1993 (12) TMI 85 - AT - Income Tax

Summary

Issues Involved:

1. Validity of the combined order passed by the CIT under section 16(2) of the Companies (Profits) Surtax Act, 1964.
2. Computation of the capital base for surtax purposes, including the inclusion of surplus and general reserve representing capital expenditure on scientific research.

Issue-wise Detailed Analysis:

1. Validity of the Combined Order Passed by the CIT under Section 16(2):

The assessee, a foreign company, argued that the combined order passed by the CIT under section 16(2) of the Surtax Act was invalid because the notice and order were issued in the name of M/s. Eskayef Ltd. instead of M/s. Eskaylab Ltd. The assessee contended that this misnaming rendered the proceedings invalid. However, the tribunal found no substance in this argument. The assessee had accepted assessments and filed appeals in the name of M/s. Eskayef Ltd. The tribunal noted that the intention of the Department was clear, and the assessee had acquiesced to the misnaming by responding to notices and filing appeals under the incorrect name. Therefore, the tribunal rejected the contention on this technical issue.

2. Computation of the Capital Base for Surtax Purposes:

a. Inclusion of Surplus:
The CIT's impugned order related to the computation of the capital base for surtax, where the CIT argued that the surplus and unappropriated profits should not have been included within "reserves." The assessee contended that the CIT mixed up items from the UK and Indian accounts. The tribunal noted that the CIT's notice and order contained several defects and misstatements, including mixing up figures from different accounts. The tribunal emphasized that the capital base for a foreign company should be computed with reference to its head-office accounts, not branch accounts in India.

b. General Reserve Representing Capital Expenditure on Scientific Research:
The CIT proposed to exclude the general reserve created by debiting the profit and loss account of the branch, equal to the allowance on account of capital assets for scientific research. The assessee argued that the CIT failed to understand the implications of the two different accounts and mixed up figures from both accounts. The tribunal found that the CIT's order was full of mistakes but was not passed without application of mind. The tribunal held that the CIT's order was a result of misapplication of mind, not a lack of application of mind, and thus was subject to appellate scrutiny but not quashable on the ground of natural justice.

Merits of the Case:

a. Surplus Inclusion:
The tribunal examined the merits of including surplus within the capital base. It referred to various Supreme Court and High Court decisions, which supported the inclusion of surplus and unappropriated profits as part of reserves for the purpose of computing the capital base. The tribunal noted that the UK Companies Act and generally accepted UK accounting practices treated retained profits as reserves, similar to US practices. Therefore, the tribunal found no reason to exclude unappropriated profits or surplus from the capital base.

b. General Reserve for Capital Expenditure on Scientific Research:
The tribunal agreed with the assessee's argument that the reserve created for capital expenditure on scientific research should be included within the capital base. The tribunal noted that the creation of this reserve did not fit within the provisions of sub-clause (iii) of clause (1) of the Second Schedule to the Surtax Act, which excluded reserves credited with amounts allowed as deductions in computing income. The tribunal concluded that the reserve for capital expenditure on scientific research should not be excluded from the computation of capital base.

Conclusion:

The tribunal concluded that the assessment orders passed by the Assessing Officer, which included surplus and general reserve within the computation of capital base, were not erroneous or prejudicial to the interests of revenue. Therefore, the CIT had no jurisdiction to revise those assessment orders under section 16(2) of the Surtax Act. The tribunal canceled the impugned combined order of the CIT for all four years and allowed the appeals filed by the assessee.