1993 (12) TMI 113 - AT - Income Tax

Summary

Issues:
1. Treatment of sums set apart for Ramaraju Memorial Fund in sur-tax assessments.
2. Whether the amounts standing to the credit of the fund should be treated as a reserve or liability.
3. Interpretation of the provisions of Article 17 of the Articles of Association.
4. Applicability of the declaratory Explanation to Rule 1 of the Second Schedule to the Companies (Profits) Sur-tax Act, 1964.
5. Deduction under section 80-G of the Act affecting the capital base for sur-tax purposes.

Analysis:

Issue 1: Treatment of sums set apart for Ramaraju Memorial Fund in sur-tax assessments
The Appellate Tribunal considered whether the amounts standing to the credit of the Ramaraju Memorial Fund should be treated as a reserve or liability. The Tribunal reviewed the provisions of Article 17 of the Articles of Association and the history of setting apart sums for the fund. The Tribunal noted that the Department argued that the company was obligated to set apart sums for charitable purposes, making it a liability. The Tribunal ultimately held in favor of the Department, citing the declaratory Explanation to Rule 1 of the Second Schedule, which clarified that such amounts should not be considered as reserves for sur-tax computation purposes.

Issue 2: Interpretation of Article 17 of the Articles of Association
The Tribunal analyzed the provisions of Article 17 of the Articles of Association, which mandated setting apart sums for the Ramaraju Memorial Fund for charitable purposes. The Department contended that this created a legal obligation for the company to spend the amounts for specific purposes, making it a liability. The Tribunal agreed with this interpretation and ruled in favor of the Department based on the legal obligations outlined in the Article.

Issue 3: Applicability of the declaratory Explanation to Rule 1 of the Second Schedule
The Tribunal emphasized the importance of the declaratory Explanation to Rule 1 of the Second Schedule, which clarified that amounts under 'Current Liabilities and Provisions' should not be considered reserves for sur-tax computation. The Tribunal found that the first appellate authority failed to consider this Explanation, leading to an incorrect decision in favor of the assessee.

Issue 4: Deduction under section 80-G affecting the capital base for sur-tax purposes
Regarding the deduction under section 80-G of the Act affecting the capital base for sur-tax purposes, the Tribunal referenced the decision in the case of Second ITO v. Stumpp Schuele & Somappa (P.) Ltd. The Tribunal upheld the decision of the first appellate authority based on the precedent set by the Supreme Court in a similar case, declining to interfere and dismissing the Department's objections.

In conclusion, the Tribunal partly allowed the departmental appeal for the assessment year 1981-82 and allowed the appeals relating to the other four assessment years in their entirety.