1995 (12) TMI 11 - HC - Income Tax

Summary

Issues Involved:

1. Interpretation of Explanation 1 to Rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.
2. Interpretation of Rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964.
3. Treatment of revaluation reserves in computing capital for statutory deduction under section 2(8) of the Companies (Profits) Surtax Act, 1964.

Issue-wise Detailed Analysis:

1. Interpretation of Explanation 1 to Rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964:

The core issue was whether the sum of Rs. 68,64,000, resulting from the revaluation of assets and recalculated depreciation, could be treated as part of the capital for determining the statutory deduction under section 2(8) of the Companies (Profits) Surtax Act, 1964. The assessee argued that the term "book assets" in Explanation 1 to Rule 2 should be interpreted to mean only "intangible assets." However, the Tribunal and the court rejected this interpretation, stating that "book assets" includes all assets, both tangible and intangible, entered in the company's books. The court emphasized that the term "asset" is broad and includes any property, whether tangible or intangible, that is recorded in the company's books. The court concluded that the increase in general reserve due to revaluation could not be considered capital for surtax purposes, as per Explanation 1 to Rule 2.

2. Interpretation of Rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964:

For question No. 2, it was determined that Rs. 57,52,837 out of Rs. 68,64,000 should be excluded from general reserves and could not be treated as part of the capital for statutory deduction purposes. This conclusion was based on the precedent set by the court in CIT v. Zenith Steel Pipes Ltd. [1978] 112 ITR 215, which was cited by the counsel for the assessee. Consequently, the court answered question No. 2 in the affirmative and in favor of the Revenue.

3. Treatment of Revaluation Reserves in Computing Capital for Statutory Deduction:

Regarding the third question, the court noted that since the answer to question No. 1 was in favor of the Revenue, it was unnecessary to address question No. 3 separately. Consequently, question No. 3 was returned unanswered.

Conclusion:

In summary, the court affirmed the Tribunal's decisions on questions Nos. 1 and 2, holding them in favor of the Revenue. The court concluded that the revaluation reserve created by recalculating depreciation over 55 years could not be included in the capital for surtax purposes. Question No. 3 was not answered due to the resolution of question No. 1. The court made no order as to costs.