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TMI Blog1984 (6) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... x: " 1. Whether, on the facts and in the circumstances of the case, r. 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, is applicable to deduction under s. 80 or to income exempt under section 10 of the Act only for computing the capital and ascertaining the standard deduction ?" Question at the instance of the assessee " 2. Whether, on the facts and in the circumstances of the case, the development rebate reserve transferred to the general reserve at the end of the statutory period is to be excluded from 'other reserves' under rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, for the purpose of computation of capital base ? " Counsel for both sides represented that the answer to the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a deduction in computing the total income of the assessee for the relevant assessment years and, consequently, it fell to be excluded by reason of r. 1(iii) of the Second Schedule to the Surtax Act. In this view, the ITO excluded the above mentioned sums while computing the capital for the purpose of the Surtax Act. The assessee appealed to the AAC who allowed the appeal on the short ground that the development rebate reserve forming part of the general reserve was not allowed as a deduction in computing the total income. According to the AAC, what was allowed in the computation of total income was development rebate under s. 33 of the Act and the development rebate reserve is entirely distinct from the statutory allowance given to the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion of the Income-tax Appellate Tribunal had also been drawn to this aspect and the Tribunal had, in paragraph 5 of its order, extracted the relevant portion of the assessment order of the ITO which contained the above contention. Sri Parvatha Rao urges that notwithstanding the above contention, the Tribunal proceeded on the mistaken view that the development rebate reserve was transferred by the assessee to the general reserve account straightaway and on that basis reached the conclusion that inasmuch as the development rebate reserve which formed part of the general reserve was allowed as a deduction in computing the total income of the assessee, it could not be treated as a reserve for the purpose of computing the capital employed in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he development rebate reserve for each of the three years was not transferred directly to the general reserve account, but to the profit and loss appropriation account. The assessee has been specifically contending throughout that the transfer was not directly to the general reserve account. Once the development rebate reserve is transferred to the profit and loss appropriation account, it follows that it formed part of the profit available to the assessee for the purpose of making various allocations towards reserves and payment of dividends. For each of the three years, the assessee made different allocations towards reserves including general reserve and the allocations so made, as is apparent from the profit and loss appropriation accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt included the balances transferred directly from development rebate reserve account. In view of the facts which we have set out above, it is clear that no part of the development rebate reserve was included in the general reserve account and, consequently, the Tribunal was in error in holding that in computing the capital under r. 1 (iii) of the Second Schedule to the Surtax Act, the three sums, namely, Rs. 23,37,630, Rs. 50,87,630 and Rs. 55,87,630, respectively, for the surtax assessment years 1972-73, 1973-74 and 1974-75 should be excluded. In our opinion, the above sums are not liable to be excluded. While scrutinising the profit and loss accounts and the balance-sheets placed before us by the assessee, we found that according to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly conceded at the end that he will have no objection to direction to the Tribunal to make appropriate adjustments on the above account in finally determining the capital while passing an order conformably to the judgment of this court. In view of the acceptance of the learned counsel for directing appropriate adjustments, we direct the Income-tax Appellate Tribunal to look into this matter and arrive at the appropriate sum to be reduced from the balance to the credit of the general reserve account following the judgment of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT[1981] 132 ITR 559. It may perhaps be relevant to mention that so far as the assessment year 1972-73 is concerned, no adjustment will be called for on this account ..... X X X X Extracts X X X X X X X X Extracts X X X X
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