1982 (8) TMI 110 - AT - Income Tax

Issues Involved:

1. Whether the deposit made by the assessee with the Industrial Development Bank of India in lieu of surcharge can be considered as payment of surcharge for the purpose of computing chargeable profits under the Companies (Profits) Surtax Act, 1964.
2. Whether the Income Tax Officer (ITO) was justified in rectifying the original assessment order under section 13 of the Act.
3. Whether the Commissioner (Appeals) was correct in enhancing the assessment by withdrawing the deduction allowed for surcharge.

Detailed Analysis:

1. Whether the deposit made by the assessee with the Industrial Development Bank of India in lieu of surcharge can be considered as payment of surcharge for the purpose of computing chargeable profits under the Companies (Profits) Surtax Act, 1964:

The Companies (Profits) Surtax Act, 1964 imposes a surtax on companies based on their chargeable profits, which are calculated by adjusting the total income computed under the Income-tax Act, 1961. The Finance Act, 1976 introduced a scheme allowing companies to make deposits with the Industrial Development Bank of India in lieu of paying a surcharge on income-tax. The assessee argued that such deposits should be treated as equivalent to payment of surcharge and thus deductible under Rule 2 of the First Schedule of the Surtax Act.

The Tribunal, however, held that a deposit made in lieu of surcharge does not equate to the payment of surcharge. The Tribunal emphasized that a deposit is returnable and does not permanently deplete the company's resources, unlike a tax which is irretrievable. Therefore, the deposit cannot be aggregated with income-tax payable to reduce chargeable profits. The Tribunal noted that the purpose of the scheme was to exempt companies from paying the surcharge if they made the deposit, not to treat the deposit as a payment of the surcharge.

2. Whether the Income Tax Officer (ITO) was justified in rectifying the original assessment order under section 13 of the Act:

The ITO initially accepted the assessee's claim that the deposit should be treated as payment of surcharge and allowed the deduction. However, upon realizing that the deposit and surcharge are not equivalent, the ITO rectified the assessment under section 13 of the Act, withdrawing the deduction and imposing additional surtax liability.

The Tribunal found that the issue was highly controversial and debatable, and thus not a clear mistake apparent from the record. Therefore, the ITO's action to rectify the assessment under section 13 was not justified. However, since the Commissioner (Appeals) had already enhanced the assessment by withdrawing the deduction for surcharge, the Tribunal deemed the appeal against the rectification order as infructuous.

3. Whether the Commissioner (Appeals) was correct in enhancing the assessment by withdrawing the deduction allowed for surcharge:

The Commissioner (Appeals) upheld the ITO's view that the deposit made by the assessee could not be considered as payment of surcharge. Consequently, he directed the ITO to enhance the assessment by withdrawing the deduction allowed for surcharge. The Tribunal agreed with this decision, emphasizing that the deposit made under the scheme was not equivalent to the payment of surcharge and thus could not be included in the income-tax payable for the purpose of computing chargeable profits.

Separate Judgments:

Per Kum. M. Fatima Beebi, Judicial Member:

The Judicial Member concurred with the Vice President's conclusions but provided additional reasoning. She clarified that the Delhi Bench's decision in the case of Daulat Ram Dharambir Auto (P.) Ltd. was based on a misinterpretation of the Finance (No. 2) Act, 1977. The proviso to section 2(1) of the Finance Act, 1977, which applies to companies making deposits under the scheme, clearly indicates that such companies have no liability to pay surcharge on income-tax for the assessment year 1977-78. Therefore, the deposit cannot be treated as equivalent to the payment of surcharge, and the deduction under Rule 2 of the First Schedule cannot include the deposit.

Conclusion:

The Tribunal dismissed both appeals, upholding the view that the deposit made by the assessee with the Industrial Development Bank of India in lieu of surcharge cannot be considered as payment of surcharge for the purpose of computing chargeable profits under the Companies (Profits) Surtax Act, 1964. The Tribunal also found that the ITO's rectification under section 13 was not justified but endorsed the Commissioner (Appeals)'s decision to enhance the assessment by withdrawing the deduction allowed for surcharge.

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