1976 (7) TMI 9 - HC - Income Tax

Summary

Issues Involved:
1. Treatment of recommended dividends as part of "other reserves" for capital base computation.
2. Deduction of the difference between actual depreciation allowed and provided from "general reserves" for capital computation.
3. Timing of depreciation deduction for computation of "other reserves" u/r 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Summary:

Issue 1: Treatment of Recommended Dividends as Part of "Other Reserves"
The court referenced its previous decisions in I.T. Reference No. 154 of 1970 and I.T. Reference No. 316 of 1975, concluding that the sums of Rs. 4,20,000 and Rs. 5,59,756 recommended as dividends were not to be treated as part of "other reserves" for the purpose of capital base computation. Question No. 1 was answered in the negative.

Issue 2: Deduction of Depreciation Difference from "General Reserves"
The court examined whether the difference between the depreciation actually allowed and the depreciation provided in the accounts should be deducted from the "general reserves" for capital computation. The Income-tax Officer had deducted these differences, but the Tribunal reversed this decision, stating that the amounts were not "credited" to the reserves as required by clause (iii) of rule 1 of the Second Schedule to the Act. The court, however, disagreed with the Tribunal, stating that the plain language of clause (iii) required such deductions. The court held that the amounts of Rs. 5,68,112 and Rs. 12,52,957 should be deducted from the general reserves for the respective years. Thus, the court answered Question No. 2 in the affirmative.

Issue 3: Timing of Depreciation Deduction for "Other Reserves" Computation
The court considered whether the depreciation deductions should have been allowed prior to the crucial dates (May 1, 1963, and May 1, 1964) for them to be deducted from "other reserves." The court interpreted clause (iii) of rule 1 to mean that the depreciation allowed for the purposes of the Income-tax Act should be deducted from the reserves, regardless of the timing of the allowance. The court also referenced a circular from the Central Board of Direct Taxes, which did not stipulate that the depreciation must be allowed before the crucial dates. Consequently, the court answered Question No. 3 in the affirmative.

Conclusion:
The court affirmed the view of the Appellate Assistant Commissioner, answering both Questions 2 and 3 in the affirmative. The assessee was ordered to pay the costs of the revenue.