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Commissioner of Income-tax, Tamil Nadu-ii, Madras Vs. English Electric Co. of India Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 751 of 1979, (Referred Case No. 432 of 1979)
Judge
Reported in(1985)44CTR(Mad)219; [1985]151ITR116(Mad)
ActsCompanies (Profit) Surtax Act, 1964
AppellantCommissioner of Income-tax, Tamil Nadu-ii, Madras
RespondentEnglish Electric Co. of India Ltd.
Appellant AdvocateNalini Chidambaram, Adv.
Respondent AdvocateM. Uttama Reddi, Adv.
Cases ReferredMysore Electrical Industries Ltd. v. Commissioner of Surtax
Excerpt:
.....difference between written down value of assets as per income tax records and books of assessee should be treated as reserve for purpose of capital computation for purpose of surtax - assets have been depreciated at higher figure than allowed under act - excess depreciation allowed had to be treated as reserve. - - on the facts of this case, we are inclined to agree with the order of the tribunal that the above decision of the supreme court clearly applies......been accepted by the tribunal. 8. before us, the learned counsel for the revenue contends that the excess depreciation which is sought to be included in the computation of capital in this case has not actually been reflected in the balance-sheet and, therefore, it can only be treated as a secret reserve and a secret reserve cannot be taken into account for the purpose of the computation of capital under the surtax act. it is also pointed out by the revenue that in the assessee's own case for an earlier year, this court has held in english electric company of india ltd. v. cit : [1981]132itr251(mad) , that such an excess provision cannot be taken into account for the computation of capital. the revenue also relies on the decision of the mysore high court in mysore electrical industries.....
Judgment:

Ramanujam, J.

1. The assessee is a company and for the assessment year 1971-72, it filed a return declaring chargeable profits at Rs. 10,04,463. However, the assessment was made on a net chargeable profit of Rs. 16,39,345. The ITO found that a sum of Rs. 1 lakh shown as development and contingency reserve was not a reserve, but was only an appropriation in order to meet a future specific liability, the amount of which was not ascertainable. On appeal, the AAC held that no specific liability has been covered by Rs. 1 lakh and, therefore, the reserve could only be a general reserve and as such the exclusion of Rs. 1 lakh from the capital computation was not justified.

2. The assessee had also claimed before the ITO that the difference between the income-tax written down value and the written down value as per books of the assets as depreciation reserve should be included in the capital computation for surtax purposes. Holding that this reserve is not reflected in the balance-sheet of the assessee, the ITO excluded the amount. On appeal, the AAC, relying on the decision of this court in United Nilgiri Tea Estates Company Ltd. v. CIT : [1974]96ITR734(Mad) , upheld the assessee's claim and included the amount in the capital computation.

3. On appeal by the Revenue, in respect of both the above items, the Income-tax Appellate Tribunal held that the development and contingency reserve of Rs. 1 lakh should be taken into account in the capital computation, agreeing with the view taken by the AAC. It also held that the difference between the written down value of the assets as per the income-tax records and the value as per the books of the assessee representing depreciation reserve should be included in the computation of capital for the purpose of levy of surtax. Aggrieved by the said decision of the Tribunal, the Revenue has sought and obtained a reference to this court on the following two questions :

'(1) Whether, on the facts and in the circumstances of the case, the development and contingency reserve of Rs. 1 lakh should be taken into account while computing the capital for the purpose of surtax

(2) Whether, on the facts and in the circumstances of the case, the difference between the written down value of the assets as per income-tax records and the books of the assessee should be treated as a reverse for the purpose of capital computation for surtax purposes ?'

4. Thus, the first question relates to the inclusion of the development and contingency reserve of Rs. 1 lakh in the capital computation for purposes of surtax. According to the ITO, the said sum of Rs. 1 lakh shown as development and contingency reserve is not a reserve at all, but only an appropriation set apart to meet a specific future liability, the amount of which was not presently ascertainable. The AAC, however, took the view that it is a free general reserve and there was no future specific liability against which the said sum could be adjusted or appropriated and, therefore, the exclusion of Rs. 1 lakh from the capital computation by the ITO was not warranted. The Tribunal drew a distinction between a provision and a reserve and took the view that the sum of Rs. 1 lakh shown as development and contingency reserve had to be taken as a general reserve and included in the capital computation for surtax purposes.

