1977 (2) TMI 4 - HC - Income Tax

Summary

Issues:
1. Inclusion of replanting, building, machinery reserve, tax contingency reserve, and pension reserve in the computation of capital under the Companies (Profits) Surtax Act, 1964.

Analysis:
The High Court of Madras was presented with a question referred by the Income-tax Appellate Tribunal regarding the inclusion of various reserves in the computation of capital under the Companies (Profits) Surtax Act, 1964. The assessee, a non-resident foreign company engaged in tea manufacturing in India, claimed that replanting, building, machinery reserve, tax contingency reserve, and pension reserve should be considered as part of its capital. The assessing officer initially rejected this claim, but the Appellate Assistant Commissioner (AAC) upheld it, stating that these reserves constituted free reserves and should be included in the capital computation. The Tribunal, following an earlier order, also held in favor of the assessee, leading to the current challenge in the High Court.

In examining the reserves, the AAC provided detailed insights into each reserve. Regarding the replanting, building, machinery reserve, the AAC noted that the reserve had been consistently added to over the years and ultimately transferred to the general reserve account, indicating its nature as a free reserve. Similarly, the tax contingency reserve was found to be created to meet future contingencies in taxation, not for immediate tax liabilities, thus qualifying as a free reserve. The pension reserve, earmarked for a specific liability, was considered a free reserve as it was not used to meet any ascertainable future contingency but was transferred to the general reserve account for dividends.

The High Court referenced a previous case involving the same assessee where a similar reserve was deemed includible in the computation of capital under a different tax act, supporting the Tribunal's decision in the current case. The Court agreed with the Tribunal's assessment of the reserves, affirming that the replanting, building, machinery reserve, tax contingency reserve, and pension reserve should be included in the capital computation under the Companies (Profits) Surtax Act, 1964. The judgment favored the assessee, granting them costs and counsel fees.