1989 (9) TMI 68 - HC - Income Tax

Summary

Issues Involved:
1. Inclusion of recommended dividends in capital computation for standard deduction.
2. Inclusion of borrowed amounts in capital computation despite repayment within seven years.
3. Deduction of depreciation differences from capital computation base.
4. Inclusion of capitalized amounts for issuing bonus shares in capital computation.
5. Timing of depreciation deductions for capital computation under the Companies (Profits) Surtax Act, 1964.

Detailed Analysis:

Issue 1: Inclusion of Recommended Dividends in Capital Computation for Standard Deduction
The first issue concerns whether the sums recommended as dividends by the directors should be included in the capital computation for ascertaining the standard deduction for the assessment years 1967-68, 1970-71, and 1971-72. The court referenced the Supreme Court decision in Vazir Sultan Tobacco Co. Ltd. v. CIT, which supports the Revenue's stance. The court rejected the distinction made by the assessee's counsel, noting that the timing of the directors' recommendation for dividend distribution relative to the finalization and approval of accounts is immaterial. The court emphasized that the pertinent factor is whether the recommendation and approval occurred in the same general meeting. Consequently, the first question was answered in the negative and in favor of the Revenue.

Issue 2: Inclusion of Borrowed Amounts in Capital Computation Despite Repayment Within Seven Years
The second issue revolves around whether amounts borrowed under an agreement stipulating repayment within not less than seven years should be included in the capital computation base, even if repaid earlier. The court highlighted that Rule 1(v) of the Second Schedule requires only that the agreement stipulates a repayment period of not less than seven years, irrespective of actual repayment timing. As both conditions of the rule were satisfied, the court ruled in favor of the assessee, answering the second question in the affirmative.

Issue 3: Deduction of Depreciation Differences from Capital Computation Base
The third issue pertains to whether the difference between depreciation allowed and that provided in the accounts should be deducted from the capital computation base. For the assessment year 1967-68, the court adhered to its previous decision in the assessee's case, ruling against the assessee but adjusting the deduction amount to Rs. 22,98,100. For the assessment years 1970-71 and 1971-72, the court noted that the assessee had capitalized the difference and issued bonus shares, thus transforming it into paid-up capital. The court found no direct nexus between the increased paid-up capital and increased book asset values, ruling that the Explanation to Rule 2 did not apply. Therefore, the third question for these years was answered in the negative and in favor of the assessee.

Issue 4: Inclusion of Capitalized Amounts for Issuing Bonus Shares in Capital Computation
The fourth issue concerns whether the proportionate increase in paid-up capital due to bonus shares should be included in the capital computation without reducing the general reserve. Both counsels agreed that this issue is covered by the court's decision in CIT v. Century Spg. and Mfg. Co. Ltd., which ruled in favor of the Revenue. Accordingly, the fourth question was answered in the negative and in favor of the Revenue.

Issue 5: Timing of Depreciation Deductions for Capital Computation
The fifth issue, raised by the assessee, questions the timing of depreciation deductions for capital computation under the Companies (Profits) Surtax Act, 1964. Given the court's discussion on the third issue, both parties agreed that this question need not be answered.

Conclusion
The court ruled in favor of the Revenue on issues 1 and 4, and in favor of the assessee on issues 2 and 3 (for the years 1970-71 and 1971-72). Issue 5 was deemed unnecessary to address. No order as to costs was made.