2003 (7) TMI 67 - HC - Income Tax

Companies (Profits) Surtax Act, 1964 - Computation of Capital - (1) Whether, Tribunal was justified and correct in law in treating the amount of Rs. 1,43,89,055 as capital reserve forming part of the capital of the assessee under rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, read with Explanation 1 to rule 2 of the said Second Schedule? - (2) Whether, Tribunal was justified and correct in law in upholding the direction given by the Commissioner of Surtax (Appeals) to the Assessing Officer to include the sum of Rs. 1,43,89,055 in the assessee s capital to determine the statutory deduction for the purpose of its surtax assessment under the Companies (Profits) Surtax Act, 1964? - we answer the questions in negative in favour of the Revenue.

Summary

Issues:
1. Interpretation of provisions of the Companies (Profits) Surtax Act, 1964 regarding treatment of a specific amount as capital reserve for surtax assessment.
2. Whether the amount in question qualifies as a component of capital under the Act for statutory deduction purposes.

Issue 1: Interpretation of Provisions

The judgment revolves around the interpretation of the Companies (Profits) Surtax Act, 1964, specifically focusing on the treatment of a sum of Rs. 1,43,89,055 as a capital reserve. The appellant challenged the inclusion of this amount in the capital for determining the statutory deduction under the Act. The court analyzed the relevant sections of the Act, emphasizing the computation of chargeable profits, the method for determining capital, and the provisions for statutory deduction. The court highlighted that the chargeable profits are computed under the Income-tax Act with adjustments as per the First Schedule, while the Second Schedule outlines the procedure for computing a company's capital for surtax purposes.

Issue 2: Capital Reserve Classification

The case involved a company that acquired twelve tea companies under a scheme of arrangement. The consideration paid was less than the book value of the net assets, resulting in a difference of Rs. 1,43,89,055. The Assessing Officer initially did not consider this amount while computing the capital under the Second Schedule. The Commissioner of Surtax (Appeals) directed the inclusion of this amount as a capital reserve for surtax assessment, a decision affirmed by the Income-tax Appellate Tribunal. The appellant contended that this reserve should not be treated as a component of capital under the Act, arguing that it did not fall under sub-rule (iii) of rule 1 of the Second Schedule when read with Explanation 1 to rule 2.

The court analyzed the contentions raised by the appellant and examined the provisions of the Second Schedule in detail. It noted that the shortfall between the book value of the assets acquired and the consideration paid led to the creation of a reserve to fill the gap. The court emphasized that this reserve, although not taxed under the Income-tax Act, could not be considered a component of capital for surtax assessment purposes. The court concluded that the reserve created by the company due to the shortfall did not qualify as capital under the Act, as per Explanation 1 to rule 2. Therefore, the decisions of the Commissioner of Income-tax (Appeals) and the Tribunal were deemed incorrect in law. Consequently, the court ruled in favor of the Revenue, disallowing the inclusion of the amount as capital reserve for surtax assessment.

In conclusion, the judgment delves into the intricate interpretation of the Companies (Profits) Surtax Act, 1964, particularly regarding the treatment of a specific amount as a capital reserve for surtax assessment. The court's detailed analysis of the relevant provisions and its ultimate decision to disallow the inclusion of the amount as capital reserve showcases a nuanced understanding of the statutory framework governing surtax assessment in this case.