1. This reference is at the instance of the assessee-company under Section 18 of the C.(P.)S.T. Act, 1964, read with Section 256(1) of the I.T. Act, 1961.
2. The following questions have been referred :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Income-tax Officer had jurisdiction to rectify the assessment under Section 13 of the Companies (Profits) Surtax Act, 1964 ,
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the depreciation provided in the accounts of the company in excess of the amount allowed as a deduction in the computation of its income for purposes of the Income-tax Act, 1961, was not a reserve for the purposes of Surtax Act ?'
3. The reference relates to the assessment years 1964-65, 1965-66 and 1966-67. The assessee filed returns for each of these years. For instance, for the assessment year 1964-65, in the return filed on 1st February, 1965, the capital computation was shown as Rs. 63,35,781. Later, a revised return was filed on 27th September, 1968, showing the capital at Rs. 64,94,868. In the statement accompanying this revised return, the difference was described as excess of depreciation reserve over the depreciation allowed/allowable in the assessment. The ITO took the written down value of the assets as on 1st October, 1962, as Rs. 43,87,327. The book value, after allowing depreciation, was shown to be Rs. 42,28,239. There was thus a difference of Rs. 1,59,087. This difference was claimed as if there was a reserve eligible for inclusion in the capital computation under the Act. The ITO proceeded on the basis of the correctness of the revised capital working and completed the assessment accordingly.
4. Similarly, for the assessment year 1965-66, in the original return filed on the 18th November, 1965, the capital was shown to be Rs. 1,11,65,563. In the revised return, the capital was shown to be Rs. 1,12,65,058, resulting in a difference of Rs. 94,495, between the original return and the revised return. This difference represented the difference between the written down value in the income-tax records and the book value, after allowance for depreciation. Similarly, for the assessment year 1966-67, in the original return filed qn October 29, 1966, the capital was shown to be Rs. 1,25,25,322. But in the revised return, the capital was claimed to be Rs. 1,26,25,580. The difference of Rs. 1,00,258 arose in the same manner as in the previous year and was claimed as a reserve. The ITO, in these years, also acted on the basis of the revised returns and completed the assessments accordingly.
5. Subsequently, the ITO realised that there was an error in the assessment which required to be rectified. He, therefore, issued appropriate notices under Section 13(1) of the Act. The assessee filed its objections, and, overruling them, the ITO rectified the assessments. The resultant figure in the revised assessment represented the capital computation shown in the original return. The assessee appealed to the AAC who found that the difference between the written down value in the income-tax records and the value in accordance with the assessee's books was not reflected in the balance-sheet as any reserve and he, therefore, confirmed the orders of rectification.
6. The assessee appealed for all these years before the Tribunal and two contentions were taken before it. One was that there was no apparent error which could be rectified under Section 13 and the other was that there was no error at all in the assessment as completed. Both these contentions were rejected by the Tribunal and the matter is under reference before us.
7. The AAC as well as the Tribunal have found that the difference between the written down value of the assets after allowance of the statutory depreciation, and the book value of the assets after deducting the depreciation shown by the assessees in its own books, had not been created as a reserve at any stage. The C. (P.) S.T. Act is designed to levy tax on the 'chargeable profits' after deducting what is called the 'statutory deductions'. The 'chargeable profits' is the sum arrived at in the corresponding income-tax assessment, but adjusted in accordance with the provisions of the First Schedule to the Act. The 'statutory deduction' is the amount equal to ten per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule to the Act, or the amount of rupees two hundred thousand, whichever is greater. In the Second Schedule to the Act are to be found the rules for computing the capital of a company for the purpose of surtax. Subject to the other provisions contained in the Schedule, the capital of a company is the aggregateof the amounts, as on the first day of the previous year relevant to the assessment year, of
i. paid up capital ;
ii. reserves, if any, created for allowance of development rebate ;
iii. other reserves as reduced by the amounts credited to such reserve as have been allowed as deductions in computing the income of the company for the purposes of the Indian I.T. Act, 1922, or the I.T. Act, 1961.
8. It is unnecessary to refer to the rest of the rules in the Second Schedule.
9. This is a case where the question is whether there is any reserve, and if there is any such reserve, whether any amounts credited to such reserve have been allowed as deductions in computing the income of the company for the purposes of the I.T. Act, 1961. One of the items of deduction for the purposes of the I.T. Act is depreciation. It is common knowledge that the depreciation is allowed under the I.T. Act under what is called the 'written down value' method, as contrasted with the straight line method, sometimes adopted in commercial accounting.
10. The company is free to provide depreciation in its books in accordance with its own conception of how the assets depreciated. In the present case, the assessee considered that its assets depreciated at a figure smaller than what was allowed under the I.T. Act. It is this difference, which the assessee claims as reserve.
11. As regards the first question, the point to be considered is whether it is an apparent error, which the ITO sought to rectify in this case. The assessee itself, as seen already, has filed a revised return. Section 5, Sub-section (3) of the Act, enables an assessee which has filed a return, to file a revised return, if it discovers any omission or wrong statement therein. In the present case, only on the basis that there was some omission or wrong statement; the assessee-company has filed a revised return. This omission or wrong statement would be only on the basis of the books. In a way, with reference to the facts in this case, it can be stated that when the assessee filed the revised return, it did so on the footing that there was an error, which was apparent being inconsistent with its books and which had to be rectified. Therefore, if the assessee could at the time of filing the revised return consider that there was some apparent error, then it cannot be stated with any justification that when the ITO proceeded to consider that the original return, and not the revised return was the proper return, the error is not an apparent error. What is sauce for the goose is also sauce for the gander.
