1985 (6) TMI 52 - AT - Income Tax

Summary

Issues:
Interpretation of rules under the Companies (Profits) Surtax Act, 1964 regarding the computation of capital for surtax purposes under the Second Schedule and whether the cost of assets should be diminished by the income from those assets as required under the First Schedule.

Detailed Analysis:

1. The appeal raised a question regarding the computation of a company's capital for surtax under the Second Schedule of the Companies (Profits) Surtax Act, 1964. The issue was whether the capital should be reduced by the cost of assets owned by the company, the income from which is required to be excluded from total income in computing chargeable profits under the First Schedule, even if those assets did not yield any income during the relevant year. The appellant argued that since the assets did not generate income, there was no need to exclude any income, and therefore, the reduction of capital was unnecessary.

2. The Income Tax Officer (ITO) disagreed with the appellant's view and reduced the capital by the cost of investments, as required under the Second Schedule. The Commissioner of Income Tax (Appeals) also supported the ITO's decision, stating that the mere existence of such assets was enough to trigger the reduction under the Second Schedule. The CIT (A) referred to previous court judgments to support this interpretation.

3. The appellant, aggrieved by the decision, argued before the Appellate Tribunal that the reduction of capital under the Second Schedule should only occur when there was actual income from the assets requiring exclusion under the First Schedule. The appellant also contended that the cost of certain assets should not be excluded from the capital base.

4. The Tribunal analyzed the provisions of the First and Second Schedules, emphasizing that the reduction of capital under the Second Schedule was not dependent on the actual income generated by the assets. The Tribunal referred to relevant court judgments, including one from the Karnataka High Court, to support its interpretation that the cost of assets should be diminished from the capital as determined under the First Schedule.

5. Ultimately, the Tribunal confirmed the views of the ITO and the CIT (A) regarding the exclusion of the cost of investments from the capital base. Additionally, the Tribunal agreed with the appellant's alternative contention that certain debentures should not be considered for exclusion from the capital base.

6. The appeal was partially allowed based on the Tribunal's interpretation of the rules under the Companies (Profits) Surtax Act, 1964, affirming the exclusion of the cost of investments from the capital base while also acknowledging the specific exclusion of certain debentures from the computation.