1991 (1) TMI 185 - AT - Income Tax

Summary

Issues:
1. Computation of surtax based on depreciation difference.
2. Interpretation of provisions under the Companies (Profits) Surtax Act, 1964 regarding reduction of reserves.
3. Applicability of the decision in Upper Ganges Sugar Mills Ltd. v. CIT [1981] 129 ITR 438.
4. Analysis of the provisions of the First and Second Schedule of the Companies (Profits) Surtax Act, 1964.
5. Comparison with the decision in CIT v. Vazir Sultan Tobacco Co. Ltd. [1988] 169 ITR 555.

Detailed Analysis:
1. The appeal involved a dispute regarding the computation of surtax for the assessment year 1983-84, specifically related to the depreciation amount debited in the profit and loss account. The issue arose from the difference between the depreciation allowed under the Income-tax Act and the depreciation provided in the books of accounts. The Assessing Officer reduced the general reserve by this difference to determine the capital of the company for surtax purposes.

2. The interpretation of the provisions of the Companies (Profits) Surtax Act, 1964 was crucial in this case. The dispute centered on whether the reserves shown in the balance sheet could be reduced based on the difference in depreciation amounts. The Tribunal analyzed Section 4 of the Act, emphasizing the computation of chargeable profits and statutory deductions. The rules for computation of chargeable profits and capital were outlined in the First and Second Schedule of the Act, respectively.

3. The Tribunal distinguished the decision in Upper Ganges Sugar Mills Ltd. v. CIT [1981] 129 ITR 438 from the current case. In the referenced case, a specific provision under Explanation 1 to Rule 2 of the Second Schedule was applicable, which was not relevant to the present dispute. The absence of a provision allowing for the deduction of the depreciation difference from reserves under the Second Schedule was a key factor in the Tribunal's decision.

4. The analysis delved into the specific rules laid down in the Second Schedule for computation of capital. Rule 1 of the Second Schedule outlined the components of a company's capital, including reserves. The Tribunal concluded that since no specific provision allowed for reducing reserves based on the depreciation difference, such a deduction could not be made in the computation of capital for surtax purposes.

5. The Tribunal also referred to the decision in CIT v. Vazir Sultan Tobacco Co. Ltd. [1988] 169 ITR 555, highlighting the inclusion of reserves created out of profits after tax deduction in the computation of capital for surtax. This decision supported the argument that reserves should not be reduced based on the difference in depreciation amounts between the Income-tax Act assessment and the books of accounts.

In conclusion, the Tribunal set aside the Assessing Officer's order and allowed the appeal, emphasizing that the reserves should not be reduced by the depreciation difference in the computation of capital for surtax purposes.