1994 (4) TMI 36 - HC - Income Tax

Summary

Issues:
1. Whether reserve for bad and doubtful debts should be included in the capital for the levy of surtax.
2. Application of provisions of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, after deduction allowed under Chapter VI-A of the Income-tax Act, 1961.
3. Whether dividends declared from the general reserve should be deducted from the general reserve for computing the capital for levy of surtax.

Analysis:

Issue 1:
The court addressed whether the reserve for bad and doubtful debts should be considered as part of the capital for surtax levy. The Income-tax Officer initially excluded this reserve from the capital calculation. However, the Commissioner of Income-tax and the Appellate Tribunal supported the assessee's claim based on the decision in CIT v. Golden Tobacco Co. Ltd. The court referred to the Supreme Court decisions in CIT v. Elgin Mills Ltd. and CIT v. Saran Engineering Co. Ltd., concluding that the reserve for bad and doubtful debts should indeed be treated as reserves and included in the capital for surtax. Therefore, the court answered this question against the Department.

Issue 2:
Regarding the application of rule 4 of the Second Schedule after deduction under Chapter VI-A of the Income-tax Act, the Income-tax Officer initially reduced the capital based on these deductions. However, the Commissioner of Income-tax (Appeals) and the Appellate Tribunal, following the decision in Addl. CIT v. Bimetal Bearings Ltd., held that such deductions need not be considered for rule 4. The Department did not press on this question, and it was not necessary to answer it.

Issue 3:
The court deliberated on whether dividends declared from the general reserve should be deducted from the general reserve for surtax capital computation. The Income-tax Officer initially deducted these dividends, but the Commissioner of Income-tax (Appeals) and the Appellate Tribunal, relying on previous court decisions, held that the dividends should be deducted. The court cited the decision in Vazir Sultan Tobacco Co. Ltd. v. CIT, affirming that dividends declared must be deducted from the general reserve for computing the capital for surtax. Therefore, the court held that the dividends declared should indeed be deducted for surtax capital computation.

In conclusion, the court answered the questions raised in the reference, holding in favor of the assessee on the issues of including the reserve for bad and doubtful debts in capital and deducting dividends declared from the general reserve for surtax computation.