1978 (1) TMI 106 - AT - Income Tax

Summary

Issues:
- Contention regarding the direction to adopt total income as computed after income-tax proceedings for the assessment year 1970-71.
- Inclusion of dividend amounts from general reserve for computing capital base for assessment years 1972-73 and 1973-74.
- Application of rule 4 of the Second Schedule of the Companies (Profits) Surtax Act for reducing capital base.
- Treatment of goodwill reserve amount for calculation of capital base.

Analysis:

1. For the assessment year 1970-71, the Department contested the direction to adopt total income post income-tax proceedings. The Tribunal's decision in the income-tax appeal confirmed the order of the AAC. Consequently, the modified total income from income tax proceedings was to be adopted for surtax purposes, leading to the dismissal of the Department's appeal for this assessment year.

2. Concerning the assessment years 1972-73 and 1973-74, the dispute centered around including dividend amounts from the general reserve for computing the capital base. The AAC, following a Bombay High Court decision, held that dividends declared out of the general reserve should not be excluded from the capital base calculation, as they retain the character of reserves until declared. The Tribunal upheld the AAC's decision based on this legal principle.

3. The application of rule 4 of the Second Schedule of the Companies (Profits) Surtax Act was another issue. The ITO had reduced the capital base in proportion to deductions allowed under Chapter VIA of the IT Act. However, the AAC, citing a Karnataka High Court decision, directed the deletion of this reduction from the capital, a decision upheld by the Tribunal.

4. Lastly, the treatment of the goodwill reserve amount was disputed. The assessee created a goodwill reserve, which the ITO did not consider for capital calculation. The AAC, guided by a Kerala High Court ruling, classified the goodwill reserve as a 'reserve' without any attached liability, thus forming part of the capital for surtax purposes. The Tribunal affirmed this decision, emphasizing the absence of liability in the goodwill reserve.

5. In conclusion, all departmental appeals were dismissed, affirming the decisions made regarding the total income adoption, inclusion of dividend amounts, application of rule 4, and treatment of the goodwill reserve amount for the respective assessment years.