1992 (9) TMI 57 - HC - Income Tax

Summary

Issues Involved:
1. Legality of the rectification order passed by the Assessing Officer.
2. Deduction of proposed dividend from general reserve.
3. Inclusion of loan taken by the assessee-company from the Bank of Baroda in the computation of its capital for surtax purposes.
4. Giving credit for the proportionate value of bonus shares.

Issue-wise Detailed Analysis:

Issue 1: Legality of the Rectification Order
Assessment Year 1967-68:
The court addressed whether the Income-tax Appellate Tribunal was justified in admitting the additional ground raised by the assessee that the Income-tax Officer was not justified in rectifying the order to reduce the capital computed by Rs. 9,53,220 for the assessment year 1967-68, as there was no mistake rectifiable under Section 13 of the Companies (Profits) Surtax Act, 1964. The Tribunal allowed the assessee to raise this additional ground. The court held that whether the contention was right or wrong on merits was a different matter, but the additional ground could be permitted. The Tribunal did not deal with the additional ground on merits, as it decided the main question that the Income-tax Officer could not have reduced the general reserve figure. The court answered this question in the affirmative, in favor of the assessee and against the Revenue.

Issue 2: Deduction of Proposed Dividend from General Reserve
Assessment Year 1967-68, 1968-69, 1969-70, and 1970-71:
The Tribunal held that the proposed dividend should not be deducted from the general reserve while computing the capital employed by the assessee. The court referred to the Supreme Court's decision in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559, which clarified the distinction between 'reserve' and 'provision'. The court concluded that proposed dividends, being a provision and not a reserve, should be excluded from the general reserve while computing the capital. Consequently, the court answered all questions under this topic in the negative, against the assessee and in favor of the Revenue.

Issue 3: Inclusion of Loan from Bank of Baroda
Assessment Year 1968-69 and 1969-70:
The court referred to its earlier decision in New India Industries Ltd. v. CIT [1977] 108 ITR 181, which held that the loan taken by the assessee-company from the Bank of Baroda qualified for inclusion in the computation of its capital for surtax purposes. The court applied this precedent and answered both questions in the affirmative, in favor of the assessee and against the Revenue.

Issue 4: Credit for Proportionate Value of Bonus Shares
Assessment Year 1967-68 and 1969-70:
The court analyzed Rule 3 of the Second Schedule to the Surtax Act, which pertains to the increase in capital due to the issuance of bonus shares. The court noted that the issuance of bonus shares from the general reserve does not increase the capital base as computed under Rule 1. The court referred to several decisions, including those of the Bombay High Court, Calcutta High Court, and other High Courts, which supported this interpretation. The court concluded that the capital base of the company did not increase due to the issuance of bonus shares, and therefore, Rule 3 was not applicable. Consequently, both questions under this topic were answered in the negative, in favor of the Revenue and against the assessee.

Conclusion:
The references were disposed of with no order as to costs, with the court providing detailed reasoning and legal precedents for each issue.