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TMI Blog1989 (9) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... tal computation base for the respective assessment years 1967-68, 1970-71 and 1971-72, even though the said amount was repaid by the assessee within a period of seven years ? (3) Whether, on the facts and in the circumstances of the case; the entire difference between the depreciation actually allowed to the assessee for the assessment years 1964-65 to 1966-67 and actually provided in the accounts for the years concerned should be deducted from the respective capital computation base for the assessment years 1967-68, 1970-71 and 1971-72 ? (4) Whether, on the facts and in the circumstances of the case, the proportionate increase of Rs. 3,26,027 in the paid-up capital for the assessee in respect of the amount capitalised for issuing bonus shares was includible in the capital computation base for the accounting period relevant to the assessment year 1971-72 without effecting any corresponding decrease in the general reserve ? At the instance of the assessee: (5) Whether, on the facts and, in the circumstances of the case, for the purpose of computation of 'other reserves/paid-up capital' under rule 1 (iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quent dates, i.e., on July 7, 1965, July 8, 1968, and July 5, 1969. Dividend was to be paid and was actually paid out of the general reserve in all the three years and the accounts as well as the recommendation of the directors regarding distribution of dividend were approved in one and the same general meeting held on August 20, 1965, August 22, 1968, and August 22, 1969, for the respective years. Shri Dastur stated that, for computing capital for the purpose of surtax assessment, the balance-sheet was the relevant document and there was no note or proposal in the balance-sheet for the distribution of dividend, there would be no justification whatsoever for reducing the general reserve by the amount of the proposed dividend. To our mind, the distinction drawn by Shri Dastur between this case and the cases covered by the Supreme Court decision is without any merit. It is common knowledge that the accounts are always of necessity finalised and approved by the directors after the end of the previous year and the annual general meeting is held some time thereafter. It is the general meeting that finally approves, the accounts including the recommendation for distribution of dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing two conditions are satisfied (i) the moneys are borrowed from the financial institutions mentioned in the sub-rule; and (ii) the agreement under which the moneys are borrowed provides for the repayment thereof during a period of not less than seven years. It is not in dispute that the assessee had borrowed moneys from the financial institutions specified in the sub-rule and that the moneys were borrowed under an agreement tinder which the moneys were to be repaid during a period of not less than seven years. Both the conditions are, thus, satisfied. To our mind, the fact that the assessee was able to pay back the moneys borrowed under the agreement during the period of seven years is not relevant for the purpose of rule 1 (v). Accordingly, the second question is answered in the affirmative and in favour of the assessee. The third question also pertains to the assessment years 1967-68, 1970-71 and 1971-72. But there is a material difference between the facts pertaining to the assessment year 1967-68 and the assessment years 1970-71 and 1971-72. Therefore, we propose to deal first with the question relating to the assessment year 1967-68. The question in so far as it pert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other hand, made a reference to Explanation to rule 2 of the Second Schedule and stated that the capital in this case was increased by taking the increased value of the book assets and, therefore, to the extent the paid-up share capital represented the increased value of book assets, it was not to be treated as capital for the purpose of computation of the capital of the company. The Explanation, further stated Dr. Balasubramanian, provided that the paid-up share capital brought into existence by increasing (by revaluation or otherwise) any book asset is not capital. The assessee in this case resorted to increasing the capital indirectly by first transferring the difference between the depreciation claimed in the income-tax returns and the depreciation debited in the books to the general reserve. Thereafter, it created general reserve account No. 1 out of the general reserve which was subsequently capitalised and used for the purpose of issuing bonus shares. The argument, thus, was that the increase in the capital was the result of the assessee's taking the increased value for the depreciable assets in the books. If the value in the books was also taken at the written down val ..... X X X X Extracts X X X X X X X X Extracts X X X X
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