1976 (11) TMI 48 - HC - Income Tax

Summary

Issues Involved:
1. Inclusion of replanting, building, and machinery reserve in the computation of capital under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963.
2. Exclusion of interest received from Mercantile Bank Ltd., a non-resident company, from chargeable profits under clause (x) of rule 1 of the First Schedule to the Super Profits Tax Act, 1963.

Detailed Analysis:

1. Inclusion of Replanting, Building, and Machinery Reserve in Computation of Capital:

The primary issue was whether the replanting, building, and machinery reserve of Rs. 8,00,000 should be included in the computation of capital under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963. The Income-tax Officer initially included this reserve in the capital computation, but the Commissioner of Income-tax later excluded it, arguing that the depreciation claimed had not been deducted from the value of the buildings or machinery, thus the reserve could not be included as it was allowed in computing business profits.

The Tribunal, however, disagreed with the Commissioner, noting that the Rs. 8,00,000 reserve did not include any amounts allowed in computing profits for the purpose of the Income-tax Act, 1961. The Tribunal accepted the Appellate Assistant Commissioner's view, who argued that the reserve was more akin to a general reserve, as no part of it had been credited to the depreciation account. Consequently, the Tribunal held that the reserve should be included in the computation of capital.

The High Court upheld the Tribunal's decision, stating that the reserve qualifies to be included in the computation of capital under rule 1 of the Second Schedule since it did not contain any part of the depreciation allowed over the years. Therefore, the court answered the first question in the affirmative, favoring the assessee.

2. Exclusion of Interest from Mercantile Bank Ltd. from Chargeable Profits:

The second issue was whether the interest received from Mercantile Bank Ltd., a non-resident company, should be excluded from chargeable profits under clause (x) of rule 1 of the First Schedule to the Super Profits Tax Act, 1963. The Tribunal had held that the interest should be excluded, reasoning that the Mercantile Bank Ltd. had an Indian branch managed locally, thus qualifying as an "Indian concern."

The High Court, however, disagreed with this interpretation. It emphasized that the term "Indian concern" should not be confused with "a concern in India." The court noted that "Indian concern" implies a stronger relationship with India, involving substantial ownership, management, and control within India. Since Mercantile Bank Ltd. was incorporated outside India and was a non-resident company, its Indian branch could not be considered an "Indian concern."

The court also highlighted that interpreting the provision to include such interest would result in a double benefit, as the interest would be excluded both under the Income-tax Act and the Super Profits Tax Act. Therefore, the court answered the second question in the negative, ruling against the assessee.

Conclusion:

The High Court concluded by answering the first question in favor of the assessee, allowing the inclusion of the Rs. 8,00,000 reserve in the computation of capital. However, it answered the second question against the assessee, ruling that the interest received from Mercantile Bank Ltd. should not be excluded from chargeable profits. No order as to costs was made since both parties had partial success.