1984 (11) TMI 18 - HC - Income Tax

Book Asset In Rule 2, Explanations To Rule 2 In Second Schedule, Inclusions In Capital, Reserve, Surtax

Summary

Issues:
1. Treatment of a specific amount as a reserve for computation of capital base.
2. Inclusion of a loan amount from a foreign agency for computation of capital base.
3. Determination of whether the term 'person' includes a foreign government.

Detailed Analysis:
Issue 1:
The case involved a dispute regarding the treatment of an amount of Rs. 2,69,048 as a reserve for the computation of the capital base under the Surtax Act. The Income-tax Officer contended that the amount represented a reserve brought into existence by revealing a book asset and was thus not eligible for inclusion. However, the Appellate Assistant Commissioner and the Tribunal disagreed, allowing the amount to be treated as a reserve. The court analyzed the application of Explanation 1 under rule 2 of the Second Schedule, emphasizing that the explanation applies independently of rule 2. The court rejected the argument that the term "book asset" referred to a fictitious asset, concluding that the increase in value due to devaluation was real and not a result of revaluation. Consequently, the court ruled in favor of the assessee, stating that Explanation 1 did not apply in this case.

Issue 2:
The second and third questions revolved around the inclusion of a loan amount of Rs. 87,50,000 borrowed from a foreign agency, USAID, for computing the capital base. The Income-tax Officer rejected the inclusion, arguing that USAID could not be considered a "person" for the purpose of computation. However, the Appellate Assistant Commissioner and the Tribunal accepted the claim, leading to a reference to the court. The court interpreted the term "person" broadly, relying on the inclusive definition under the Income-tax Act, which encompasses foreign governments. Citing relevant case law, the court held that borrowings from a foreign government, such as USAID, should be included for computing the capital base. Consequently, the court answered questions 2 and 3 in favor of the assessee.

Conclusion:
The court ruled in favor of the assessee on all three issues, directing the Revenue to pay the assessee's costs. The judgment clarified the interpretation of relevant provisions under the Surtax Act and upheld the inclusion of specific amounts and borrowings for the computation of the capital base.