1994 (2) TMI 17 - HC - Income Tax

Company Surtax, Computation Of Capital, Debenture Redemption Reserve, Dividend Reserve, General Reserve

Summary

Issues:
1. Whether the amount in the dividend reserve account should be treated as a reserve for computing the capital base of the company.
2. Whether the amounts in the deferred taxation account and debenture redemption reserve account should be considered as reserves for the purpose of addition to the capital.

Analysis:

Issue 1:
The case involved the assessment years 1965-66 and 1966-67. The dispute centered around the treatment of Rs. 1 crore standing to the credit of the dividend reserve account. The Income-tax Officer initially rejected the claim, stating it was a provision for the liability related to dividend distribution and not a reserve. However, the Appellate Assistant Commissioner reversed this decision, emphasizing that the amount was set aside for a future liability and should be considered a reserve. The Tribunal upheld this decision, noting that the dividend reserve account was distinct from the account used for dividend distribution. The court agreed with the Tribunal, ruling that the amount in the dividend reserve account should indeed be treated as a reserve for computing the company's capital base.

Issue 2:
In relation to the assessment year 1966-67, the question arose regarding the treatment of Rs. 40 lakhs each in the deferred taxation account and debenture redemption reserve account as reserves for capital computation. The Income-tax Officer classified these amounts as provisions, but the Appellate Assistant Commissioner deemed them as reserves. The Tribunal also supported this view, emphasizing that the amounts were not utilized for any specific liability and were transferred to the general reserve account. The court concurred with the Tribunal, stating that the character of these accounts remained that of reserves despite their labels, and thus, they should be considered as reserves for the purpose of capital addition. Therefore, the amounts in both accounts were ruled to be reserves in favor of the assessee and against the Revenue.

In conclusion, the court answered question No. 1 in the affirmative and question No. 2 in the negative, disposing of the reference with no costs awarded.