1987 (5) TMI 51 - AT - Income Tax

Issues Involved:
1. Computation of chargeable profits under the First Schedule to the Companies (Profits) Surtax Act, 1964.
2. Proportional diminution of capital under rules 1 to 3 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.
3. Classification of provision for doubtful debts as reserves in the computation of capital.
4. Classification of provision for additional sales tax as reserves.

Issue 1: Computation of Chargeable Profits
The primary contention revolves around whether the gross amount of dividends or the net amount of dividends should be deducted from the total income when computing chargeable profits under the First Schedule to the Companies (Profits) Surtax Act, 1964. The Income-tax Officer had deducted the dividends included in the total income, i.e., the gross dividends after deducting expenses for earning the dividend income and the deduction under section 80M of the Income-tax Act, 1961. The Commissioner (Appeals) directed that the gross amount of dividends should be deducted instead.

The departmental representative argued, citing the Supreme Court ruling in Distributors (Baroda) (P.) Ltd. v. Union of India, that the deduction under section 80M is admissible only on the amount of dividends included in the gross total income, not on the gross amount of dividends. The representative contended that the rules for computing chargeable profits are procedural and should apply to all pending assessments and appeals, including those made after 1-4-1981.

Conversely, the assessee's counsel argued that the assessment years in question predated the insertion of the Explanation to rule 1 by the Finance Act, 1981, and thus, it was not applicable. The counsel emphasized that the Supreme Court's ruling in Distributors (Baroda) (P.) Ltd. pertained to whether dividends should be reduced by expenses for earning them and not by the deduction under section 80M.

The Tribunal concluded that the Income-tax Officer was justified in deducting only the dividends included in the total income and not the gross dividends. The order of the Commissioner (Appeals) was reversed on this issue, restoring the Income-tax Officer's approach.

Issue 2: Proportional Diminution of Capital
The revenue's grievance was against the direction that the capital computed under rules 1 to 3 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, should not be proportionately diminished concerning deductions under Chapter VIA of the Income-tax Act, 1961. Both parties referred to the Bombay High Court rulings in CIT v. Century Spg. & Mfg. Co. Ltd. and CST v. Ballarpur Industries Ltd.

Following these rulings, the Tribunal held that the expression "not includible" in rule 4 of the Second Schedule refers to incomes not included in the total income as mentioned in Chapter III of the Income-tax Act, 1961, and not to incomes under Chapter VIA, which form part of the gross total income. The Commissioner (Appeals)'s direction was upheld.

Issue 3: Provision for Doubtful Debts
The assessee contended that the provision for doubtful debts should be treated as reserves in the computation of capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964. The counsel argued that since these amounts were not allowed as deductions in computing the total income, they should be considered reserves.

The departmental representative countered that sub-rule (iii) of rule 1 speaks of reserves, not provisions, and that the amounts in question represented diminution in the value of assets, not reserves, as per the Supreme Court ruling in Vazir Sultan Tobacco Co. Ltd. The Tribunal agreed with the departmental representative and ruled that the provision for doubtful debts could not be considered reserves.

Issue 4: Provision for Additional Sales Tax
This issue pertains only to the assessment year 1977-78. The assessee argued that the provision for additional sales tax should be treated as a reserve since the Commissioner of Sales Tax ultimately ruled in favor of the assessee, making the provision unnecessary.

The Tribunal found that the provision was made as a precautionary measure and was in excess of what was reasonably necessary. Following the Supreme Court ruling in Vazir Sultan Tobacco Co. Ltd., the Tribunal concluded that the amount should be treated as a reserve.

Conclusion:
The appeals filed by the revenue were partly allowed. The cross objection for the assessment year 1977-78 was partly allowed, while the cross objections for the assessment years 1978-79 and 1979-80 were dismissed.

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