1984 (6) TMI 33 - HC - Income Tax

Summary

Issues:
1. Interpretation of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 for deduction under s. 80 or income exempt under section 10.
2. Exclusion of development rebate reserve from 'other reserves' under rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964 for computing capital base.

Analysis:
Issue 1:
The High Court addressed the interpretation of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, in the context of deduction under s. 80 or income exempt under section 10. The court referred to a previous decision in favor of the assessee and upheld the view taken by the Income-tax Appellate Tribunal, ruling in favor of the assessee and against the Revenue on this issue.

Issue 2:
Regarding the exclusion of the development rebate reserve from 'other reserves' under rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964 for computing the capital base, the court analyzed the facts presented. The assessee claimed that the development rebate reserve, transferred to the general reserve after the statutory period, should not be excluded. The Income Tax Officer (ITO) and the Tribunal held that the development rebate reserve formed part of the general reserve and should be excluded. However, the court found that the development rebate reserve was transferred to the profit and loss appropriation account, not directly to the general reserve account. The court scrutinized the accounts and concluded that the development rebate reserve should not be excluded from the computation of capital. Additionally, the court highlighted that amounts drawn from the general reserve for paying dividends should be excluded from the reserve account to determine the capital, citing a Supreme Court decision. The court directed the Tribunal to make appropriate adjustments in determining the capital, ensuring the correct treatment of sums drawn from the general reserve for dividend payments.

In conclusion, the High Court answered the second question in favor of the assessee, stating that the development rebate reserve should not be excluded from the computation of capital, and directed adjustments to be made for sums drawn from the general reserve for dividend payments.