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Issues:
- Computation of chargeable profits for sur-tax purposes based on paid-up capital, investment allowance reserve, and general reserve. - Treatment of shares held by the assessee in U.P. Hotels & Restaurants Ltd. as investments. - Interpretation of the Companies (Profits) Surtax Act, 1964, First and Second Schedule regarding exclusion of income from dividends. - Discrepancy in the treatment of investments in the balance sheet and its impact on the computation of total paid-up capital and reserves. Detailed Analysis: 1. The primary issue in this judgment revolves around the computation of chargeable profits for sur-tax purposes, specifically focusing on the treatment of paid-up capital, investment allowance reserve, and general reserve. The Counsel for the assessee argued against the Assessing Officer's method, emphasizing the nature of shares held in U.P. Hotels & Restaurants Ltd. as being held on trust rather than as investments by the assessee. The Counsel highlighted the principles of understanding between the parties and contended that the shares were held for the benefit of another group, not as investments of the assessee. Reference was made to relevant provisions of the Companies (Profits) Surtax Act, 1964, to support the argument that the shares should not be considered investments for the purpose of computing chargeable profits. 2. The Departmental Representative, on the other hand, argued that since the assets (shares) were shown as investments in the balance sheet, they should be diminished from the total paid-up capital and reserves as per the Second Schedule. Various judicial precedents were cited to support this position, emphasizing the treatment of funds received for share purchases and the necessity of linking advances received to the purchase of shares. The Counsel for the assessee countered this argument by referring to a Supreme Court decision, asserting that the advances received were specifically for the purchase of shares and should not be treated as loans or unpaid purchase consideration. 3. The Tribunal carefully considered the rival submissions and analyzed the provisions of the Companies (Profits) Surtax Act, 1964, along with the First and Second Schedule. It was noted that the legislative intent was to levy surtax on the profits of the company, excluding certain incomes like dividends. The Tribunal emphasized the distinction between profits and gains from business and income from dividends, leading to the deduction of a portion of paid-up capital for arriving at the net profit chargeable to surtax. The Tribunal highlighted the importance of determining whether the shares held by the assessee could be considered investments from which dividends were earned or expected. 4. The Tribunal delved into the specifics of the understanding between the assessee and the Gupta family regarding the shares in U.P. Hotels Ltd. It was established that the assessee held the shares on trust for the benefit of the Gupta family, acting as a lender of money rather than an investor. The Tribunal concluded that since the shares were not investments made by the assessee but acquisitions as a trustee, they should not be deducted for computing the paid-up share capital and reserves as per the Second Schedule of the Companies (Profits) Surtax Act. The Tribunal directed the Assessing Officer to adjust the computation accordingly, considering the nature of the shares held by the assessee. 5. Ultimately, the appeals were allowed in favor of the assessee, highlighting the significance of the understanding between the parties regarding the shares in question and the impact of such understanding on the computation of chargeable profits for sur-tax purposes. The judgment clarified the distinction between investments made by a company and acquisitions made on trust, emphasizing the need for a thorough examination of the factual circumstances surrounding such transactions.
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