1979 (2) TMI 55 - HC - Income Tax

Summary

Issues Involved:
1. Whether the amounts appearing as 'retained earnings' and 'unremitted foreign income' were reserves for the computation of capital under the Super Profits Tax Act.
2. Whether the provisions of the Super Profits Tax Act, 1963, were applicable to the assessee.
3. Whether 'dividend payable' and 'provision for Federal, foreign and State income-tax' are reserves for the purpose of computing the capital of the company under the Super Profits Tax Act, 1963.

Detailed Analysis:

1. Retained Earnings and Unremitted Foreign Income as Reserves:

The Tribunal held that 'retained earnings' and 'unremitted foreign income' qualify to be treated as 'reserves' for the purpose of computing the capital base of the company. The AAC supported this view, stating that the retained earnings were used for the business and unremitted foreign income had the same nature and character. The court agreed with this interpretation, noting that these amounts, classified under 'Capital', were required to be retained under the law of the land where the company was incorporated. The court referenced the Supreme Court decision in First National City Bank [1961] 42 ITR 17, which held that amounts described as 'undivided profits' were reserves because the law of the land required it. Thus, the amounts were correctly considered reserves for the computation of capital under the S.P.T. Act.

2. Applicability of the Super Profits Tax Act, 1963:

The Tribunal rejected the assessee's contention that it was not liable to the super profits tax, holding that the assessee had been declared a company under the Indian I.T. Act, 1922, and thus, under sub-s. (10) of s. 2 of the S.P.T. Act, it was a 'company' for the purposes of the Act. The court upheld this view, referencing s. 297(2)(k) of the I.T. Act, 1961, which ensures that declarations under the old Act continue under the new Act. The court dismissed the assessee's argument that a fresh declaration was necessary under the I.T. Act, 1961, stating that the expressions 'notifications' or 'orders' are broad enough to include 'declarations'. Thus, the declaration under the Indian I.T. Act, 1922, remains valid, making the assessee a company for the S.P.T. Act.

3. Dividend Payable and Provision for Federal, Foreign, and State Income-Tax as Reserves:

The Tribunal held that provisions for dividend and taxation could not be considered reserves as they were shown as current liabilities in the balance sheet. The court agreed, noting that the amounts for dividend had already been declared and were thus existing demands, not reserves. However, for the provision for Federal, foreign, and State income-tax, the court held that there was no existing demand of tax, making the sum set apart a reserve for computing the capital of the company under the S.P.T. Act. The court emphasized that the true nature and character of the sum, rather than its nomenclature, should determine whether it qualifies as a reserve. The court referenced several decisions, including CIT v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499, which defined reserves as profits kept back for future use and not distributed as dividends.

Conclusion:

- Retained Earnings and Unremitted Foreign Income: Affirmed as reserves.
- Applicability of the S.P.T. Act: Affirmed, the assessee is a company under the Act.
- Dividend Payable: Not a reserve.
- Provision for Federal, Foreign, and State Income-Tax: Affirmed as a reserve.

Judgment:

The court answered the questions as follows:
- Question 1 (Assessee's Reference): Affirmative, against the assessee.
- Question 2 (Assessee's Reference): Partly affirmative (dividend payable not a reserve) and partly negative (provision for taxation is a reserve).
- Question (Department's Reference): Affirmative, against the department.

No order as to costs was made in either reference.