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TMI Blog1978 (8) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... n the assessment, the assessee had claimed that under r. 2 of the Second Schedule to the said Act its capital should be diminished by the cost of its assets, the income from which was excluded from its total income in computing its chargeable profits, less two funds, being a provision for taxation of Rs. 31,78,000 and proposed dividend being Rs. 15,90,000. The ITO did not accept the contentions of the assessee and computed the capital without taking into account the said funds. Being aggrieved by the order of the ITO the assessee preferred an appeal. It was contended before the AAC that the provision for taxation and the proposed dividend should be deducted under r. 2 of the Second Schedule to the Act. The AAC took note of a decision of the Tribunal in respect of an earlier assessment and held that the provision for taxation and the proposed dividend were reserves and could not be deducted in computing the capital under the First Schedule, but he held that the dividend proposed to be distributed by the assessee was a surplus and this had to be deducted from the investments in working out the capital. The appeal of the assessee was partly allowed. Being still aggrieved the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Act, 1964? 3. If the answer to question No. 2 is in the negative whether the company is entitled to the deduction of provision for taxation from its cost of investment in terms of clause (ii) of rule 2 of the Second Schedule of the Companies (Profits) Surtax Act, 1964 ? Mr. K. Ray, learned counsel for the assessee, has contended at the hearing that so far as question No.1 is concerned it was covered by decision of this court in Duncan Brothers and Co. Ltd. v. CIT [1978] 111 ITR 885, where it was held that a provision for taxation was not a reserve as to, form part of the capital of a company under r. 1 of the Second Schedule to the Super Profits Tax Act, 1963. Mr. Ray conceded that following the same it must be held that a provision for taxation was also not a reserve within the meaning of the I Companies (Profits) Surtax Act, 1964, and, therefore, the first question had to be answered in the affirmative and in favour of the revenue. On question No, 2, Mr. Ray submitted that the Tribunal erred in not deciding the question as to the deductibility of the amount set apart as provision for taxation from the cost of its investments under cl . (ii) of r. 2 of the Second Schedul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne in which the question is, whether the order of the court from which the appeal is brought was right on the materials which that court had before it." Ram Datta Sita Ram of Basti, In re [1947] 15 ITR 61 (All) [FB]. This was cited for the following proposition laid down by the Allahabad High Court (P. 83): " ...if the legality of an order is questioned, it is a question of law arising out of that order itself within the meaning of the first proviso to sub-section (2) of section 66 of the Act." (c) Senairam Doongarmall v. CIT [1956] 29 ITR 122, where a Division Bench of the Assam High Court held, inter alia, as follows (p. 146): "It must however be observed that the omissions complained of have exposed the orders of the Tribunal to just criticism. The orders ought to be complete and it should not be necessary in a mandamus petition or in petition under section 66(2) of the Income-tax Act to presume what happened at the hearing. If a point is argued it should be dealt with and disposed of in express terms, however weak the argument or baseless the contention. If a point raised in the ground of appeal is not pressed at the hearing, the fact itself should be stated. The Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a duty to decide all questions of fact and law raised in the appeal before it: for that purpose it must consider whether on the materials relied upon by the assessee his plea is made out." (h) CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710 (SC). The facts in this case were that the assessee carried on business of manufacture and sale of cotton yarn. In the relevant assessment year, the assessee had spent certain sums for the introduction of a new system in its plant and claimed development rebate for the introduction thereof. The ITO disallowed the claim on the ground that the introduction did not involve the installation of new machinery. This order was confirmed by the AAC. Before the Tribunal, the assessee, besides submitting its claim for development rebate, also urged that the amount laid out for the introduction of the new system was, in any event, allowable expenditure under s. 10(2)(v) of the Indian I.T. Act, 1922. The Tribunal accepted such contention and held that the amount so spent was admissible as an allowance under s. 10(2)(v). A question thereafter arose whether the Tribunal had jurisdiction to allow the claim under s. 10(2)(v). In a final