1986 (1) TMI 142 - AT - Income Tax

Issues Involved:
1. Gross vs. Net Amounts of Dividends and Royalties
2. Applicability of Rule 4 of the Second Schedule to Surtax Act
3. Inclusion of General Reserve No. 2 in Capital Base
4. Deductibility of Deposits with IOBI in lieu of Surcharge
5. Reduction of Short Provision of Gratuity from General Reserve
6. Proportionate Increase in Paid-Up Share Capital for Bonus Shares
7. Deduction of Donations under Rule 1(vii) of the First Schedule

Detailed Analysis:

1. Gross vs. Net Amounts of Dividends and Royalties:
The primary issue raised by the Department concerns whether the amounts of dividends and royalties to be excluded under Rule 1(viii) and (ix) of the First Schedule to the Companies (Profits) Surtax Act, 1964, should be gross or net amounts. The Tribunal referenced multiple cases, including CIT vs. Jupiter General Insurance Co. Ltd., where it was held that "income by way of dividends" referred to gross dividends. However, this interpretation was overruled by the Supreme Court in Distributors (Baroda) (P) Ltd. vs. Union of India, where it was held that "such income by way of dividends" referred to net income. Consequently, the Tribunal concluded that the relevant expressions in Rule 1(viii) and (ix) should be interpreted to mean net income by way of dividends and royalties, aligning with the Supreme Court's decision.

2. Applicability of Rule 4 of the Second Schedule to Surtax Act:
The Department contended that Rule 4 of the Second Schedule should apply to deductions under Chapter VI-A of the IT Act, thereby reducing the capital base proportionately. The Tribunal noted that this issue had been previously decided against the Department by the Tribunal and the Bombay High Court in CIT vs. Century Spg. & Mfg. Co. Ltd. and Commissioner of Surtax vs. Bellarpur Industries Ltd. The Tribunal upheld these decisions, rejecting the Department's ground.

3. Inclusion of General Reserve No. 2 in Capital Base:
The Department argued that General Reserve No. 2, created from profits exempt under Section 80J of the IT Act, should not be included in the capital base for surtax purposes. The Tribunal referenced its earlier decision in the appeal for the assessment year 1973-74, which had decided this issue in favor of the assessee. The Tribunal upheld the CIT (A)'s order, confirming the inclusion of General Reserve No. 2 in the capital base.

4. Deductibility of Deposits with IOBI in lieu of Surcharge:
For the assessment year 1977-78, the Department contested the CIT (A)'s decision that deposits made by the assessee with IOBI in lieu of surcharge were eligible for deduction under Rule 2(i) of the First Schedule. The Tribunal referred to the Special Bench decision in Travancore Chemical and Mfg. Co. Ltd. vs. ITO, which decided this issue against the assessee. Consequently, the Tribunal set aside the CIT (A)'s order and restored the Surtax Officer's decision.

5. Reduction of Short Provision of Gratuity from General Reserve:
The assessee argued that the ITO's action of reducing the short provision of gratuity from the General Reserve while computing the capital employed was incorrect. The Tribunal noted that Rule 1A of the Second Schedule, inserted retrospectively from April 1, 1975, did not refer to the provision for gratuity liability. As such, the ITO was not justified in deducting the short provision for gratuity from the reserve. The Tribunal directed the ITO not to make this deduction.

6. Proportionate Increase in Paid-Up Share Capital for Bonus Shares:
For the assessment year 1977-78, the assessee contended that the ITO erred in not granting a proportionate increase in paid-up share capital due to the issuance of bonus shares. The Tribunal noted that this issue had been decided against the assessee by the Bombay High Court in CIT vs. Century Spg. & Mfg. Co. Ltd. The Tribunal followed this decision and rejected the assessee's ground.

7. Deduction of Donations under Rule 1(vii) of the First Schedule:
For the assessment year 1979-80, the assessee argued that the ITO erred in granting a deduction for donations under Rule 1(vii) to the extent of Rs. 2,50,000 instead of Rs. 2,80,051. The Tribunal clarified that the sum with reference to which the deduction is allowable under Section 80G of the IT Act was Rs. 5,00,000, not the actual donation of Rs. 5,60,101. The Tribunal rejected the assessee's submission that 50% of Rs. 5,60,101 should be allowed as a deduction.

In conclusion, the Tribunal partly allowed the appeals, providing detailed reasoning for each issue raised by both the Department and the assessee.

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