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Issues: Interpretation of Rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964 regarding deduction of excess depreciation from the capital base.
The judgment by the High Court of Madras, delivered by Judge R. Jayasimha Babu, addressed the interpretation of Rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The court highlighted the importance of the law laid down by the Bombay High Court in the case of CIT v. Zenith Steel Pipes Ltd., emphasizing that if an assessee claims deduction for higher depreciation but shows a lower amount in the profit and loss account and then credits the difference to a general reserve, that reserve must be reduced from the capital base for computing chargeable profits. However, in the present case, the Tribunal found no separate depreciation reserve or credit to a general reserve, leading to the conclusion that no deduction from the general reserve was warranted. The judgment emphasized that the existence of a differential alone does not justify deduction unless there is evidence of crediting it to a reserve. The assessing authority wrongly assumed the existence of a notional reserve without proper basis in the books of account. The Tribunal correctly held that no deduction from the general reserve was justified when the depreciation allowed under the Income-tax Act exceeded the amount in the profit and loss account. Furthermore, the judgment clarified that for Rule 1(iii) to apply, there must be a tangible reserve to which a credit has been made, whether a general or special reserve. In this case, the Tribunal found no depreciation reserve, emphasizing that an Assessing Officer cannot create a notional reserve for the purpose of deduction in computing the capital base. As a result, the questions raised by the Revenue were answered in favor of the assessee, concluding that the excess depreciation should not be reduced from the capital base under Rule 1(iii) of the Companies (Profits) Surtax Act, 1964.
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