12. In the balance-sheet, there is no reserve with reference to the difference between the written down value under the I.T. Act and the bookvalue of the assets. The balance-sheet has been filed along with the return filed by the assessee. The error discovered by the ITO is an apparent error, apparent from the assessee's own balance-sheet, and, therefore, there could be no valid objection to Section 13(1) being invoked on the facts here. The first question has thus to be, and is, answered in the affirmative and in favour of the revenue.
13. As regards the second question, the finding of the AAC and the Tribunal that there was no reserve created by the assessee in its books, clearly established that the assessee was not entitled to the difference in capital computation arising as a result of the revised return filed by the assessee. Rule 1(iii) contemplates 'other reserves' being adjusted in the manner provided therein. The expression 'other reserves' would postulate the existence of the reserves in the balance-sheet. A reserve is what is set apart out of profits ascertained. In the absence of any specific reservation for this purpose out of the ascertained profits, and in the absence of the general reserve including any amount relevant for this purpose, the assessee would not be entitled to any addition with respect to the amount in question.
14. Even if the assessee can be said to have created a reserve with reference to the difference in question, the rule itself contemplates the deduction of the amount representing the allowance for depreciation actually granted in the assessment, being taken out of the said reserve. The result will be, the assessee would not get the benefit of the difference in any event.
15. The learned counsel for the assessee drew our attention to a decision in ITO v. India Foils Ltd. : 91ITR72(Cal) . In that case, a foreign company transferred all its properties to an Indian company, which was its hundred per cent. subsidiary. The Indian company closed its books and submitted its returns for the assessment year 1962-63. In this return, the Indian company calculated the depreciation allowable on the assets on the same basis as the predecessor company had claimed in its income-tax assessment returns for the previous years. In other words, the Indian company adopted the written down value in accordance with the income-tax records of the foreign company in order to arrive at the depreciation for the assessment year 1962-63. Subsequently, along with a letter, the auditors of the Indian company furnished an amended statement of depreciation on the basis of the actual cost of fixed assets to the assessee. This cost was based on the shares issued to the foreign company for the assets taken over. The ITO accepted the revised working and determined the depreciation accordingly. For three subsequent years, different ITOs accepted the same position. However, a successor-ITO issued a notice under Section 154/155 of the I.T. Act, 1961, in order to rectify the error in theassessment. On receipt of this notice, the assessee filed a writ petition challenging the validity of the said notice. The Calcutta High Court held that when the valuation was accepted not only by one ITO, but by three ITOs, it could not be said that it was a mistake apparent on the face of the record. It was held that a mistake should be an obvious, clear and patent one, and that one which was not so apparent, as in the case on hand, and which required a long and elaborate reasoning would not be a mistake apparent from the record. The position in the present case is wholly different. On the basis of some alleged mistake in its own return, the assessee filed a revised return. The ITO accepted the revised return; but later on found that the original return represented the correct position. In other words, he found that the assessee had not committed any error in the original return, which could be revised by a revised return. In these circumstances, he set in motion the rectification proceedings. The present case has absolutely no analogy to the case decided by the Calcutta High Court, so as to apply the said decision of the Calcutta High Court to the facts of this case.
16. The learned counsel appearing for the Commissioner drew our attention to two other decisions. The first is of the Mysore High Court in Mysore Electrical Industries Ltd. v. Commr. of Surtax : 80ITR571(KAR) . In that case, the question was whether a sum of Rs. 1,03,162, which represented the difference between the depreciation computed by the assessee on its assets and the depreciation as allowed by the I.T. authorities, could be considered as a reserve. The balance-sheet of the assessee in that case also did not contain any such item as a reserve. The High Court was in agreement with the view expressed by the Tribunal that there was no reserve, which had to be taken into account for the purpose of capital computation. There is no discussion in the said judgment, but the matter appears to be too patent to warrant a discussion. We adopt the same view here.
17. The Bombay High Court in C1T v. Zenith Steel Pipes Ltd. : 112ITR215(Bom) , was concerned with a case where the assessee provided a sum of Rs. 4,86,298 as and by way of depreciation in its books and out of the surplus profits for the said year, transferred a sum of Rs. 7,50,000 to the general reserve. The ITO computed the depreciation at Rs. 10,54,410. Thus, for this year, a sum of Rs. 5,68,112 was allowed as depreciation in addition to the sum provided in the books of the company. Similar difference in the assessment for another year was also before that High Court. The question was whether this amount of Rs. 5,68,112 was liable to be deducted, out of the 'other reserves', i.e., the general reserve provided in the books of the company. The High Court held that this amount had to be deducted, because there was to that extent an allowance of depreciationand Rule 1(iii) contemplated the deduction of such an amount. The principle of this decision would also show that even if there had been any crediting of any amount representing the difference between the income-tax written down value and the book value, there would have to be a deduction corresponding to the difference between the depreciation in the income-tax assessment and the book figures. Thus, considered from any angle, the assessee could not have got the allowance on the basis of the revised return.
18. The second question as framed does not appear to be to bring out the real controversy. We consider it necessary to reframe the question as follows :
'Whether, on the facts and in the circumstances of the case, the difference between the depreciation allowed in the income-tax assessment and the depreciation provided in the books can be taken to be a reserve for the purposes of the Surtax Act ?'
19. So, the second question is also answered in the negative and in favour of the revenue. In the circumstances of the case, there will be no order as to costs.