Commissioner of Income Tax vs Gramophone Company of India Ltd.

Ajit K. Sengupta, J.—At the instance of the Commissioner of Income Tax, West Bengal, the following questions of law have been referred to this court u/s 256(1) of the Income Tax Act, 1961, for the assessment years 1973-74 and 1974-75.

"(1) Whether, on the facts and in the circumstances of the case and on a correct interpretation of Rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the Tribunal was correct in holding that a diminution of the capital, in proportion to the deduction allowed under Sections 80M, 80J and 80O of the Act of 1961, in computing the total income of the assessee under the latter Act, was not permissible ?

(2) Whether, on the facts arid in the circumstances of the case, the Tribunal was correct in holding that the amount set apart as ''Reserve for doubtful debts and advances'' and ''Tax equalisation reserve'' were ''reserves'' within the meaning of Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, and should be included in computing the capital of the assessee under the said Schedule ?"

In view of the judgment delivered today in Income Tax Reference No. 131 of 1978 in Commissioner of Income Tax Vs. Britannia Biscuit Co. Ltd., the first question is answered in the affirmative and in favour of the assessee.

The second question came up for consideration in the assessee''s own case in Commissioner of Income Tax Vs. Gramophone Co. of India Ltd., . Following the said decision, we answer the second question in the manner indicated hereafter,

On the finding of the Tribunal and following the law laid down by the Supreme Court in Vazir Sultan Tobacco Co. Ltd., Hyderabad and Others Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad, , it appears to us that the amount set apart under the head "Tax equalisation reserve" is wholly in excess of the amount that may be reasonably necessary for meeting the known or existing tax liability and this excess is to be treated as a reserve and included in the capital computation.

We answer the common question for the assessment years 1973-74 and 1974-75 in the affirmative to the extent as above and in favour of the assessee.

The second question, so far as it concerns the "Reserve for doubtful debts and advances", cannot be answered as there is no finding whether the amount set apart under this head is in excess of what may be reasonably necessary to meet a known or expected liability. We remand the matter to the Tribunal to be disposed of in accordance with the principles laid down by the Supreme Court in Vazir Sultan Tobacco Co. Ltd., Hyderabad and Others Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad, and subsequent decisions of the Supreme Court on this issue, The Tribunal will, if necessary, call for further evidence in this matter.

No order as to costs.

Bhagabati Prasad Banerjee, J.

I agree.