1980 (8) TMI 5 - HC - Income Tax

Summary

Issues Involved:

1. Validity of reassessments under section 9 of the Super Profits Tax Act, 1963, and section 8 of the Companies (Profits) Surtax Act, 1964.
2. Inclusion of premium deposits in capital computation.
3. Classification of premium deposits and unearned premium under rule 2 of the Second Schedule.
4. Classification of provision for taxation and proposed dividends as reserves under rule 2, clause (ii).
5. Classification of provision for outstanding claims as a fund, surplus, or reserve under rule 2(ii) of the Second Schedule.

Issue-wise Detailed Analysis:

1. Validity of Reassessments:

The primary issue was whether the reassessments for the years 1963-64 and 1964-65 under section 9 of the Super Profits Tax Act, 1963, and section 8 of the Companies (Profits) Surtax Act, 1964, were justified in law. The court noted that both sections contain two limbs, and the present case concerned the second limb, which allows reassessment if the Income-tax Officer (ITO) has "reason to believe" based on "information in his possession" that profits have escaped assessment. The court emphasized that "information" could be derived from subsequent assessments or external sources, as long as it was not merely a change of opinion. The Tribunal found that the ITO had new information from the 1965-66 assessment, which revealed errors in the original capital computations. This was considered sufficient grounds for reassessment, and the court upheld the validity of the reassessments.

2. Inclusion of Premium Deposits in Capital Computation:

The second issue was whether premium deposits should be included in the capital computation of the assessee-company. The court referred to the Full Bench decision in Madras Motor and General Insurance Co. Ltd. v. CIT [1979] 117 ITR 354, which held that premium deposits and unearned premium could not be considered reserves for capital computation under rule 2 of Schedule II to the Companies (Profits) Surtax Act, 1964. Consequently, the court answered this issue against the assessee.

3. Classification of Premium Deposits and Unearned Premium:

The third issue was whether premium deposits and unearned premium fell under either clause (i) or (ii) of rule 2 of the Second Schedule to the Act. The court again referred to the Full Bench decision, which clarified that these items could not be classified as reserves under the specified rules. Thus, this issue was also resolved against the assessee.

4. Classification of Provision for Taxation and Proposed Dividends:

The fourth issue pertained to the classification of the provision for taxation and the amount set apart for proposed dividends in the balance-sheet under rule 2, clause (ii). The Full Bench decision held that these amounts could not be regarded as reserves for capital computation purposes. Therefore, the court answered this issue against the assessee.

5. Classification of Provision for Outstanding Claims:

The fifth issue was whether the provision for outstanding claims for the assessment years 1964-65 to 1967-68 could be considered a fund, surplus, or reserve under rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The Full Bench decision concluded that the provision for outstanding claims did not qualify as a fund, surplus, or reserve. Consequently, this issue was resolved against the assessee.

Conclusion:

The court answered all the questions of law against the assessee, upholding the reassessments and the interpretations of capital computation rules as per the Full Bench decision. The Department was awarded costs, with counsel's fee set at Rs. 500.