1986 (1) TMI 141 - AT - Income Tax

Issues Involved:
1. Interpretation of "gross" vs. "net" amounts of dividend and royalty under rules 1(viii) and 1(ix) of the First Schedule to the Companies (Profits) Surtax Act, 1964.
2. Applicability of rule 4 of the Second Schedule to deductions under Chapter VIA of the Income-tax Act, 1961.
3. Inclusion of General Reserve No. 2 in the capital base computation for surtax purposes.
4. Treatment of deposits with IDBI in lieu of surcharge for the assessment year 1977-78.
5. Reduction of short provision of gratuity from general reserve in computing capital employed.
6. Proportionate increase in paid-up share capital due to bonus shares issuance.
7. Deduction in respect of donations under rule 1(vii) of the First Schedule to the Companies (Profits) Surtax Act, 1964.

Detailed Analysis:

1. Interpretation of "gross" vs. "net" amounts of dividend and royalty:
The department contended that the learned Commissioner (Appeals) erred in holding that the amounts of dividend and royalty to be excluded under rules 1(viii) and 1(ix) should be gross amounts. This issue was common across all five assessment years. The Tribunal referred to the Supreme Court's decision in Distributors Baroda (P.) Ltd. v. Union of India, which overruled the earlier Cloth Traders (P.) Ltd. case, establishing that the terms referred to net income, not gross. Consequently, the Tribunal held that under clauses (viii) and (ix) of rule 1, net income by way of dividends and royalties must be excluded from the total income.

2. Applicability of rule 4 of the Second Schedule:
The department argued that the Commissioner (Appeals) erred in holding that rule 4 of the Second Schedule was not applicable to deductions under Chapter VIA. The Tribunal noted that this issue had been previously decided against the department by the Tribunal and the Bombay High Court in CIT v. Century Spg. & Mfg. Co. Ltd. and CST v. Ballarpur Industries Ltd. The Tribunal followed these decisions and rejected the department's ground.

3. Inclusion of General Reserve No. 2 in the capital base computation:
The department contended that the Commissioner (Appeals) erred in including General Reserve No. 2, created from profits exempt under section 80J, in the capital base for surtax purposes. The Tribunal noted that this issue had been previously decided against the department by the Tribunal in the appeal for the assessment year 1973-74. The Tribunal followed the earlier decision and confirmed the order of the Commissioner (Appeals).

4. Treatment of deposits with IDBI:
For the assessment year 1977-78, the department argued that the Commissioner (Appeals) erred in holding that the amount deposited with IDBI in lieu of surcharge should not be considered. The Tribunal referred to the Special Bench decision in Travancore Chemicals & Mfg. Co. Ltd. v. ITO, which was against the assessee. The Tribunal followed this decision and set aside the order of the Commissioner (Appeals), restoring the ITO's order.

5. Reduction of short provision of gratuity from general reserve:
The assessee contended that the Commissioner (Appeals) erred in upholding the ITO's action of reducing short provision of gratuity from the general reserve while computing the capital employed. The Tribunal noted that rule 1A of the Second Schedule, inserted by the Finance Act, 1976, did not refer to gratuity provisions. Consequently, the ITO was not justified in deducting the short provision for gratuity from the reserve. The Tribunal directed the ITO not to deduct the amount representing short provision for gratuity.

6. Proportionate increase in paid-up share capital due to bonus shares:
The assessee argued that the Commissioner (Appeals) erred in not granting a proportionate increase in paid-up share capital under rule 3 of the Second Schedule for the issue of bonus shares. The Tribunal noted that this issue had been decided against the assessee by the Bombay High Court in Century Spg. & Mfg. Co. Ltd.'s case. The Tribunal followed the High Court's decision and rejected this ground.

7. Deduction in respect of donations under rule 1(vii):
The assessee contended that the Commissioner (Appeals) erred in granting deduction for donations to the extent of Rs. 2,50,000 instead of Rs. 2,80,051. The Tribunal noted that under section 80G, deduction was limited to 50% of Rs. 5 lakhs, the smaller amount. Consequently, the sum with reference to which deduction was allowable was Rs. 5 lakhs, not the actual donation amount of Rs. 5,60,101. The Tribunal rejected the assessee's submission and upheld the Commissioner (Appeals)'s order.

Conclusion:
The appeals were partly allowed, with the Tribunal setting aside and confirming various orders of the Commissioner (Appeals) based on the detailed analysis of each issue.

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