1996 (6) TMI 109 - AT - Income Tax

Summary

Issues:
1. Deduction of sum from capital employed based on tax liability difference.
2. Interpretation of Rule 1-A of Schedule II of the Companies (Profits) Surtax Act, 1964.
3. Application of Rule 1-A in reducing capital base.
4. Reasonableness of tax provision and final assessed tax liability.
5. Compliance with Rule 1-A in determining capital employed.

Analysis:

The appeal challenged the deduction of a sum from the capital employed due to a variance in tax liability. The Assessing Officer reduced the capital employed by Rs. 4,95,739 based on the difference between the provision made for taxation and the actual tax liability. This adjustment was made in reference to Rule 1-A of Schedule II of the Companies (Profits) Surtax Act, 1964, which was confirmed by the first appellate authority.

The Tribunal analyzed Rule 1-A along with its Explanation, which pertains to the reduction of capital where a company fails to credit the tax liability amount in its books. The rule specifies that the Assessing Officer can reduce the capital base by the amount not credited or the shortfall if a credit has been made. The rule focuses on reasonableness in crediting tax liabilities and dividends.

In this case, the provision made for tax was Rs. 31,05,900, while the final assessed tax liability varied. The Tribunal considered the reasonableness of the provision in light of the assessed tax liability. It concluded that the assessee satisfied the test of reasonableness, as the difference between the provision and final assessed tax was justifiable. The decision emphasized that each case must be evaluated based on its facts and figures to determine compliance with Rule 1-A.

Based on the interpretation of Rule 1-A and considering the reasonableness of the tax provision, the Tribunal set aside the first appellate authority's order. It directed the Assessing Officer to re-compute the capital employed without the reduction made based on the tax liability difference. Ultimately, the appeal was allowed in favor of the assessee.