5. This view taken by the Tribunal finds support from the decision in Vazir Sultan Tobacco Co. Ltd. v. CIT : [1981]132ITR559(SC) . That case also related to the question of computation of capital for purposes of surtax. The Supreme Court, after pointing out the difference between 'provision' and 'reserve', expressed the view that the expression 'reserve' has to be understood in its popular sense, that is to say, the sense or meaning that is attributed to it by persons interested in or dealing with companies and in that sense the expression 'reverse' is an appropriation of profits, the asset or assets by which it is represented being retained to form part of the capital employed in the business. According to their Lordships of the Supreme Court, the appropriation of profits for a known and existing liability, the quantification whereof has to be done later, will amount to a provision and where an appropriation has been made with a view to meet a future contingency which is reasonably anticipated it will be a reserve. It is true, the true nature and character of the appropriation must be determined with reference to the substance of the matter and the purpose for which the appropriation has been made, such intention and purpose being gathered from the surrounding circumstances.

6. In this case, the ITO has found that the assessee's claim for inclusion of another Rs. 12 lakhs being a general reserves is includible in the computation of capital but it has chosen to exclude the sum of Rs. 1 lakh which is shown as a development and contingency reserve. According to the Tribunal, Rs. 1 lakh shown in the development and contingency reserve bears the same nature and character as Rs. 12 lakhs shown in the general reserve. On the facts of this case, we are inclined to agree with the order of the Tribunal that the above decision of the Supreme Court clearly applies. The first question is, therefore, answered in the affirmative and against the Revenue.

7. Coming to the second question, as already stated, the assessee's claim is that the difference between the income-tax written down value and the written down value as per the books of assets amounting to Rs. 1,69,317 should be included in the capital computation for surtax purposes. Though this claim was rejected by the ITO, the same was upheld by the AAC following the decision in United Nilgiri Tea Estates Company Limited v. CIT : [1974]96ITR734(Mad) . In that case, the amount at credit of the depreciation reserve account in excess of the amount allowed for income-tax purposes was held to stand on the same footing as excess provision for development rebate and, therefore, it will have to be treated as a reverse for the purpose of the Super Profits Tax Act, 1963. The view of the AAC has been accepted by the Tribunal.

8. Before us, the learned counsel for the Revenue contends that the excess depreciation which is sought to be included in the computation of capital in this case has not actually been reflected in the balance-sheet and, therefore, it can only be treated as a secret reserve and a secret reserve cannot be taken into account for the purpose of the computation of capital under the Surtax Act. It is also pointed out by the Revenue that in the assessee's own case for an earlier year, this court has held in English Electric Company of India Ltd. v. CIT : [1981]132ITR251(Mad) , that such an excess provision cannot be taken into account for the computation of capital. The Revenue also relies on the decision of the Mysore High Court in Mysore Electrical Industries Ltd. v. Commissioner of Surtax : [1971]80ITR571(KAR) , which has been referred to in English Electric Company of India Ltd. v. CIT : [1981]132ITR251(Mad) and of the Allahabad High Court in M. P. Sugar Mills Co. (P.) Ltd. v. CIT : [1979]120ITR348(All) .

9. According to the learned counsel for the assessee, however, actually the disputed amount has been shown as an excess provision in the balance-sheet and the Tribunal was in error in proceeding that it was not shown in the balance-sheet and, therefore, it was a secret reserve. He then states that the decision in English Electric Co. of India Ltd. v. CIT : [1981]132ITR251(Mad) , admittedly proceeded on a factual error and, therefore, it should be taken to have been wrongly decided. It is also pointed out that the said decision is under appeal before the Supreme Court and, therefore, this court has to decide the question independently without reference to the said decision. It is significant to note that the learned counsel for the Revenue also in a way concedes that the decision in English Electric Co. of India Ltd. v. CIT : [1981]132ITR251(Mad) , proceeds on the basis of a factual error. The learned counsel for the assessee then contends that even if the amount in question is not shown as an excess provision for depreciation in the balance-sheet of the assessee, it cannot be taken to be conclusive, for the ITO is not bound by the entries in the balance-sheet and he has to compute the capital notwithstanding the entries in the balance-sheet. The learned counsel for the assessee refers to the decisions in CIT v. Indian Leaf Tobacco Development Co. : [1981]132ITR831(Cal) and CIT v. Bank of India : [1982]136ITR218(Bom) as supporting his claim that the excess provision for depreciation has to be treated as a reverse and as such should be taken into account for the purpose of the computation of capital and submits that the decision taken in the above two cases are consistent with the view taken by this court in United Nilgiri Tea Estates Company Ltd. v. CIT : [1974]96ITR734(Mad) .

