1988 (4) TMI 116 - AT - Income Tax

Summary

Issues Involved:
1. Inclusion of Development Rebate Reserve in the Capital Base.
2. Inclusion of Excess Provision of Income-tax in the Capital Base.
3. Validity of CIT(A)'s Order.

Issue-wise Detailed Analysis:

1. Inclusion of Development Rebate Reserve in the Capital Base:

The primary issue in the assessee's appeal was whether the amount of Rs. 130.15 lakhs transferred from the Development Rebate Reserve to the General Reserve should be included in the capital base of the company. The assessee argued that the basic nature of the reserve does not change even after its transfer. However, the ITO and CIT(A) held that once transferred, these reserves could not be considered as development rebate reserves and were instead classified under "Other reserves" as per sub-rule (iii) of Rule 1 in the Second Schedule of the Companies (Profits) Sur-tax Act, 1964.

The Tribunal agreed with the Revenue, stating that after transfer to the general reserve, the development rebate reserve loses its specific identity and cannot be treated as such. It was noted that the amounts credited to the development rebate reserve in excess of the statutory requirement of 75% could be considered as part of "other reserves" if they had not been allowed in computing the profits of the company under the IT Act. The Tribunal directed the ITO to ascertain whether there were excess amounts in the development rebate reserve that could be included in the capital base. Therefore, this ground of the assessee was rejected subject to the directions for ascertaining the excess amounts.

2. Inclusion of Excess Provision of Income-tax in the Capital Base:

The second issue was whether the excess provision of income-tax should be included in the capital base. The assessee contended that there was an excess provision of Rs. 2,94,228 and relied on the Supreme Court decision in Vazir Sultan Tobacco Co. Ltd. vs. CIT to argue that excess provision should be treated as a reserve. The ITO had rejected this claim, and the matter had been previously restored to the ITO by the Tribunal for the assessment year 1980-81.

The CIT(A) noted that the provision for tax was based on specific calculations and that the company had provided for estimated miscellaneous contingencies. The CIT(A) found that the tax provided for was not more than what was reasonably necessary, and any excess amounts were written back to the general reserve by the company. The Tribunal upheld the CIT(A)'s finding, agreeing that the provision made was a properly calculated provision and did not call for interference. The Tribunal rejected the assessee's ground on this matter.

3. Validity of CIT(A)'s Order:

The assessee also claimed that the order of the CIT(A) was bad in law and on facts. However, the Tribunal did not find merit in this claim. The Tribunal's detailed analysis and agreement with the CIT(A)'s findings on the inclusion of development rebate reserve and excess provision of income-tax indicate that the CIT(A)'s order was upheld as valid and justified.

Conclusion:

The Tribunal dismissed the Departmental appeal based on the order of the Tribunal for the assessment year 1980-81. The assessee's appeal was partially allowed for statistical purposes, with specific directions to the ITO to ascertain the excess amounts in the development rebate reserve that could be included in the capital base. The Tribunal upheld the CIT(A)'s findings on both the inclusion of development rebate reserve and excess provision of income-tax in the capital base, rejecting the assessee's grounds on these issues.