and reserves under rule 2(1) of Schedule II to the Business Profits Tax Act." The Tribunal has noticed this judgment in support of its finding. We accept the findings of the Tribunal. Regarding question No. 2 Question No. 2 is with regard to capital expenditure on scientific research as appearing in the United Kingdom acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the deduction. Simply because of the fact that the amounts involved in both these entries are the same, it cannot be said that the amount credited to the reserve account in this regard has been allowed as deduction in computing the income of the assessee. We thus fully support the view of the assessee that the reserve artificially created on account of capital expenditure on scientific research is also to be considered as reserve and again is not to be excluded from the computation of capital of the assessee in accordance with the provisions of sub-clause (iii) of rule 1 of the Second Schedule. Ultimately, the Tribunal comes to a conclusion that because of inclusion of surplus (corresponding to reinstatement profits in the UK accounts) and of general reserve (corresponding to reinstatement of capital expenditure on scientific research in the UK account) within the computation of capital base of the assessee-company for all the four years under consideration. We are totally not in agreement with the findings of the Tribunal. The Tribunal virtually seems to make a case for the company. When there is a second entry in the reserve account, that entry has to be noticed for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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