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TMI Blog2017 (10) TMI 421X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions. The First Schedule to the Act contains the rules for computing the chargeable profits and Second Schedule contains rules for computing the capital base of the company. The Tribunal found that in the case before it, these conditions have not been satisfied. In the case before the Tribunal in respect of differential, there is no reserve credited by the board of directors through a conscious overt act, nor is there any crediting of amount to any reserve by a conscious overt act on the part of board of directors. Of course, a large amount has been allowed in the income tax proceedings as and by way of depreciation. But the other two conditions were not satisfied. That is why the Tribunal found that there was no need to reduce the capital base by differential. It is these facts of the matter which enabled the coordinate Bench of the Tribunal at Madras to observe that true it is that in the case of Zenith Steel Pipes (supra) this Court has taken a view which supports the revenue, but the contentions advanced before the Tribunal's coordinate Bench at Madras and considered by it, were not advanced before the Bombay High Court. It is in these circumstances that the coordinate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra) matter rested its conclusion on one aspect of the matter and that is with regard to the deduction for the purposes of charge of Surtax. Mr. Seth inviting our attention to the charging provision, would submit that Surtax Act states that subject to the provisions contained therein, there shall be charged on every company for every assessment year commencing on and from 1st April 1964 but before first day of April 1988, a tax referred to as Surtax, in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate specified in the third schedule. After inviting our attention to the definitions of the term `Chargeable Profits' appearing in Section 2(5) and the definition of the term `Statutory Deduction' as defined in Section 2(8) of the Surtax Act, it is submitted that the second schedule is referable to Section 2(8) of the Surtax Act. The second schedule of Surtax Act prescribes rules for computing the capital of a company for the purposes of Surtax. 3. Mr. Seth would submit that capital of the company shall be the aggregate of the amounts mentioned in Rule 1(i), (ii) and (iii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1(iii) are read, there is no scope for accepting the alternate argument of Mr.Seth as well. There is nothing in this rule which would unable the assessee to argue that the reserves, as depleted by payment of dividend, should be reduced. These are the words read into by the assessee and the Legislature has not provided for anything other than the words specifically inserted therein. For all these reasons he would submit that the questions be answered against the assessee and in favour of revenue. 7. For properly appreciating the rival contentions, we must note the facts. The assessee before us is a public limited company. The accounting year for the surtax assessment is 1986 87. Under the Surtax Act, capital of the assessee as on the first day of the accounting year namely 1st July 1984 was to be computed. The capital was computed by taking into consideration the fact that the assessee charges depreciation in its books of account under straight line method, which is permitted under the Companies Act, 1956. However, under the provisions of Income Tax Act, 1961, the assessee is required to claim deduction for depreciation only on the basis of written down value and in the income ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and from 1st April 1964 but before 1st April 1988 a tax which is referred to as the Surtax, in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the third schedule. The definitions are contained in Section 2 and we are concerned with terms `chargeable profits' and `statutory deductions'. The term `chargeable profits' is defined in Section 2(5) to mean that total income of an assessee computed under the Income Tax Act, 1961 (43 of 1961) for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule. The term `statutory deduction' is defined in Section 2(8) to mean : an amount equal to fifteen per cent of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of two hundred thousand rupees, whichever is greater : Provided that where the previous year is longer or shorter than a period of twelve months, the aforesaid amount of fifteen per cent or, as the case may be, of two hundred thousand rupees shall be increased or dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany for the purposes of the Indian Income tax Act, 1922 or the Income tax Act, 1961. (1A) Where a company has not made any credit in any account in its books as on the first day of the previous year relevant to the assessment year which is of the nature of item (8) or item (9) under the heading `Current Liabilities and Provisions' in the column relating to `Liabilities' in the `Form of Balance Sheet', given in Part I of Schedule VI to the Companies Act, 1956, or where the Income tax Officer is of opinion that the amount credited in such account falls short of the amount which should have reasonably been credited by it the amount of its capital as computed under rule I shall be reduced by the amount