1988 (6) TMI 43 - HC - Income Tax

Issues Involved:
1. Inclusion of amounts under "Capital Redemption Reserve" in computing the capital base.
2. Deduction from the capital base of proportionate capital ascertainable with reference to the exempted portion of dividends.
3. Deduction of 50% of actual donations without invoking the ceilings under section 80G of the Income-tax Act for the assessment year 1976-77.

Detailed Analysis:

Issue 1: Inclusion of Amounts under "Capital Redemption Reserve" in Computing the Capital Base

The court examined whether the amounts standing under "Capital Redemption Reserve" are includible in computing the capital base. The assessee argued that the capital redemption reserve falls under "other reserves" as per clause (iii) of rule I of the Second Schedule to the Companies (Profits) Surtax Act, 1964. This reserve was created to redeem cumulative preference shares issued in 1956 and redeemable on or after April 1, 1968. The Income-tax Officer had refused to consider this as part of the reserves for computing the capital base, but the Tribunal agreed with the assessee. The court noted that Schedule VI to the Companies Act lists "capital redemption reserve" under "Reserves and surplus" in the liabilities column. The Explanation to rule I implies that "capital redemption reserve" is a reserve to be included in the capital base. Section 80 of the Companies Act further supports this by indicating that "capital redemption reserve" partakes the nature of share capital. Hence, the court agreed with the Tribunal and answered the question in the affirmative, in favor of the assessee and against the Revenue.

Issue 2: Deduction from the Capital Base of Proportionate Capital Ascertainable with Reference to the Exempted Portion of Dividends

This issue was resolved based on the precedent set by the court in CIT v. Indian Detonators Ltd. [1983] 143 ITR 547. The court concluded that no deduction could be made from the capital base of proportionate capital ascertainable with reference to the exempted portion of dividends. The question was answered in favor of the assessee.

Issue 3: Deduction of 50% of Actual Donations Without Invoking the Ceilings Under Section 80G of the Income-tax Act for the Assessment Year 1976-77

The court analyzed the amount to be excluded under clause (vii) of rule I of the First Schedule to the Companies (Profits) Surtax Act. The assessee made donations amounting to Rs. 5,38,675 during the relevant year. The authorities allowed a deduction of Rs. 1,00,000 based on the ceiling under section 80G. The debate centered on whether the exclusion should be 50% of the actual donations or 50% of the amount allowed as deduction under section 80G. The court examined section 80G, which prescribes that 50% of the aggregate donations should be allowed as a deduction, subject to a ceiling of Rs. 2,00,000 or 10% of the gross total income, whichever is less.

The court clarified that the correct interpretation of rule 1(vii) is to exclude 50% of the actual donations made for purposes recognized by section 80G(2), not just 50% of the amount allowed as deduction under section 80G. This interpretation aligns with the objective of the Surtax Act, which aims to tax excess profits, allowing for a more accurate reflection of charitable contributions. Therefore, the court concluded that 50% of Rs. 5,38,675 should be excluded while computing the chargeable profits.

The third question was answered stating that 50% of the actual donations (50% of Rs. 5,38,675) should be excluded under clause (vii) of rule 1 in the First Schedule to the Companies (Profits) Surtax Act, 1964.

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