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TMI Blog1992 (11) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... estions have been referred to us at the instance of the assessee : " (1) Whether, having regard to the different provisions of the Super Profits Tax Act, 1963, the assessment made under section 7(2) of the Act for the assessment year 1963-64 on November 25, 1972, beyond the period of four years from the end of the assessment year in question, is valid in law ? (2) Whether, on the facts and in the circumstances of the case, it was correct to hold that 'surplus' of income did not form part of the capital base of the company ? (3) Whether, on the facts and in the circumstances of the case, it was correct to hold that full provision for taxation and foreign taxation provision did not form part of the capital base of the company ? " Question No. 1 : This question is governed by the decision of this court in the case of Indian Hume Pipe Co. Ltd. v. CIT [1991] 189 ITR 683. It is, therefore, an accepted position on both sides that this question must be answered in the affirmative and in favour of the Revenue. Question No. 2 : It is an agreed position on both sides that this question is governed by the decision of the Supreme Court in the case of CIT v. Century Spinning and Manuf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, therefore, answered in the affirmative and in favour of the Revenue. As far as question No. 4 is concerned, the relevant facts are that for the purposes of the Companies (Profits) Surtax Act, 1964, while computing the capital base under the Second Schedule to the Companies (Profits) Surtax Act, 1964, for the assessment years 1964-65 and 1965-66, the Income-tax Officer excluded the cost of certain shares, the income from which was not included in the chargeable profits of the assessee-company because these shares had not earned any dividend for the two assessment years in question. The assessee contends that since during the relevant assessment years, the assessee had not earned any dividend from those shares, sub rule (viii) of rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, would not apply to the assessee's case. Therefore, under rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, these shares cannot be excluded from the capital base of the assessee-company. In order to appreciate this contention, it is necessary to look at the relevant provisions of the Companies (Profits) Surtax Act, 1964. Surtax is levied under this Act on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. It is not material whether in a given assessment year, these assets have, in fact, earned any income. If the assets are capable of generating income which would be excluded, inter alia, under clause (viii) of rule 1 of the First Schedule, then such assets would be excluded from the capital base under rule 2 of the Second Schedule. This interpretation is borne out by the language of rule 2 which describes assets, the income from which is "required to be excluded" from the total income of the assessee in computing its chargeable profits. The rule makes no reference to the assets actually earning any income during any year of accounting. It merely describes the type of assets that are to be so excluded. This view, which we are taking, is borne out by the decisions of the Karnataka and Calcutta High Courts in the cases of CIT v. United Breweries Ltd. [1978] 114 ITR 901 and Nav Bharat Vanijya Ltd. v. CIT [1980] 123 ITR 865, respectively. The Karnataka High Court also considered rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, read with clause (viii) of rule 1 of the First Schedule to the said Act. The Karnataka High Court also emphasised the words in rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statutory deduction, refers to the amount of the cost of assets, if any, the income from which is not included in the chargeable profits in accordance with clause (iii) or clause (vi) or clause (viii) of rule 1 of the First Schedule. Hence, the Madras High Court said that one has to look to the fact whether any income from these assets had been actually excluded in the given year. The Madras High Court has, however, overlooked Note 6 at the foot of this form which relates to this entry. Note 6 describes the income which is "not includible in the chargeable profits of the company" under this entry. Therefore, the form and the entry in that form do not necessarily support the conclusion arrived at by the Madras High Court. In any event, the language of the statute cannot be overridden by a form prescribed under the Rules framed under the Act. The Madras High Court has, on equitable considerations, held that when the company does not get any reduction in its chargeable profits because the shares do not earn any dividend, the value of the shares should not be reduced from the capital base of the company. We fail to read any such "equity" in the provision in question. If this interpre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are required to be excluded from the capital base of the company while reserve for doubtful debts and contingency reserves, to the extent that they are not set up for any specific liability, are required to be included in the capital base of the company. The question is answered accordingly. Question No. 2 : In view of the decision in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 (SC), question No. 2 is answered in the affirmative and in favour of the assessee. Question No. 3 : In view of the judgment of the Division Bench of this court (Mrs. Sujata Manohar and Srikrishna JJ.) decided on October 19, 1992, in Income-tax Reference No. 174 of 1977 (Hindustan Construction Co. Ltd. v. CIT [1994] 207 ITR 1091), this question is required to be answered in the affirmative and in favour of the assessee. Question No. 4 : In view of the decision in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 (SC), question No. 4 is required to be answered in the negative and in favour of the Revenue. Question No. 5 : In view of the decision in the case of CIT v. Century Spinning and Manufacturing Co. Ltd. [1978] 111 ITR 6 (Bom), this question is required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he capital under the Surtax Act, 1964 ? (8) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding for the assessment years 1968-69 and 1969-70 that the exchange difference reserve should be treated as 'reserves' for the purpose of capital computation under the Surtax Act, 1964 ? (9) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding for the assessment years 1968-69 and 1969-70 that the amount standing in general reserve No. 2 account should be considered as part of capital for the purpose of the Surtax Act, 1964 ? " Question No. 1 : It is an accepted position that in view of the decision in the case of CIT v. Saran Engineering Co. Ltd. [1986] 161 ITR 741 (SC), forfeited dividends are required to be excluded from the capital base of the company while contingency reserves are required to be included in the capital base of the company. Question No. 2 : In view of the decision in the case of CIT v. Saran Engineering Co. Ltd. [1986] 161 ITR 741 (SC), this question is required to be answered in the affirmative and in favour of the assessee to the extent that this reserve is not set up for any spec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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