Decided on September 12,1994



S. Bandyopadhyay, Accountant Member - (1.) SINCE the issue involved in these two surtax appeals filed by the assessee for the two successive years is common, the appeals have been consolidated and a combined order is being passed for the sake of convenience.
(2.) The appeals pertain to Companies (Profits) Surtax Act, 1964 and the issue involved is computation of "capital and reserves" for the purpose of determination of the standard deduction allowable. There was a search in the premises of the assessee-company which is engaged in the business of manufacture of iron and steel products. After the search, a settlement was arrived at by the assessee-company with the CIT in accordance with which the assessee offered to tax the excess amounts claimed towards burning loss. The total amount of income thus offered was Rs. 1,46,75, i 30 spread over a long period covering the assessment years 1976-77 to 1984-85. It is the contention of the assessee that this income was represented by certain assets outside its books, which were found out during the search. In the surtax assessments under consideration, the assessee claimed that the cumulative figures of extra profit in this way disclosed and offered by it for taxation, as at the beginning of the relevant previous years minus cumulative tax thereon, were to be treated as "reserve and surplus" for the purpose of computation of capital base. It appears that in the assessments, the Assessing Officer did not accept this claim of the assessee although no discussion in this regard seems to have been made by him. In the appeals filed before him, the CIT(A) found that the assessee had surrendered for taxation an amount of Rs. 7,86,610 for the assessment year 1980-81 and Rs. 21,94,210 for the assessment year 1981-82 on account of excess burning loss. He stated that the concealed income of the assessee which had been surrendered in the settlement arrived at with the Department was not reflected either in the books or in the balance sheets of the assessee for either of the two years. He stated that in fact, the surrendered income had been claimed as expenditure by way of excess burning loss during these two years. By relying on the decision of the Mysore High Court in the case of Mysore Electrical Industries Ltd. v. Commissioner of Surtax [1971] 80 ITR 571 in which the importance of presence of entries in the books/balance-sheet of a company for claiming an amount as "reserve" had been highlighted, the CIT(A) negatived the contention of the assessee about inclusion of the amounts within "reserve". The CIT(A) also took into consideration the discussion made by the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 32 ITR 559 in which the parameters for considering whether concerned amounts would constitute "reserve" had been discussed. The CIT(A) finally came to the conclusion that it was clear from the facts of the case that the assessee's contention was not to be accounted inasmuch as none of the conditions laid down by the Mysore High Court and the Supreme Court for inclusion of certain amounts within "reserve" was satisfied. Finally, the CIT(A) rejected the claim of the assessee.
(3.) A full fledged representation was made before us by Shri Venkatesan, learned counsel for the assessee on 2-8-1994. He strongly argued that since the amounts under consideration represented the secret profits of the assessee-company, they were required to be included within "reserves" for the purpose of computation of the capital base of the company in connection with its surtax assessments. He argued that according to the balance sheet, the entire net profits for these two years had been transferred to general reserve and hence it would follow that the secret profits also should be deemed to have been transferred to the general reserve. He furthermore stated that the amounts under consideration were kept by the company itself in the form of stock. He also relied on the following decisions of different courts in support of his contention: (i) CIT v. Century Spg. & Mfg. Co. Ltd. [1953] 24 ITR 499 (SC) (ii) CIT v. SaranEngg. Co. Ltd. [1986] 161 ITR 741 (SC) (iii) Siemens India Ltd. v. CIT [1994] 206 ITR 83 (Bom.). In reply to the above arguments of Shri Venkatesan, the learned DR Shri Puniha also argued very vehemently to which we shall advert to below in the appropriate places. The proceedings were adjourned to 16-8-1994 merely for the purpose of allowing Shri Venkatesan an opportunity to submit further arguments, if any and also to refer to citations, if any, in support of his claim that even secret profits kept outside books may also be considered as "reserve" for the purpose of surtax assessment.;

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