1992 (11) TMI 24 - HC - Income Tax

Summary

Issues:
1. Deduction of sum transferred from retirement gratuity reserve to general reserve account in computing capital base.
2. Invocation of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 for diminishing capital base.
3. Deduction of provision for taxation in excess of actual tax liability and provision for contingencies while computing capital base.

Analysis:

Issue 1:
The first question pertains to the deduction of a sum transferred from the retirement gratuity reserve to the general reserve account in computing the capital base. The court referred to a previous case involving the same assessee, where it was established that only the amount exceeding the actuarial valuation of the liability should be considered a reserve. The court held that the transferred amount should not be deducted unless it exceeded the actuarial valuation of the liability. Therefore, the answer to question 1 was in the negative, favoring the Revenue, except for the excess amount beyond the actuarial valuation, which could be treated as a reserve.

Issue 2:
The second question revolves around the applicability of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 for diminishing the capital base. The court relied on a Supreme Court judgment in the case of Second ITO v. Stumpp, Schuele and Somappa P. Ltd. and answered the question in the affirmative, favoring the assessee.

Issue 3:
The third question is divided into two parts. Part 3(a) concerns the deduction of provision for taxation in excess of the actual tax liability. Citing the decision in Vazir Sultan Tobacco Co. Ltd. v. CIT, the court answered this part in the affirmative, favoring the assessee. Part 3(b relates to the deduction of provision for contingencies. The court determined that since the provision was not an actual liability and was made against unaccepted staff demands, it should be treated as a reserve and not deducted while computing the capital base. Therefore, question 3(b) was answered in the affirmative, favoring the assessee.

In conclusion, the judgment addressed various issues related to the computation of capital base under the Companies (Profits) Surtax Act, 1964, providing detailed reasoning and legal interpretations for each question raised.