2002 (9) TMI 87 - HC - Income Tax

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the development rebate reserve written back should not be reduced from the capital base under rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964? - The amount credited into the general reserve from the development rebate reserve therefore is not to be regarded as an amount which had been allowed as a deduction in the computation of the income of the previous year under the Income-tax Act. - The question referred to us is answered in favour of the assessee and against the Revenue.

Summary

Issues:
1. Interpretation of rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964 regarding the treatment of development rebate reserve written back in the capital base calculation.

Analysis:
The case involved a dispute regarding the treatment of a development rebate reserve that was transferred to the general reserve by the assessee after the period for which the reserve was required had ended. The Assessing Officer and the appellate authority disagreed with the assessee's position that the transferred amount should not be deducted while computing the capital base under the Second Schedule to the Companies (Profits) Surtax Act, 1964. The Tribunal, however, sided with the assessee and allowed the appeal.

The relevant provisions under consideration were Rule 1 and its clauses (i), (ii), and (iii) of the Second Schedule to the Act. Section 34(3) of the Income-tax Act, 1961, was also crucial as it dealt with the creation of a development reserve by an assessee claiming the benefit of development rebate. The section specified that an amount equal to seventy-five percent of the development rebate should be debited to the profit and loss account and credited to a reserve account for business purposes within a specified period.

The court analyzed that the Act did not specify that the deduction allowed through development rebate must be credited to the development rebate reserve. The development rebate reserve needed to be maintained separately for the specified period. The court emphasized that the amount credited to the reserve was not the same as the deduction allowed by way of development rebate, as clarified in Section 34(3)(a).

Considering these provisions, the court found it challenging to accept the Revenue's argument that the amount transferred to the general reserve should be deducted from the capital base. The court highlighted that even if rule 1(iii) could be interpreted to include the deduction allowed under the Income-tax Act, the literal construction favoring the assessee should be preferred.

Ultimately, the court ruled in favor of the assessee, stating that the amount transferred from the development rebate reserve to the general reserve should not be considered as a deduction in the income computation under the Income-tax Act. The judgment favored the assessee and went against the Revenue's position.

This detailed analysis clarifies the interpretation of the relevant provisions and the court's reasoning behind the judgment in resolving the issue presented before it.