10. On a due consideration of the matter, we are of the view that the decision rendered by this court in United Nilgiri Tea Estates Company Limited v. CIT : [1974]96ITR734(Mad) , squarely applies to the facts of this case. Here the assessee has claimed depreciation in excess of the depreciation allowed by the ITO. Excess depreciation has naturally to be taken to be an excess provision for depreciation. We are not inclined to agree with the learned counsel for the Revenue that since the excess is not an appropriation out of profits, it cannot be taken as a reserve. Though the Tribunal proceeded on the basis that the excess depreciation has not been shown in the accounts as a reserve and, therefore, it should be taken to be a secret reserve and that as a secret reserve the assessee is entitled to claim its inclusion in the computation of capital, it is seen that the excess depreciation has been actually shown separately in the balance-sheet. This factual position is not seriously disputed by the Revenue. Therefore, it is unnecessary to go into the other question raised by the learned counsel for the Revenue that it is only banking companies who are enabled to have secret reserves and in the case of companies other than banking companies the secret reserves, if any, cannot be taken into account for the purpose of the computation of capital.

11. The learned counsel for the Revenue then contends that the excess provision should be taken to arise out of revaluation of the assets and, therefore, Explanation (1) of clause 2 of Schedule II to the Surtax Act will be applicable, in which case, the assessee is not entitled to take the amount in question in the computation of capital. We are of the view that the said Explanation relied on by the Revenue will not be applicable to this case because there is no question of revaluation of the assets in this case. Thus, after considering every aspect of the matter, we are of the view that the present case falls within scope of the ruling in United Nilgiri Tea Estates Company Limited v. CIT : [1974]96ITR734(Mad) . It is no doubt true, in the assessee's own case in English Electric Co. of India Ltd. v. CIT : [1981]132ITR251(Mad) , this court has taken a different view. But, as already stated, there is a factual error that has crept in the said decision and the decision is based on such a factual error. The said decision is also the subject-matter of appeal before the Supreme Court. That decision cannot, therefore, be taken as conclusive. In that case, the learned judges after holding that the company is free to provide depreciation in its books in accordance with its own conception of how the assets depreciated, proceeded to state that the assessee considered that its assets depreciated at a figure smaller than what was allowed under the I.T. Act and in such cases the difference cannot be claimed as a reserve. But both the assessee and the Revenue concede before us that the basic assumption that the assessee depreciated its assets at a figure smaller than what was allowed under the I.T. Act is not correct and that in fact the assessee had depreciated its assets at a figure higher than what was allowed under the Act. But on the factual finding in that case that there is no excess depreciation than what was allowed under the I.T. Act but there was only a deficiency, the decision in that case cannot be taken exception to. But, whereas, in this case, the assets have been depreciated at a high figure than what was allowed under the Act and thus there is in fact an excess depreciation than what was allowed under the Act, the excess depreciation has necessarily to be treated as a reserve. The same view has been taken in CIT v. Indian Leaf Tobacco Development Co. : [1981]132ITR831(Cal) by the Calcutta High Court. In that case, the amount of excess depreciation was treated as a reserve and that was held to be includible in the computation of capital. In that case, the decision of this court in United Nilgiri Tea Estates Co. Ltd. v. CIT : [1974]96ITR734(Mad) , has been referred to with approval.

12. In this view of the matter, question No. 2 is also answered in the affirmative and against the Revenue. The assessee will have its costs of this reference from the Revenue. Counsel's fee Rs. 500.


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