AI Structured Summary
Not yet generated for this judgment
Judgment
Thanikkachalam, J.—At the instance of the Department, the Tribunal referred the following three questions, for the opinion of this Court, for
the asst. yrs. 1971-72 to 1973-74 under s. 256(1) of the IT Act, 1961.
(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the reserve for bad and doubtful debts and
the reserve for balance in Pakistan should be taken as capital for the levy of surtax for the asst. yrs. 1971-72 to 1973-74?
Whether the Tribunal was right in law in holding that the dividends declared subsequent to the first day of the accounting period should not be
deducted from the general reserve while computing the capital for levy of surtax for the asst. yrs. 1971-72 to 1973-74?
Whether the Tribunal was right in holding that the capital should not be proportionately reduced in terms of r. 4 of the Second Schedule to the
Companies (Profits) Surtax Act, 1964, consequent to the deductions allowed under Chapter VI-A of the IT Act, 1961, for the asst. yrs. 1971-72
and 1972-73?
In so for as Question No. 3 is concerned, the point for consideration is whether the capital should be proportionately reduced in terms of r. 4 of
the Second Schedule to the Companies (Profits) Surtax Act, 1964, consequent to the deductions allowed under Chapter VI-A of the IT Act,
1961, for the asst. yrs. 1971-72 and 1972-73. A similar question camp up for consideration before the Supreme Court in Second Income Tax
Officer and Another Vs. Stumpp Schuele and Somappa (P) Ltd., , wherein the Supreme Court held that the relief allowed under s. 80-I (priority
industry) and s. 80-J (newly established industrial undertaking) of the IT Act, 1961, were not income, profits and gains, not includible in the total
income of the company under r. 4 of Schedule II to the Companies (Profits) Surtax Act, 1964 and would not go to diminish the capital of the
company to be computed for the purposes of the Surtax Act. In view of the above cited decision of the Supreme Court, we answer, question No.
3 in the affirmative and against the Department.
In so far as Question No. 2 is concerned, the point for consideration is whether the dividends declared subsequent to the first day of the
accounting period should not be deducted from the general reserve while computing the capital for levy of surtax for the asst. yrs. 1971-72 to
1973-74. A similar question came up for consideration before the Full Bench of this Court in Southern Roadways Ltd. Vs. Commissioner of
Income Tax, Tamil Nadu-IV, , wherein this Court held that when the general body approved the recommendation of the board of directors for
distribution of the dividend at the meeting hold on 30th September, 1969, the approval related back to the first day of the accounting year. A
similar view was also taken by the Supreme Court in Indian Tube Co. P. Ltd. Vs. Commissioner of Income Tax, . Accordingly we answer
question No. 2 in the negative and in favour of the Department.
So far as Question No. 1 is concerned, it consists of two items. The first item is whether the reserve for bad and doubtful debts should be taken
as capital for the levy of surtax for the asst. yrs. 1971-72 to 1973-74. The second item relating to reserve for balance in Pakistan should be taken
as capital for the levy of surtax for the asst. yrs. 1971-72 to 1973-74. With regard to the bad debt, there is a decision of the Supreme Court in
CIT v. Saran Engineering Co. Ltd. (1981) 161 ITR 741 wherein it was held that for computing the capital for the purpose of standard deduction in
connection with the liability to tax under the Super Profits-tax Act, 1963, the bad and doubtful debts reserve (sic) for balance in Pakistan is
concerned, it was contended that the reserve for balances in Pakistan should not be included in computing the capital base. The ITO had not
included them, but on the assessee''s appeal the CIT(A) had allowed the assessee''s plea in this behalf. The Revenue contested the CIT(A''s) order
before the Tribunal. The Tribunal accepted the assessee''s contention that the reserve was created not for a loan liability and was of the same
nature as reserve for doubtful debts. The Tribunal, therefore, agreed that these sums in question should be treated as reserve for inclusion in the
capital base. In view of the decision of the Supreme Court in State Bank of Patiala, Patiala Vs. Commissioner of Income Tax, Patiala, , and
another decision of the Supreme Court in Commissioner of Income Tax Vs. Jyoti Ltd., , there is no infirmity in the order passed by the Tribunal on
facts that the reserve for balances in Pakistan should be treated as reserve. Accordingly, in as much as the order passed by the Tribunal is in
accordance with the abovecited decisions of the Supreme Court, we answer question No. 1 referred to us in the affirmative and against the
Department. No costs.