1984 (2) TMI 43 - HC - Income Tax

Summary

Issues:
1. Inclusion of amounts set aside for taxation in the computation of capital under the Companies (Profits) Surtax Act, 1964.
2. Treatment of a sum credited to the capital reserve account as a capital receipt for the purpose of assessing chargeable profits.

Analysis:
The judgment pertains to the assessment years 1964-65 and 1966-67, involving the inclusion of amounts set aside for taxation in the computation of capital under the Companies (Profits) Surtax Act, 1964. The assessee had set apart sums for taxation and tax contingency in different years but had not utilized these amounts for tax payment. The Income Tax Officer (ITO) did not include these amounts in the capital computation without reasons. The Appellate Authority Commission (AAC) and the Income-tax Appellate Tribunal both held that these amounts should not be included in the computation of capital. The questions referred to the court related to the eligibility of these amounts for inclusion in the capital computation.

Regarding the treatment of a sum credited to the capital reserve account as a capital receipt, the Tribunal held that the amount should be included in the chargeable profits for the year 1966-67. Both the assessee and the Department requested the Tribunal to refer questions for determination. The court was tasked with deciding whether this sum should be excluded from the chargeable profits for the assessment year 1966-67.

In response to question No. 3, the court relied on a previous Division Bench decision and held that the sum in question should not be excluded from the chargeable profits for the assessment year 1966-67. However, for questions 1 and 2, the court considered the nature of the amounts set aside for taxation and tax contingency. The court distinguished between provisions and reserves, citing the Supreme Court's decision in Vazir Sultan Tobacco Co. Ltd. v. CIT. The court concluded that the amounts in question were reserves and not provisions, as they were in excess of the needs of the assessee. Therefore, these amounts should be treated as reserves for the purpose of capital computation under the Companies (Profits) Surtax Act, 1964.

Ultimately, the court answered questions 1 and 2 in favor of the assessee, stating that the amounts should be included in the computation of capital. The judgment concluded with no order as to costs, settling the issues raised in the case.