1989 (2) TMI 142 - AT - Income Tax

Accounting Year Assessment Year Bona Fide Capital Employed Prejudicial To The Interests Of Revenue Statutory Deduction

Issues Involved:
1. Jurisdiction of the Commissioner under Section 16 of the Companies (Profits) Surtax Act, 1964.
2. Correctness of the statutory deduction computation by the Surtax Officer.
3. Classification of the amount in the Profit & Loss Appropriation Account as reserve.

Issue-wise Analysis:

1. Jurisdiction of the Commissioner under Section 16 of the Companies (Profits) Surtax Act, 1964:
The assessee contested the issuance of the notice under Section 16 of the Companies (Profits) Surtax Act, 1964, arguing that the Commissioner was legally wrong in holding that the order passed by the IAC (Assessment) was erroneous and prejudicial to the interest of the revenue. Section 16 empowers the Commissioner to revise orders prejudicial to revenue, allowing him to call for and examine the record of any proceeding under this Act. If the Commissioner considers an order erroneous and prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard, pass such order as the circumstances justify. The Commissioner issued a notice under Section 16(1) on 17-3-1987, reasoning that the IAC erroneously included the balance lying in the profit and loss account amounting to Rs. 23,05,998 while computing the statutory deduction, resulting in an undercharge of surtax by Rs. 1,55,653.

2. Correctness of the statutory deduction computation by the Surtax Officer:
The Surtax Officer computed the chargeable profits by deducting the income-tax payable from the total income and further reducing the statutory deduction, which was calculated at 15% of the capital employed. The capital employed was computed by including the paid-up capital and reserves. The Commissioner found that the IAC erroneously included the balance in the profit and loss account in the capital employed, leading to an incorrect statutory deduction of Rs. 7,05,205 instead of Rs. 3,39,306. The Commissioner directed the Surtax Officer to recompute the statutory deduction excluding the amount of Rs. 23,05,998 and issue a revised demand notice.

3. Classification of the amount in the Profit & Loss Appropriation Account as reserve:
The assessee argued that the amount of Rs. 23,05,998 in the Profit & Loss Appropriation Account was part of the reserves and surpluses, citing judgments from the Calcutta High Court and the Supreme Court. The Commissioner disagreed, referring to the Second Schedule to the Companies (Profits) Surtax Act, 1964, and relevant rules for computing the capital of a company. He observed that the amount in question continued to be an unappropriated balance of the Profit & Loss Appropriation Account and lacked a resolution by the Board of Directors or confirmation by shareholders to be treated as a general reserve. The Commissioner relied on the judgment of the Madras High Court and the Supreme Court's judgment in Mysore Electrical Industries Ltd., concluding that the IAC erred in including the amount as a reserve for statutory deduction purposes.

Conclusion:
The Tribunal found that the Surtax Officer's order was made in a bona fide manner, considering relevant judgments and statutory provisions. The view taken by the Surtax Officer was deemed bona fide and in accordance with law, including the amount of Rs. 23,05,998 as a reserve for determining the capital employed. The Tribunal noted that the Commissioner did not consider the subsequent Supreme Court judgment in Vazir Sultan Tobacco Co. Ltd., which had addressed the earlier judgment in Mysore Electrical Industries Ltd. Consequently, the Tribunal held that the Surtax Officer's order was neither erroneous nor prejudicial to the interests of revenue. The Tribunal canceled the Commissioner's order and restored the Surtax Officer's order, allowing the appeal.

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