1987 (2) TMI 89 - AT - Income Tax

Summary

Issues Involved:

1. Validity of reopening assessment under Section 8(b) of the Companies (Profits) Surtax Act, 1964.
2. Computation of capital base for statutory deduction under Section 2(8) of the Act.
3. Treatment of development rebate reserve and issuance of bonus shares.

Issue-wise Detailed Analysis:

1. Validity of Reopening Assessment under Section 8(b):

The core issue revolves around whether the STO was justified in reopening the assessment under Section 8(b) based on an internal audit report. The assessee argued that all relevant materials were presented during the original assessment, and the reopening was merely a change of opinion. The STO, however, justified the reopening by citing new information received from an internal audit report, which referenced the decision in CIT v. Zenith Steel Pipes Ltd. (1978) 112 ITR 215 (Bom.). The Tribunal, however, noted that the decision in Zenith Steel Pipes Ltd. pertained to excess depreciation reserves, not development rebate reserves, and thus did not constitute 'information' under Section 8(b). Additionally, the Tribunal found that the STO's reliance on the decision in CIT v. Sundaram Clayton Ltd. (1983) 140 ITR 235 (Mad.) was misplaced, as it was rendered after the STO initiated the proceedings. Consequently, the Tribunal held that the STO was not justified in reopening the assessment under Section 8(b).

2. Computation of Capital Base for Statutory Deduction under Section 2(8):

The STO initially computed the net chargeable profits and capital base, including a deduction for proposed dividends and treating certain reserves as liabilities. The assessee contended that the capital base should include the proportionate increase due to the issuance of bonus shares and that the development rebate reserve should not be deducted from the general reserve. The Commissioner (Appeals) initially accepted the assessee's computation but did not rule on the validity of the reopening. The Tribunal directed the Commissioner (Appeals) to reconsider the matter, including the applicability of CIT v. Century Spinning & Mfg. Co. Ltd. (1978) 111 ITR 6 (Bom.). Upon review, the Tribunal found that the original computation by the STO was flawed and that the assessee's approach, supported by the CBDT Circular No. 53 (F. No. 7/2/68-TPL) dated 11-1-1971, was correct.

3. Treatment of Development Rebate Reserve and Issuance of Bonus Shares:

The STO reduced the general reserve by the amount of excess development rebate reserve and the issuance of bonus shares. The assessee argued that the excess development rebate reserve should be treated as 'other reserves' for computing the capital base, as per the CBDT Circular No. 53. The Tribunal agreed with the assessee, noting that the circular was binding and that the development rebate reserve in excess of statutory requirements should be included in the capital base. Furthermore, the Tribunal accepted the assessee's argument that the issuance of bonus shares, decided after the first day of the previous year, should not result in a reduction of the general reserve, citing CIT v. New Swadeshi Sugar Mills Ltd. (1985) 151 ITR 220 (Bom.).

Conclusion:

The Tribunal concluded that the STO was not justified in reopening the assessment under Section 8(b) and that the original computation of the capital base by the STO was incorrect. The Tribunal set aside the orders of the surtax authorities and allowed the appeal, thereby accepting the assessee's computation of the capital base and treatment of reserves.