1979 (1) TMI 8 - HC - Income Tax

Summary

Issues Involved:

1. Whether the amount shown as "Earned Surplus" in the balance sheet of the assessee was eligible for being included as a "reserve" in computing the capital for the assessment year 1963-64.
2. Whether the amount shown as "Earned Surplus" in the balance sheet of the assessee was eligible for being included as a "reserve" in computing the capital of the assessee for the purpose of the Companies (Profits) Surtax Act, 1964, for the assessment years 1964-65 and 1965-66.
3. Whether, having regard to the Explanation to rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the Tribunal was right in holding that the addition to "Earned Surplus" as shown in the balance sheet of the company as on December 31, 1962, and as on December 31, 1963, are not reserves as on the first day of the previous year, that is to say, January 1, 1963, and January 1, 1964.

Issue-wise Detailed Analysis:

1. Eligibility of "Earned Surplus" as a "Reserve" for Assessment Year 1963-64:

The assessee, a company incorporated in the United States, contended that the amounts shown as "Earned Surplus" in its balance sheets as on January 1, 1962, were eligible for inclusion as a "reserve" in computing its capital for super profits tax under the S.P.T. Act, 1963. The ITO and AAC rejected this contention, relying on the Supreme Court's decision in Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499, and excluded these balances from the computation of capital. The Tribunal, however, found that the provisions of the Business Profits Tax Act were in pari materia with the S.P.T. Act, 1963, and held that the term "reserves" as interpreted by the Supreme Court in First National City Bank [1961] 42 ITR 17 and Standard Vacuum Oil Co. [1966] 59 ITR 685 should apply. The Tribunal concluded that "Earned Surplus" partook the character of "reserves" and should be included in the capital computation.

2. Eligibility of "Earned Surplus" as a "Reserve" for Assessment Years 1964-65 and 1965-66:

For the assessment years 1964-65 and 1965-66, the assessee argued that the amounts shown as "Earned Surplus" in its balance sheets as on January 1, 1963, and January 1, 1964, should be included as "reserves" for surtax purposes under the C.(P.)S.T. Act, 1964. The Tribunal held that the statutory provisions were similar to those under the S.P.T. Act, 1963, and applied the same reasoning as for the assessment year 1963-64. The Tribunal found that "Earned Surplus" should be treated as "reserves" under the C.(P.)S.T. Act, 1964, as well.

3. Application of the Explanation to Rule 1 of the Second Schedule to the C.(P.)S.T. Act, 1964:

The Tribunal decided against the assessee on the limited point of applying the Explanation to rule 1 of the Second Schedule to the C.(P.)S.T. Act, 1964, for the assessment years 1964-65 and 1965-66. The Tribunal held that the amount which was required to be considered was the one shown as available under that head on the first day of the assessment year only. The High Court, however, concluded that if the amount shown under "Earned Surplus" is treated as a reserve, then the principle enunciated in Otis Elevator Co. [1977] 107 ITR 241 (Bom) should apply, and the proposed additions should be related back to the first day of the previous year despite the Explanation.

Conclusion:

For the assessment year 1963-64, the High Court answered in the affirmative and in favor of the assessee, holding that the amount shown as "Earned Surplus" was eligible for inclusion as a "reserve" in computing the capital.

For the assessment years 1964-65 and 1965-66, the High Court answered in the affirmative and in favor of the assessee for the first question, holding that the "Earned Surplus" should be included as a "reserve" in computing the capital. For the second question, the High Court held that the addition to "Earned Surplus" should be related back and added to the amount on the first day of the previous year, thus answering in favor of the assessee and against the view expressed by the Tribunal. The Commissioner was directed to pay the costs of the reference to the assessee.