appeal, the Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion whether a notice under section 34 issued by the Income-tax Officer on March 2, 1957, was incompetent did not arise out of the order of the Tribunal. It is clear from the statement of the case (vide paragraph 7) that Karuppan Chettiar had submitted before the Appellate Assistant Commissioner that section 34(1)(a) was inapplicable since the returns made under section 22(3) had not been disposed of . Before the Tribunal also that contention was raised (vide paragraph 9 of the statement of case). The question was raised before the Tribunal. Even if it was not expressly dealt with by the Tribunal, it still arose out of the order of the Tribunal: Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd. [1961] 42 ITR 589 (SC). (b) Thakur Sukhpal Singh v. Thakur Kalyan Singh, AIR 1963 SC. 146. This decision was cited for the following observations of the Supreme Court (pp. 148-149): " It is urged that the judgment of the appellate court has to state the points for determination, the decision thereon and the reasons for the decision, and these the appellate court cannot do till it has gone through the record and considered the entire matter on record including the judgment u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edule to the Companies (Profits) Surtax Act, 1964, and, therefore, could not be taken into account for the purpose of the diminution or the reduction of capital under that rule. It was sought to be argued that a fund as contemplated under the said rule bad to be free fund available for any purpose and not earmarked for a particular purpose. Such contention was negatived in that case and it was held that a provision for taxation constituted a fund within the meaning of that rule. Mr. Roy also brought to our notice a circular, being circular No. I.P. (XV-5) of 1968, dated 23rd January, 1968, which, inter alia, provides as follows: " Treatment of the amount standing to the credit of 'Reserve for unexpired risks'. Attention is invited to the provisions of the Second Schedule to the Companies (Profits) Surtax Act, 1964, which lay down the rules for computing the capital employed by a company for the purposes of the said Act ...... A question has been raised whether the amount standing to the credit of the 'reserve for unexpired risks' in the balance-sheet of a general insurance company should be regarded as a fund, surplus or reserve within the meaning of cl. (ii) of rule 2 of the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said form there is a marginal note as follows : " The Word 'fund' in relation to any 'Reserve' should be used only where such reserve is specifically represented by earmarked investments." Mr. Sengupta also drew our attention to " Dictionary for Accountants 4th Edn., by Eric L. Kohler, pp. 204 to 208, which reads as follows: "Fund. 1. An asset or group of assets within any organization, separated physically or in the account; or both from other assets and limited to specific uses. Examples: a petty cash or working fund; replacement and renewal fund; an accident fund; a contingent fund; pension fund. 2. Cash, securities, or other assets placed in the hands of a trustee, principal or income or both being expended in accordance with the terms of a formal agreement. Examples: a trust fund created by a will; an endowment fund; a sinking fund. 3. (government accounting) A self-balancing group of accounts-asset, liability, revenue and expense-relating to specified sources and uses of capital and revenue. 4. pl. Current assets less current liabilities (on an accrual basis): working capital; a term used in flow statements. 5. pl. = cash. v.t. 1. To convert currently matur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he profits for the year in question and dividends paid and proposed must then be deducted to disclose the funds which have been ploughed back, or retained in the business, as opposed to 'external' sources of finance, such as funds arising from the issue of shares or debentures." On the facts and records in the present reference, it appears to us that the controversy in the proceedings below up to the Tribunal, related to the computation of the capital of the assessee under the Companies (Profits) Surtax Act, 1964 it was specifically contended by the assessee before the ITO and the AAC that the amounts set apart by it for the purposes of the proposed dividend and the provision for taxation should be taken into account and deducted from the cost of its investments under cl. (ii) of r. 2 of the Second Schedule of the Act so that there is a lesser reduction in its capital. This contention has been duly recorded by the ITO and the AAC. Before the Tribunal a further point was raised, namely, that the amount set apart for the provision for taxation was, in any event, a reserve and should be included in the capital to start with. This contention has been negatived by the Tribunal. But th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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