2016 (9) TMI 450 - HC - Income Tax

Capital computation - Companies (Profits) Surtax Act, 1964 - Tribunal held that the amount be reduced from the General Reserve being the amount transferred from the profit of the last year for the purpose of capital computation? - Held that - We find that the issue raised herein above stands concluded against Applicant-Assessee and in favour of the Respondent-Revenue by a virtue of the decision of this Court in CIT v/s. Bharat Bijlee Ltd. 1976 (7) TMI 38 - BOMBAY High Court . Mr. Thakkar, learned Counsel appearing for the Applicant-Assessee sought to distinguish the same by pointing out that in the case of Bharat Bijlee Ltd., (supra), the amount was set aside on the last date of the previous year of the earlier Assessment Year. In this case also, the amount of ₹ 25,000/was transferred to the general reserve from the profits of the earlier year. Thus, reducing the capital only by ₹ 25,000/and not ₹ 91,000/as done by the Assessing Officer and CIT(A).Accordingly, question as posed for our opinion is to be answered in the affirmative i.e. in favour of the Respondent-Revenue and against the Applicant-Assessee. Debentures issued to Indian Medical Research Society - whether were not includable in the capital computation? - Held that - Debentures were redeemable at the option of the Applicant-Assessee at any time by giving three calender months prior notice, even before the expiry of seven years from the date of issue. Thus, they are required to be included in the capital of the company in terms of subrule (iv) to Rule 1 of the Second Schedule to the said Act.In the above view, question (b) as framed for our opinion is answered in the affirmative i.e. in favour of the Respondent-Revenue and against the Applicant-Assessee.

Summary

Issues:
1. Whether the Tribunal was justified in reducing the General Reserve by a specific amount for capital computation?
2. Whether debentures issued to a society were includable in the capital computation for surtax purposes?

Analysis:

Issue 1:
The case involved a dispute regarding the reduction of the General Reserve for capital computation. The Tribunal held that only the amount transferred from profits to the general reserve should be considered for reduction, not the entire proposed dividend amount. The Applicant argued that a previous court decision should not apply in this case, but the High Court disagreed. The Court found in favor of the Revenue, stating that the capital should be reduced by the amount transferred from profits, not the proposed dividend amount.

Issue 2:
The second issue revolved around debentures issued to a society and their inclusion in capital computation for surtax. The debentures were redeemable at the option of the company before seven years. The Assessing Officer and the Commissioner did not include the debentures in the capital computation. The Tribunal upheld this decision. The High Court analyzed the terms of the debentures and relevant laws. It found that the debentures were indeed redeemable within seven years, as the company had the option to redeem them earlier. Therefore, the debentures should be included in the capital computation for surtax purposes. The Court ruled in favor of the Revenue, concluding that the debentures were redeemable at the company's option before the seven-year period, making them part of the capital for surtax computation.

In conclusion, the High Court answered both questions in favor of the Revenue and against the Applicant, disposing of the reference accordingly without any costs.