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Issues Involved:
1. Whether the excess amount of depreciation should be considered a reserve under Rule 1 of the Second Schedule to the Super Profits Tax Act, 1963. Issue-wise Detailed Analysis: 1. Excess Depreciation as Reserve: The central issue is whether the excess amount of depreciation, amounting to Rs. 58,85,850, should be treated as a reserve within the meaning of Rule 1 of the Second Schedule to the Super Profits Tax Act, 1963. The Tribunal held that the depreciation provided in the books in excess of the depreciation allowed for income-tax assessment should be treated as reserves for computation of capital. This decision was based on the precedent set by the Gujarat High Court in CIT v. Viramgam Mills Co. Ltd. [1961] 43 ITR 270, which stated that excess depreciation could be considered a reserve built from the profits of the company. 2. Definition of "Reserve": The term "reserve" under Rule 1 of the S.P.T. Act, 1963, has been analyzed in several decisions. In CIT v. Burn and Co. Ltd. [1978] 114 ITR 565, it was held that to determine whether an amount is a reserve, one must consider the substance of the matter, whether the amount represents profit earned by the company, and whether there has been a decision by competent authorities to keep the amount for future use. The Supreme Court's interpretation in CIT v. Century Spg. & Mfg. Co. Ltd. [1953] 24 ITR 499 was also referenced, which emphasized that undistributed profits set apart for future use could be considered a reserve. 3. Explanation 1 to the Second Schedule of the S.P.T. Act, 1963: Explanation 1 states that a reserve created by revaluation or otherwise of any book asset is not capital for computing the company's capital. The court interpreted "book asset" to include both tangible and intangible assets. However, it was noted that the excess depreciation in this case was not created by revaluation, thus not falling under this explanation. 4. Accounting Principles and Depreciation: The court referred to authoritative texts on accountancy, such as Spicer and Pegler's Book-keeping and Accounts and Pickles' Accountancy, which distinguish between provisions and reserves. Depreciation is generally considered a charge against profits, but any amount set aside in excess of necessary provision is regarded as a reserve. 5. Relevant Case Law: Several cases were discussed to elucidate the treatment of excess provisions and reserves: - In Upper Ganges Sugar Mills Ltd. v. CIT [1981] 129 ITR 438, excess depreciation was treated as a reserve. - CIT v. Shalimar Tar Products (1935) Ltd. [1981] 127 ITR 86 dealt with provisions for known liabilities, which were not considered reserves. - CIT v. Tensile Steel Ltd. [1976] 104 ITR 581 highlighted that interest on deferred payments for acquiring assets could be capitalized. - CIT v. Viramgam Mills Co. Ltd. [1961] 43 ITR 270 supported the notion that depreciation deducted from profits could constitute a reserve. - Nagammal Mills Ltd. v. CIT [1974] 94 ITR 387 and United Nilgiri Tea Estates Co. Ltd. v. CIT [1974] 96 ITR 734 treated excess provisions for bonus and development rebate as reserves. Conclusion: The court concluded that the excess depreciation amount of Rs. 58,85,850 should be treated as a reserve for the purpose of computing capital under the S.P.T. Act, 1963. It was noted that this amount was kept apart from profits and not distributed as dividends, indicating an intention for future use. The Tribunal's decision was upheld, and the question was answered in the affirmative, in favor of the assessee.
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