1978 (6) TMI 53 - HC - Income Tax

Summary

Issues:
1. Interpretation of rule 2 of the Second Schedule of the Companies (Profits) Surtax Act, 1964.
2. Whether the cost of shares not yielding dividends should be excluded from the capital base for determining statutory deduction.

Analysis:
The case involved a reference from the Income-tax Appellate Tribunal regarding the interpretation of rule 2 of the Second Schedule of the Companies (Profits) Surtax Act, 1964. The assessee, M/s. United Breweries Ltd., claimed that the cost of shares not yielding dividends should not be deducted from the capital base for determining the statutory deduction. The Income-tax Officer initially excluded the cost of shares, reducing the claimed deduction. However, the Appellate Assistant Commissioner and the Tribunal ruled in favor of the assessee, stating that only income-yielding assets should be excluded under rule 2.

The court analyzed the relevant provisions of the Act, emphasizing that the deduction under the Act is based on chargeable profits and statutory deduction. The chargeable profits are determined by excluding specified incomes under the First Schedule. The statutory deduction is calculated based on the capital of the company as per the Second Schedule. Rule 2 of the Second Schedule states that assets yielding excluded income should reduce the capital base.

The court addressed the core issue of whether the cost of shares not yielding dividends should be excluded from the capital base. It rejected the assessee's argument that only income-earning assets should be considered under rule 2. The court clarified that the rule applies to assets meeting the description in the First Schedule, regardless of actual income receipt. Thus, the shares not yielding dividends should be excluded from the capital base under rule 2.

In conclusion, the court held that the cost of shares not yielding dividends should be excluded from the capital base as per rule 2 of the Second Schedule. The liability of the assessee should be computed based on this exclusion. The court answered the referred question accordingly, emphasizing the application of the rule to assets requiring exclusion under the Act.