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TMI Blog1983 (8) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... for repayment of loans are to be treated as reserves created by the company and that they are to be taken into account for computing the capital of the company for the purpose of super profits tax for the assessment year 1963-64 ? 2. Assessment year 1966-67:- Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the various amounts shown in the balance-sheet of the assessee-company as reserves for repayment of loans are to be treated as reserves created by the company and that they are to be taken into account for computing the capital of the company for the purpose of surtax for the assessment year 1966-67 ? 3. Assessment year 1970-71 :-Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the various amounts shown in the balance-sheet of the assessee-company as reserves for repayment of loans are to be treated as reserves Created by the company and that they are to be taken into account for computing the capital of the company for the purpose of surtax for the assessment year 1970-71 ?" The assessee is a public limited company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 63-64 and for computing the capital of the company for the purpose of the Companies (Profits) Surtax Act, 1964, for the years 1966-67 and 1970-71. Appeals were filed by the assessee before the AAC for all the three years. In the appeals for the years 1963-64 and 1966-67 (annexures B-1 and B-2), the AAC agreed with the assessee's contention and held that the reserve appropriated out of the profits and transferred to the reserve called " Reserve for IFC loan repayment will be treated as part of the reserve and such amounts qualified to be treated as part of the capital for the purpose of "standard deduction ". But for the assessment year 1970-71, the AAC took a different view. He found that the reserve actually represented current liabilities as envisaged in the balance-sheet to be prepared according to rules of the Companies Act and to the extent the amount was earmarked for repayment, it cannot be treated as a reserve. It was only a mere provision and so cannot be taken into account for the purpose of standard deduction (annexure Ext. B-3). The Department filed second appeals before the Appellate Tribunal for the years 1963-64 and 1966-67 and the assessee filed a second appeal befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and gains, the aforesaid increase or decrease, as the case may be, shall be calculated with reference to the length of the previous year of the longest duration. 4. Charge of tax-subject to the provisions contained in this Act, there shall be charged on every company for every assessment year commencing on and from the first day of April, 1964, a tax (in this Act 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 Second Schedule-subject to the other provisions contained in this Schedule, the capital of a company shall be the aggregate of the amounts, as on the first day of the previous year relevant to the assessment year, of ......... (iii) its other reserves as reduced by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or the Income-tax Act, 1961 (43 of 1961). " From the aforesaid provisions, it is clear that every company shall be charged a tax in respect of so muc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , for the year ended 31-3-57, Rs. 2 lakhs was set apart. It was increased and from 31-3-57 included the following amounts : Rs. Amount set apart in the year ended 31-3-57 2 lakhs do. 31-3-58 2 lakhs do. 31-3-59 2 lakhs do. 31-3-60 do. 31-3-61 1 1/2 lakhs do. 31-3-62 2 1/2 lakhs ----------------------- Total : 10 lakhs ----------------------- We have already stated that the assessee had to repay these amounts by annual instalments. The first instalment for repayment fell in 1960 (January 1, 1961). Each year they had repaid Rs. 2 1/2 lakhs with the result Rs. 71/2 lakhs had been repaid by March 31, 1962. These repayments have not been made out of the funds set apart in the reserve account. The funds have not been touched at all for this purpose. On the other hand, the AAC had found, and it is also supported by records, that these funds were actually used for some other purpose in the year 1967, i.e., for the issue of bonus shares. From these facts we draw an inference that although the reserve is ostensibly for the repayment of loan to I.F.C.I, in fact it is not. As facts show, it came into existence even before the loan was negotiated, the repayment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was earmarked for repayment of the loan and that it was only Provision and cannot be a general reserve and so, different from a general reserve. For one thing , the Appellate Tribunal has found that the reserve, in the instant case, styled as " Reserve for repayment of loan from I.F.C.I." appeared even before the loan was taken from the Corporation, and although it was ostensibly so named, in fact, it was not for the repayment of the loan from I.F.C.I. and that the reserve had nothing to do with the repayment of the loan. The Appellate Tribunal also held that the reserve created in this case out of the "taxed profits", by an appropriation approved, is in no way different from a general reserve. These findings of fact are not assailed by the Revenue and it is not open to the Revenue in these proceedings to contend that the reserve created in the instant case is not a general reserve or in any way different from a general reserve. Moreover, the Appellate Tribunal adverted to the test as to what constitutes " a reserve " for the purpose of computation of capital under the Companies (Profits) Surtax Act, 1964, Schedule II, rule 1, as laid down by this court in the decision in CIT v. Pe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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