TMI Blog1976 (7) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... en into account in the capital computation base for the year concerned ? 3. Whether, on the facts and in the circumstances of the case, for the purpose of computation of ' other reserves ' under rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, deduction for depreciation under the Income-tax Act for the assessment years 1964-65 and 1965-66 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 income-tax assessments for the said assessment years were completed after the respective first day of the previous year ? " Questions Nos. 1 and 2 are referred to at the instance of the revenue while question No. 3 is referred to at the instance of the assessee. At the outset we may state that so far as question No.1 is concerned is covered by our decisions in I. T. Reference No. 154 of 1970 [Commissioner of Income-tax v. Geoffrey Manners and Co. Ltd. [1977] 108 ITR 987 (Bom)] and I. T. Reference No. 316 of 1975 [subsequently reported as Commissioner of Income-tax v. Marrior (India) Ltd. [1974] 107 ITR 35 (Bom)]. Following the said decisions question No. 1 is answered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years an aggregate depreciation of Rs. 27,59,923 ought to have been provided. He, therefore, took the view that the sum of Rs. 14,87,015 (the difference between Rs. 27,59,923 actually allowed and Rs. 12,72,908 written off in the books of account of the assessee) was to be deducted from the total amount of general reserve of Rs. 37,00,000 for the purpose of computation of capital. He rejected the contention of the assessee that the entire amount standing to the credit of the general reserve ought to be taken into account for computation of capital. Aggrieved by the orders passed by the Income-tax Officer in respect of the two years appeals were preferred by the assessee-company before the Appellate Assistant Commissioner. It was contended before the Appellate Assistant Commissioner on behalf of the assessee that, having regard to the provisions of clause (iii) of rule 1 of the Second Schedule to the Act, before a reduction could be made in respect of any amount from the item of other reserves the following two conditions ought to be fulfilled : (1) that the amount in question should have been allowed as reduction ; and (2) such amount should have been credited to other reserv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o take into consideration the entire amount standing to the credit of the general reserves in the computation of capital for the years under consideration. Such a view was taken by the Tribunal by reason of the fact that in its opinion even though the amounts in question had been allowed as a deduction in computing the income of the assessee under the Act, the second condition that the said amounts should have been credited to other reserves in question was not fulfilled. The Tribunal took the view that the words " credited therein " implied a conscious and deliberate act on the part of the assessee to credit to the general reserves the amounts in question, which in the case in question related to the depreciation amount as allowed by way of deduction in calculating the income for the purposes of the Income-tax Act. Question No. 2 is raised at the instance of the revenue because the Tribunal has set aside the order of the Appellate Assistant Commissioner directing deduction to be made from the amounts of general reserves of Rs. 7,50,000 and Rs. 37,00,000 while question No. 3 is raised at the instance of the assessee on the ground that upon proper interpretation of the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the Super Profits Tax Act, 1963. The two questions which are for our consideration, one at the instance of the revenue and the other at the instance of the assessee, depend upon the interpretation of the provisions contained in clause (iii) of rule 1 of the Second Schedule to the Act. Under section 4, which is a charging section of the Act, surtax is leviable in respect of so much of the chargeable profits of the company 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 expression " statutory deduction " is defined in section 2(8) as meaning an amount equal to ten per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule or an amount of two hundred thousand rupees, whichever is greater. There are two provisos to this definition but they are not relevant for the present purpose. The Second Schedule lays down the rules for computation of capital of a company for the purpose of surtax. We are concerned in the present case with the provisions of clause (iii) of rule 1 and its provisions are as under : " 1. Subject to the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ggregate depreciation provided as on April 30, 1964, in the books of the assessee-company was Rs. 12,72,908 while the Appellate Assistant Commissioner allowed by way of depreciation up to that year the sum of Rs. 27,59,923. Thus for the year ending April 30, 1963, a sum of Rs. 5,68,112 was allowed as depreciation in addition to the sum provided in the books of the assessee-company, while for the year ending April 30, 1964, a sum of Rs. 12,52,957 was allowed as depreciation in excess of what was provided by the assessee-company in its books. The questions which are raised are in relation to these amounts and whether any part thereof is liable to be deducted merely on the ground that they are credited to " other reserves ", i.e., general reserves in the present case. As the assessee-company provided lesser amount by way of depreciation than what was allowed in the computation of the income of the assessee-company for purposes of the Income-tax Act, 1961, the difference between the amount of depreciation actually allowed to the assessee and the amount actually provided in its books, was forming part of the general reserve. It is, therefore, quite apparent that the assessee-company whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at circular it is laid down that the provisions of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, in so far as they are relevant, are that the capital of a company shall be the sum of the amounts of ---(a) its paid up capital ; (b) its reserves, if any, created under proviso (b) to section 10(2)(vib) of the Act of 1922 or section 34(3) of the Act of 1961 ; and (c) its other reserves in so far as the amounts credited to such other reserves have not been allowed in computing the profits of the company for the purposes of the Indian Income-tax Act, 1922, or the Income-tax Act, 1961. It is stated in this circular in respect of other reserves that the rule makes it explicit that such other reserves shall be taken into consideration for the computation of the capital only in so far as the amounts credited to such reserves have not been allowed in computing the company's profits for the purposes of the Act of 1922 or the Act of 1961. The words " have not been allowed " cannot be equated with the words " are not allowable ". They have to be understood as meaning " have not in fact been allowed ". It is also laid down in this circular that the corresponding provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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