1986 (3) TMI 138 - AT - Income Tax

Summary

Issues Involved:

1. Jurisdiction of the Commissioner to pass the revisionary order.
2. Consideration of Rs. 68,19,399 as part of the capital reserve account.
3. Non-deduction of Rs. 19,78,116 shown as debit balance in the miscellaneous expenditure account.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Commissioner to Pass the Revisionary Order:

The first issue revolves around whether the Commissioner had the jurisdiction to pass the revisionary order covering both assessment years 1977-78 and 1978-79. The assessee argued that the assessment orders passed by the ITO had merged with those passed by the Commissioner (Appeals) and later by the Tribunal, thereby stripping the Commissioner of any revisionary powers under section 16(1) of the Act. The Tribunal, however, found that the amounts involved in the present appeals were neither considered by the ITO in his assessment orders nor by the Tribunal in its second appellate orders. Citing the Supreme Court's decision in CIT v. Rai Bahadur Hardutory Motilal Chamaria, the Tribunal held that the Appellate Assistant Commissioner (AAC) has no jurisdiction to assess a source of income not processed by the ITO and not disclosed in the returns or assessment order. Consequently, the Tribunal concluded that the Commissioner was competent to exercise revisionary jurisdiction as the subject matter concerning the revisionary order was not considered by the ITO or the first appellate authority. Therefore, the Tribunal held the first point against the assessee and in favor of the revenue.

2. Consideration of Rs. 68,19,399 as Part of the Capital Reserve Account:

The second issue concerns whether Rs. 68,19,399, representing the net difference in exchange due to the devaluation of the Indian rupee, should be considered as part of the capital reserve account. The Commissioner had initially held that the increase in rupee value of sterling balances due to devaluation should not be considered as part of capital, citing Explanation 1 to Rule 2 of the Second Schedule of the Companies (Profits) Surtax Act, 1964, which states that a reserve brought into existence by revaluation of any book asset is not capital for computing the capital of a company. However, the Tribunal referred to a decision by the Andhra Pradesh High Court which clarified that Explanation 1 applies only when a book asset is revalued by an act of volition or unilateral act of the company. Since the increase in value was due to devaluation and not revaluation, the Tribunal held that the increase in rupee value of sterling deposits did not amount to revaluation of existing assets. Consequently, the Tribunal set aside the Commissioner's order on this point and restored the treatment given by the ITO, allowing the appeals of the assessee on this point.

3. Non-deduction of Rs. 19,78,116 Shown as Debit Balance in the Miscellaneous Expenditure Account:

The third issue pertains to whether the debit balance of Rs. 19,78,116 in the miscellaneous expenditure account should be deducted from the uncommitted reserves while computing the capital for surtax purposes. The Commissioner held that according to normal commercial prudence, debit balances in the profit and loss account and miscellaneous expenditure account should be adjusted against uncommitted reserves. The assessee argued that the deduction of the debit balance was only for display in the published accounts and not an actual appropriation of uncommitted reserves. However, the Tribunal agreed with the Commissioner, stating that the amount spent should be deducted from the reserves as it represents expenditure that has gone out from the company's coffers. The Tribunal held that the assessee could not claim the amount for computing capital for surtax purposes and confirmed the Commissioner's order on this point, dismissing the appeals of the assessee.

Conclusion:

In the result, the appeals were partly allowed. The Tribunal upheld the Commissioner's jurisdiction to pass the revisionary order and confirmed the non-deduction of Rs. 19,78,116 from the reserves. However, it set aside the Commissioner's order regarding the inclusion of Rs. 68,19,399 as part of the capital reserve account, restoring the ITO's treatment of this amount.