1992 (10) TMI 15 - HC - Income Tax

Summary

Issues Involved:
1. Whether the provision for taxation and proposed dividend should be included in computing the capital base under the Super Profits Tax Act, 1963.
2. Whether the excess book depreciation written off over depreciation allowance under the Income-tax Act should be included in the capital base under the Super Profits Tax Act, 1963.

Detailed Analysis:

Issue 1: Provision for Taxation and Proposed Dividend
The first issue concerns whether the provision for taxation and proposed dividend constitute a reserve and should be included in the capital base of the assessee-company under the Super Profits Tax Act, 1963.

The court examined the relevant provisions of the Super Profits Tax Act, 1963, and the definitions of "chargeable profits" and "standard deduction" under sections 2(5) and 2(9) of the Act. Rule 1 of the Second Schedule was pivotal, which included paid-up share capital and reserves in the capital computation.

The Supreme Court's decision in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 was referenced, where the distinction between a "provision" and a "reserve" was elucidated. The court stated, "A 'Provision' is a charge against the profits to be taken into account against gross receipts in the profit and loss account, a 'reserve' is an appropriation of profits." The Supreme Court emphasized that amounts set aside for known liabilities are provisions, but any excess amounts could be considered reserves.

Applying this principle, the court concluded:
- Provision for Taxation: It is a provision for a known liability and not a reserve. However, any excess provision could be treated as a reserve and included in the capital base.
- Proposed Dividend: It is not a reserve and cannot be included in the capital base.

The Tribunal was directed to work out the amounts accordingly, recognizing any excess provision for taxation as a reserve.

Issue 2: Excess Book Depreciation
The second issue addressed whether the excess book depreciation over the depreciation allowance under the Income-tax Act should be included in the capital base under the Super Profits Tax Act, 1963.

The assessee had claimed a larger amount of depreciation in its profit and loss account, reducing its profits and reserves. The court referred to section 205(2) of the Companies Act, which allows different methods for calculating depreciation. The excess depreciation, not allowed under the Income-tax Act, was claimed by the assessee as a reserve.

The court cited the Supreme Court's decision in CIT v. Elgin Mills Ltd. [1986] 161 ITR 733, which clarified that excess provision for depreciation should be treated as a reserve. The Madras High Court's decisions in United Nilgiri Tea Estates Co. Ltd. v. CIT [1974] 96 ITR 734 and CIT v. English Electric Co. of India Ltd. [1985] 151 ITR 116 supported this view, stating that excess depreciation should be considered a reserve for capital computation purposes.

The court concluded that the excess provision for depreciation, being an extra amount retained by the assessee, should be treated as a reserve and included in the capital base under the Super Profits Tax Act, 1963.

Final Judgment:
- Question 1: Answered in the negative and in favor of the Revenue, with the exception that any excess provision for taxation should be treated as a reserve and included in the capital base.
- Question 2: Answered in the negative and in favor of the assessee.

No order as to costs was made.