1992 (11) TMI 10 - HC - Income Tax

Assessment Year, Bonus Shares, Capital Reserve, Company Surtax, Computation Of Capital, Contingency Reserve, General Reserve, Reserve For Doubtful Debts, Super Profits Tax, Surtax Assessment

Issues Involved:
1. Validity of assessments made beyond the statutory period.
2. Inclusion of 'surplus' of income in the capital base.
3. Inclusion of full provision for taxation and foreign taxation in the capital base.
4. Exclusion of cost of shares from the capital base for computing surtax.
5. Classification of forfeited dividends, reserve for doubtful debts, and contingency reserve as 'reserves.'
6. Treatment of excess provisions for foreign and local taxation as 'reserves.'
7. Inclusion of proposed dividend in the capital computation.
8. Proportional increase of paid-up share capital due to bonus shares.
9. Treatment of various reserves and provisions in the capital computation under the Surtax Act.

Detailed Analysis:

1. Validity of Assessments Made Beyond the Statutory Period:
For the assessment year 1963-64, the question of whether the assessment made under section 7(2) of the Super Profits Tax Act, 1963, was valid despite being beyond the four-year period was answered in the affirmative and in favor of the Revenue, based on the decision in Indian Hume Pipe Co. Ltd. v. CIT [1991] 189 ITR 683.

For the assessment years 1964-65 and 1965-66, the question of the validity of assessments made under section 6 of the Companies (Profits) Surtax Act, 1964, beyond the four-year period was also answered in the affirmative and in favor of the Revenue, following the same precedent.

2. Inclusion of 'Surplus' of Income in the Capital Base:
For both the assessment years 1963-64 and subsequent years, the question of whether the 'surplus' of income formed part of the capital base was answered in the affirmative and in favor of the Revenue, as governed by the decision in CIT v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499.

3. Inclusion of Full Provision for Taxation and Foreign Taxation in the Capital Base:
For the assessment year 1963-64, the inclusion of full provision for taxation and foreign taxation in the capital base was answered in the affirmative and in favor of the Revenue, guided by the decision in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559.

For subsequent years, the same question was similarly answered in the affirmative and in favor of the Revenue, based on the same precedent.

4. Exclusion of Cost of Shares from the Capital Base for Computing Surtax:
The relevant facts indicate that the Income-tax Officer excluded the cost of certain shares, the income from which was not included in the chargeable profits because these shares had not earned any dividend for the two assessment years in question. The court held that under rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, these shares must be excluded from the capital base, even if no dividend was earned during the relevant period. This interpretation was supported by decisions in CIT v. United Breweries Ltd. [1978] 114 ITR 901 and Nav Bharat Vanijya Ltd. v. CIT [1980] 123 ITR 865. The contrary view taken by the Madras High Court in Addl. CIT v. Madras Motor and General Insurance Co. Ltd. [1979] 117 ITR 354 was not followed. The question was answered in the affirmative and in favor of the Revenue.

5. Classification of Forfeited Dividends, Reserve for Doubtful Debts, and Contingency Reserve as 'Reserves':
For the assessment year 1963-64, it was accepted that forfeited dividends should be excluded from the capital base, while reserve for doubtful debts and contingency reserves, to the extent they are not set up for any specific liability, should be included. This was based on CIT v. Saran Engineering Co. Ltd. [1986] 161 ITR 741 (SC).

6. Treatment of Excess Provisions for Foreign and Local Taxation as 'Reserves':
For the assessment year 1963-64, the excess provision for foreign taxation and local taxation should be treated as 'reserves' for the purpose of capital computation, as per Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 (SC).

7. Inclusion of Proposed Dividend in the Capital Computation:
For the assessment year 1963-64, the proposed dividend was not to be included in the capital computation, following Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 (SC).

8. Proportional Increase of Paid-up Share Capital Due to Bonus Shares:
For the assessment year 1963-64, the paid-up share capital should not be increased proportionately under rule 2 of the Second Schedule to the Super Profits Tax Act in respect of bonus shares, based on CIT v. Century Spinning and Manufacturing Co. Ltd. [1978] 111 ITR 6 (Bom).

9. Treatment of Various Reserves and Provisions in the Capital Computation under the Surtax Act:
For the assessment years 1964-65, 1965-66, 1968-69, and 1969-70:
- Forfeited dividends should be excluded, while contingency reserves should be included in the capital base (CIT v. Saran Engineering Co. Ltd. [1986] 161 ITR 741 (SC)).
- Reserve for doubtful debts should be included if not set up for any specific liability (CIT v. Saran Engineering Co. Ltd. [1986] 161 ITR 741 (SC)).
- Excess provisions for foreign and local taxation should be treated as 'reserves' (Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 (SC)).
- Surplus in the profit and loss account and provisions for taxation should be reduced from the cost of assets excluded (Hindustan Construction Co. Ltd. v. CIT [1994] 207 ITR 1091 (Bom)).
- Proposed dividend should not be included in the capital computation (Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 (SC)).
- Dividend equalization reserve should not be included in the computation of capital (Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 (SC)).
- General reserve should be reduced by the amount of dividend declared (Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 (SC)).
- Exchange difference reserve should be treated as 'reserves' (CIT v. Saran Engineering Co. Ltd. [1986] 161 ITR 741 (SC)).
- The amount in general reserve No. 2 account should be considered part of capital (question not arising from the Tribunal's finding, hence not answered).

No order as to costs was made.

← Previous Next →