which has not been so credited or, as the case may be, the amount of such shortfall. Explanation For the purposes of this rule, the amount of credit which should have reasonably been made by a company in relation to any account of the nature of item (9) aforesaid, means the amount of dividend declared or paid by the company, on or after the first day of the previous year relevant to the assessment year, for the previous year immediately preceding the first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany ought to have provided a sum of ₹ 17,39,255/ by way of depreciation and what has been actually provided was lesser than that which ought to have been provided. He took the view that the whole of the sum which was transferred to the general reserve was not liable to be taken into account in the computation of capital as on 1st May 1963. This was the view also for the A.Y.1966 67. However, the appellate authority which was approached, had to decide two contentions, one of which was that the conditions in clause (iii) of Rule 1 of Second Schedule have to be satisfied. Mr.Seth relies upon these conditions but would read something further in them. The Division Bench held as under : ... The two questions which are for our consideration, one at the instance of the revenue and the other at the instance of the assessee, depend upon the interpretation of the provisions contained in clause (iii) of rule 1 of the Second Schedule to the Act. Under section 4, which is a charging section of the Act, surtax is leviable in respect of so much of the chargeable profits of the company of the previous year or previous years, as the case may be, as exceed the statutory deduction, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Act, 1961. It is common ground and it cannot be disputed having regard to the facts determined by the taxing authorities and the Tribunal that the assessee, as it was following the straight line method of depreciation, provided depreciation at an amount lesser than that was permitted to it in its assessment under the Indian Income tax Act. For the year ending April 30, 1963, it merely provided a sum of ₹ 4,86,298 as and by way of depreciation while the Appellate Assistant Commissioner found as a fact that the assessee company was entitled to provide ₹ 10,54,410 by way of depreciation in respect of its profits for the period ending April 30, 1963. Similarly, the aggregate depreciation provided as on April 30, 1964, in the books of the assessee company was ₹ 12,72,908 while the Appellate Assistant Commissioner allowed by way of depreciation up to that year the sum of ₹ 27,59,923. Thus for the year ending April 30, 1963, a sum of ₹ 5,68,112 was allowed as depreciation in addition to the sum provided in the books of the assessee company, while for the year ending April 30, 1964, a sum of ₹ 12,52,957 was allowed as depreciation in excess of what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stant Commissioner was right in taking the view that for the first year a sum of ₹ 5,68,112 ought to be deducted from the amount of general reserve of ₹ 7,50,000 and a sum of ₹ 12,52,957 ought to have been deducted from the amount of general reserve of ₹ 37,00,000 for the second year. What is required to be considered having regard to the language of clause (iii) of rule 1 of the Second Schedule to the Act as well as the circular referred to by Mr. Toprani is when for the purposes of surtax the capital has to be computed as required by the Second Schedule to the Act whether depreciation has been allowed under the Income tax Act for the relevant year, and if it is so allowed, then if the provisions of clause (iii) of rule 1 are attracted, they are to be given effect to. 15. Mr. Malhotra is right in his contention that merely because a coordinate Bench has distinguished a judgment of this Court in Zenith Steel Pipes (supra), we must not remit the questions back to the Tribunal. Firstly he would submit that the coordinate Bench was sitting at Madras. The Tribunal's coordinate Bench at Madras was bound by the judgment and order of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st have been allowed as deduction in computing the income of the company for the purposes of income tax. The Tribunal found that in the case before it, these conditions have not been satisfied. In the case before the Tribunal in respect of differential, there is no reserve credited by the board of directors through a conscious overt act, nor is there any crediting of amount to any reserve by a conscious overt act on the part of board of directors. Of course, a large amount has been allowed in the income tax proceedings as and by way of depreciation. But the other two conditions were not satisfied. That is why the Tribunal found that there was no need to reduce the capital base by differential. 16. It is these facts of the matter which enabled the coordinate Bench of the Tribunal at Madras to observe that true it is that in the case of Zenith Steel Pipes (supra) this Court has taken a view which supports the revenue, but the contentions advanced before the Tribunal's coordinate Bench at Madras and considered by it, were not advanced before the Bombay High Court. It is in these circumstances that the coordinate Bench of the Tribunal distinguished it. We do not see how in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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