1994 (1) TMI 24 - HC - Income Tax

Account Books, Companies Profits Surtax, Company Surtax, Computation Of Capital Reserves, Depreciation Actually Allowed, General Reserve

Summary

Issues:
1. Whether reserves should be deducted under the Companies (Profits) Surtax Act, 1964.
2. Whether the reduction in reserves was justified given the dividend declared by the assessee.

Analysis:

Issue 1:
The case involved a dispute regarding the deduction of reserves under the Companies (Profits) Surtax Act, 1964. The Surtax Officer had deducted a specific amount from the reserves, contending that excess reserves had been created due to the difference in depreciation calculation methods. The Surtax Officer relied on the decision of the Bombay High Court in CIT v. Zenith Steel Pipes Ltd. [1978] 112 ITR 215, which held that the excess depreciation allowed should be deducted from reserves for capital computation. The Commissioner of Income-tax (Appeals) and the Tribunal also upheld this decision. Consequently, the High Court affirmed the same, ruling in favor of the Revenue and against the assessee.

Issue 2:
The second question raised was whether the reduction in reserves should be adjusted considering the dividends declared by the assessee. The assessee argued that the depreciation difference should have been reduced by the dividends declared. However, the authorities found that the assessee failed to provide evidence that making proper provisions for depreciation would have significantly reduced distributable profits compared to the dividends declared. It was also noted that the dividends were not paid out of capital but out of profits. As the assessee did not present figures to support their claim, the High Court upheld the Tribunal's decision, answering the second question in favor of the Revenue and against the assessee.

In conclusion, both issues were decided in favor of the Revenue, upholding the deductions made by the Surtax Officer and dismissing the assessee's contentions regarding the adjustment for dividends declared. The case was disposed of with no order as to costs.