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TMI Blog1986 (2) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... June, 1974, informed the assessee that he proposed to revise the assessments of surtax for the said assessment years 1969-70 and 1970-71 under section 16 of the Surtax Act. In its reply to the said letter of the Commissioner, dated June 26, 1974, the assessee requested the Commissioner to drop the proceedings under section 16 and also made representations on merits supporting the assessments already made. The Commissioner of Income-tax passed a consolidated order on July 25, 1974, under section 16 of the Surtax Act rejecting the contentions of the assessee. He held that in the case of the assessee, since its income by way of royalty, etc., received from foreign companies having been deducted in computing the assessee's total income under the Income-tax Act, rule 4 of the Second Schedule to the Surtax Act would apply in the case of the assessee in the computation of its capital for the purpose of surtax. He also held that the reserve for doubtful debts and advances for the assessment years 1969-70 and 1970-71 should not be regarded as a reserve for computation of capital and for the assessment year 1969-70, the tax equalisation reserve should be treated as a Provision and not as r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cotton Mills Ltd. v. CWT [1966] 59 ITR 767, held that the tax equalisation reserve should also be included in the computation of the capital base. On an application of the Revenue under section 256(1) of the Income-tax Act, 1961, the Tribunal has referred the following questions as questions of law arising out of its order for the opinion of this court Assessment years 1969-70 and 1970-71 : " Whether, on the facts and in the circumstances of the case, and on a correct interpretation of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the Tribunal was correct in holding that diminution of the capital, in proportion to the deduction allowed under section 80-0 of the Income-tax Act, 1961, in computing the total income of the assessee under the latter Act, was not permissible ? " Assessment years 1969-70, 1970-71, 1971-72 and 1972-73: " Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that amount set apart as " Reserve for Doubtful Debts and Advances " and " Tax Equalisation Reserve were "reserves " within the meaning of rule I of the Second Schedule to the Companies (Profits) Surtax Act, 1964, and should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital ; (b) Upper Ganges Sugar Mills Ltd. v. CIT [1981] 129 ITR 438 (Cal): In this case, a Division Bench of this court considered whether adjustment made in respect of excess depreciation charged in earlier years could not be treated as part of the capital for the purpose of determining the statutory deduction under section 2(8) of the Companies (Profits) Surtax Act, 1964. It was found that the assessee had been claiming depreciation following the written down value method up to an assessment year but in the assessment year in question, the assessee changed its method and adopted the straightline method and the excess depreciation was adjusted in the manner as computed under section 205(2)(b) of the Companies Act, 1956. The Income-tax Officer had included the excess depreciation adjusted in the general reserve. The Commissioner reversed the decision of the Income-tax Officer and directed that the said adjustment should be excluded from the computation of capital. On an appeal, the Tribunal held that a reserve brought into existence by creating or increasing by revaluation or otherwise of its book assets should not be considered to be capital for computation under rule 2 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ...... (at p. 581) (a) a mass of undistributed profits cannot automatically become a reserve and that somebody possessing the requisite authority must clearly indicate that a portion thereof has been earmarked or separated from the general mass of profits with a view to constituting it either a general reserve or a specific reserve, (b) the surrounding circumstances should make it apparent that the amount so earmarked or set apart is in fact a reserve to be utilised in future for a specific purpose and on a specific occasion." In the instant case, it has been found by the Tribunal that when debt or advance is more than six months old, a percentage of the same is set apart out of the current year's profit as a reserve. When the recovery is extremely doubtful, 100% of the debt is debited to the profit and loss account. The Tribunal found that the amounts have in earlier years been treated as " reserve " for the purpose of the Super Profits Tax Act. So far as the Tax Equalisation Reserve was concerned, it was found by the Appellate Assistant Commissioner that the said reserve was created for the first time in the accounts of the assessee for the year ending on June 30, 1966. Addition ..... X X X X Extracts X X X X X X X X Extracts X X X X
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