1969 (10) TMI 20 - HC - Income Tax

Whether the Tribunal was justified in law in holding that the sum representing development rebate reserve, loan redemption reserve, plant modernisation and rehabilitation reserve was not to be considered in computing the assessee s capital for the purpose of the Companies (Profits) Surtax Act, 1964 read with section 256(1) of the Income-tax Act, 1961

Summary

Issues:
1. Whether various reserves and provisions should be considered in computing the assessee's capital for the purpose of the Companies (Profits) Surtax Act, 1964.
2. Whether the appropriations made by the board of directors after the relevant assessment year should be considered in computing the capital base.

The judgment addresses multiple issues regarding the computation of the assessee's capital for the Companies (Profits) Surtax Act, 1964. The questions raised involve the treatment of different reserves and provisions in the capital calculation. The first set of questions pertains to specific reserves like plant modernisation, loan redemption, development rebate, dividend, excess provision for depreciation, and super profits tax reserves. The court examines whether these amounts should be included as "other reserves" for capital computation. The judgment clarifies that provisions for taxation and dividends do not constitute reserves under the Act, aligning with the Explanation to rule 1 of the Second Schedule.

Regarding the second issue, the judgment delves into the timing of appropriations made by the board of directors post the relevant assessment year. The court analyzes whether these appropriations, passed by the general body of shareholders, should be considered effective from the end of the previous accounting year. The court references the Explanation to rule 1, emphasizing that amounts in the nature of reserves as of the first day of the previous year relevant to the assessment year should be regarded as reserves for capital computation purposes.

The court distinguishes between reserves and provisions, highlighting that appropriations for reserves made after the accounting year can still be considered effective from the start of the year. The judgment cites precedents and resolves the issues in favor of the assessee for questions related to plant modernisation, loan redemption, and development rebate reserves. However, it rules in favor of the revenue for questions concerning dividend reserve, excess provision for depreciation, and super profits tax reserve. The judgment concludes by directing each party to bear their own costs, providing a comprehensive analysis of the legal principles and interpretations applied in the decision.