1994 (4) TMI 15 - HC - Income Tax

Summary

Issues:
1. Interpretation of rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 for the assessment years 1969-70 and 1972-73.
2. Inclusion of the cost of shares in the capital computation for levy of surtax.
3. Applicability of judgments by the High Court and Supreme Court in similar cases.

Analysis:
The High Court of Madras addressed two tax references concerning the same assessee but for different assessment years, 1969-70 and 1972-73. The primary issue revolved around the interpretation of rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. In Tax Case No. 1178 of 1980, the question pertained to the exclusion of the sum of Rs. 2,69,534 being the cost of shares from the capital computation for surtax levy for the assessment year 1969-70. Similarly, in Tax Case No. 1392 of 1980, the question was about the exclusion of Rs. 8,81,684 being the cost of shares for the assessment year 1972-73.

The respondent-assessee contended that the cost of shares should be included in the capital computation for surtax assessment. The Surtax Officer initially excluded a portion of the cost of shares based on the absence of borrowed money and reduced it by the "reserve for doubtful debts." However, the Appellate Assistant Commissioner accepted the assessee's claim and directed the inclusion of the cost of shares in the capital computation. The Appellate Tribunal, relying on previous judgments, upheld the orders of the Appellate Assistant Commissioner.

The court referred to a Division Bench decision of the Madras High Court in Addl. CIT v. Madras Motor and General Insurance Co. Ltd. [1979] 117 ITR 354, emphasizing the reasonableness and fairness in interpreting the provisions of the Surtax Act. The court highlighted that the exclusion of assets under rule 2 of the Second Schedule should only apply when rule 1 of the First Schedule is attracted. The court rejected the Revenue's argument to remand the case for further consideration, stating that the Tribunal correctly decided in favor of the assessee based on the existing findings.

Additionally, the court considered a recent judgment of the Bombay High Court in CIT v. Geoffrey Manners and Co. Ltd. [1993] 204 ITR 483, which supported the Tribunal's view on the exclusion of investments in shares from the capital base under the Surtax Act. Consequently, the court answered the questions in favor of the assessee, affirming the inclusion of the cost of shares in the capital computation for surtax levy for both assessment years.

In conclusion, the judgment clarified the application of rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, highlighting the importance of interpreting the provisions in a reasonable and fair manner to determine the capital computation for surtax assessment.