Commissioner of Income Tax vs Lucas Indian Services Ltd.

Gulab C. Gupta, J.—This is a reference u/s 256(2) of the Income Tax Act, 1961 (hereinafter referred to as ""the Act""), at the instance of the

Revenue requesting decision of this court on the following questions of law :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the reserve for bad and doubtful

debts should be treated as reserve and should be included in the capital for the levy of surtax ?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right and justified in applying the provisions of rule 4 of

the Second Schedule to the Companies (Profits) Surtax Act, 1964, consequent to the deduction allowed under Chapter VI-A of the Income Tax

Act, 1961 ?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the dividends declared from the

general reserve should not be deducted from the general reserve for computing the capital for levy of surtax ?

The assessee is a public limited company subject to payment of tax under the Act. In computing the capital under the Second Schedule to the

Companies (Profits) Surtax Act for the assessment years 1970-71 to 1974-75, the Income Tax Officer has held that the reserve for the bad and

doubtful debts cannot be treated as a reserve and, therefore, excluded the same. On appeal, the Commissioner of Income Tax accepted the

assessee''s claim for treating the same as reserve following the decision of the Bombay High Court in Commissioner of Income Tax, Bombay City-

VI Vs. Golden Tobacco Co. Ltd., . This view of the Commissioner of Income Tax is affirmed by the Appellate Tribunal and gives rise to question

No. 1 referred to this court for its decision.

For the assessment years 1970-71 to 1973-74, the Income Tax Officer treated deductions given under Chapter VI-A of the Act as income not

includible in the total income within the meaning of rule 4 of the Second Schedule and diminished the capital proportionately. But the Commissioner

of Income Tax (Appeals) following the decision of this court in Additional Commissioner of Income Tax Vs. Bimetal Bearings Ltd., , held that

deduction given under Chapter VI-A of the Act need not be considered for rule 4. This decision was affirmed by the Appellate Tribunal and has

given rise to the second question included in the order of reference.

Learned counsel for the Department stated at the very outset that the Department does not wish to press a decision on the second question and

hence it is not considered necessary to answer the second question.

As regards the third question, the Income Tax Officer deducted the dividends proposed in respect of the accounting years from the general

reserve in computing the capital. The Commissioner of Income Tax (Appeals), following the decisions of this court in the cases :

(1) Commissioner of Income Tax Vs. Madras Motor and General Insurance Co. Ltd., and (2) India Motor Parts and Accessories Ltd. Vs.

Commissioner of Income Tax, ,

however, held that the dividend proposed in respect of the accounting years should be deducted from the general reserve in computing the

capital. This view has been affirmed by the Appellate Tribunal and gives rise to the third question mentioned above.

As regards the first question, the same stands concluded by the two decisions of the Supreme Court in :

(1) Commissioner of Income Tax, Kanpur Vs. Elgin Mills Ltd., Kanpur, and (2) Commissioner of Income Tax, Kanpur Vs. Saran Engineering Co.

Ltd, .

Learned counsel for the parties really conceded that the aforesaid Judgments conclude the controversy and should form the answer of this court

to the question. Since these decisions of the apex court authoritatively decide the controversy, the first question referred to this court is answered

by holding that the Appellate Tribunal was right in holding that the reserves for bad and doubtful debts should be treated as reserves and should be

included in the capital for the levy of surtax. Question No. 1 is, therefore, answered against the Department.

As regards question No. 3, the matter received consideration of the Supreme Court in Vazir Sultan Tobacco Co. Ltd., Hyderabad and Others

Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad, , and it was held that dividends declared by the assessee should be deducted

from the general reserve for computing the capital for levy of surtax. Since the aforesaid decision squarely applies to the facts of this case, question

No. 3 is answered by holding that, on the facts and circumstances of the case, the Appellate Tribunal was not right in holding that the dividends

declared from the general reserve should not be deducted from the general reserve for computing the capital for levy of surtax. In other words, we

hold that the dividends declared should be deducted from the general reserve for computing the capital for levy of surtax.

The reference stands answered accordingly. There will be no order as to costs.