1984 (3) TMI 29 - HC - Income Tax

Summary

Issues:
1. Inclusion of development and contingency reserve in capital computation for surtax purposes.
2. Treatment of excess depreciation as a reserve for capital computation in surtax assessment.

Analysis:

Issue 1: Inclusion of development and contingency reserve in capital computation for surtax purposes

The case involved a company's assessment for the year 1971-72 where the Income Tax Officer (ITO) disputed the inclusion of a Rs. 1 lakh development and contingency reserve in the capital computation for surtax. The Appellate Assistant Commissioner (AAC) considered it a general reserve and allowed its inclusion. The Tribunal, following the decision in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 (SC), upheld the inclusion, distinguishing between provision and reserve. The High Court agreed with the Tribunal's decision, emphasizing that the nature and purpose of the appropriation determine whether it constitutes a provision or a reserve. The court held that the development and contingency reserve should be included in the capital computation for surtax purposes.

Issue 2: Treatment of excess depreciation as a reserve for capital computation in surtax assessment

The second question revolved around the treatment of excess depreciation, amounting to Rs. 1,69,317, in the capital computation for surtax. The ITO initially excluded this amount, but the AAC and the Tribunal, relying on United Nilgiri Tea Estates Company Ltd. v. CIT [1974] 96 ITR 734 (Mad), allowed its inclusion as a reserve. The Revenue argued that since the excess depreciation was not reflected in the balance sheet, it should be considered a secret reserve and not included in the capital computation. However, the court disagreed, stating that the excess depreciation was separately shown in the balance sheet, making it eligible for inclusion as a reserve. The court also rejected the Revenue's argument regarding revaluation of assets under Explanation (1) of Schedule II to the Surtax Act, as there was no such revaluation in this case. The court upheld the inclusion of excess depreciation as a reserve for the purpose of capital computation in surtax assessment, citing precedents and distinguishing the case from previous decisions based on factual errors.

In conclusion, the court answered both questions in favor of the assessee, allowing the inclusion of both the development and contingency reserve and the excess depreciation as part of the capital computation for surtax purposes. The court awarded costs to the assessee.