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Issues Involved:
1. Exclusion of Rs. 86,24,000 from the capital account of the assessee-company. 2. Exclusion of Rs. 78,69,681 transferred from 'revaluation reserve' to 'general reserve' while computing the assessee's capital base. Detailed Analysis: 1. Exclusion of Rs. 86,24,000 from the Capital Account: The first issue concerns the exclusion of Rs. 86,24,000 from the capital account of the assessee-company under the Second Schedule of the Companies (Profits) Surtax Act, 1964. This amount represented a dividend declared out of the general reserve. The point in issue is resolved against the assessee based on the precedent set by the Hon'ble Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559. Consequently, the order of the learned Commissioner (Appeals) upholding the exclusion of the said sum is affirmed. 2. Exclusion of Rs. 78,69,681 Transferred from 'Revaluation Reserve' to 'General Reserve': The second issue pertains to the exclusion of Rs. 78,69,681, which was transferred from the 'revaluation reserve' to the 'general reserve' while computing the capital base of the assessee-company under Explanation 1 to rule 2 of the Second Schedule of the Act. The revaluation reserve was created in 1966 due to the devaluation of the rupee, which led to an increase in the value of imported fixed assets. This revaluation reserve was not included in the capital computation up to the assessment year 1974-75. At the end of the accounting period corresponding to the assessment year 1974-75, the amount standing to the credit of the revaluation reserve account was transferred to the general reserve account. The board of directors reported this transfer to the shareholders, stating that many of the revalued assets had been fully depreciated, justifying the transfer. The Income Tax Officer (ITO) excluded this amount while computing the capital, arguing that the nature of the reserve had not changed despite the transfer. The Commissioner (Appeals) confirmed this exclusion, leading to the current appeal. The learned counsel for the assessee argued that the revaluation reserve should not have been excluded from the capital computation. Firstly, because the revaluation reserve account did not appear in the balance sheet on the first day of the previous year, the ITO had no basis to exclude it. Secondly, the revaluation reserve was created by revaluing tangible assets, not book assets, and thus should not be affected by Explanation 1 to rule 2. Support for this view was drawn from the Supreme Court's observations in CIT v. Standard Vacuum Oil Co. [1966] 59 ITR 685, which distinguished between book assets and real tangible assets. The learned counsel also referred to the opinion of the Expert Advisory Committee of the Institute of Chartered Accountants of India, which stated that amounts from revaluation reserves could be transferred to revenue reserves once the assets were fully depreciated. The revenue opposed these submissions, asserting that the nature of the reserve remained unchanged despite the transfer. They argued that the distinction between book assets and real assets was irrelevant in this context and that the Supreme Court's observations in Standard Vacuum Oil Co. were not applicable to this case. Upon examining the facts and submissions, the Tribunal noted that under rule 1 of the Second Schedule, the capital of a company is computed by aggregating its paid-up share capital and reserves. Explanation 1 to rule 2 excludes reserves created by revaluation from this computation. A book asset typically refers to an asset entered in the company's books, including intangible assets like goodwill. The Tribunal found merit in the assessee's argument that the revaluation reserve had lost its original nature once the revalued assets were fully depreciated. The transfer to the general reserve was justified, as the revaluation reserve no longer represented a revaluation of assets but rather an accumulation of the company's profits and other surpluses. Consequently, Explanation 1 to rule 2 ceased to apply to the transferred amount of Rs. 78,69,681, and its exclusion from the capital computation was not justified. The Tribunal reversed the orders of the authorities below and allowed the assessee's appeal, concluding that the sum of Rs. 78,69,681 should not be excluded while computing the capital of the assessee-company.
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