Ramanujam, J. - (1.) THE assessee is a public limited company. Its accounts for the year ending on 31st March, 1962, relevant for the assessment year 1962-63, were considered by the board of directors on 19th July, 1962. THE profit in that year amounted to Rs. 12,39,139. After making certain provisions towards tax, gratuity, etc., there was a balance of Rs. 5,88,365. THE board of directors recommended the following appropriations: JUDGEMENT_78_ITR92_1973Html1.htm
(2.) THIS left a balance of Rs. 9,760. The provisions made towards tax liability and actual payments of tax were as under : JUDGEMENT_78_ITR92_1973Html2.htm The provision for taxation as on March 31, 1961, was Rs. 2,91,493 as against the actual tax liability for 1961-62 of Rs. 2,85,343 leaving a surplus of Rs. 6,150. The appropriations towards gratuity were as under : JUDGEMENT_78_ITR92_1973Html3.htm In working out the capital base for the purpose of ascertaining the amount of standard deduction under the Super Profits Tax Act, 1963, the assessee included the following sums apart from the capital of Rs. 53,82,682 : JUDGEMENT_78_ITR92_1973Html4.htm The Super Profits Tax Officer considered the development rebate reserve and the general reserve as capital and rejected the claim in respect of the other items for the reason that they were merely provisions for specific liabilities and would not constitute reserves under Rule 1 of the Second Schedule to the Super Profits Tax Act, 1963. The assessee appealed to the Appellate Assistant Commissioner. He held that the sum of Rs. 1,55,174 representing the reserve for repairs and renewals should be regarded as reserve and included it in the computation of capital. He, however, agreed with the Super Profits Tax Officer in respect of the other items.
(3.) ON further appeal to the Tribunal, it held that the assessee was entitled to treat the sum of Rs. 2,32,595 representing the provision for gratuity as a reserve. It also held that the excess provision for taxation in 1961-62 to the extent of Rs. 6,150 would also be a reserve. At the instance of the revenue, the following questions have been referred to this court under Section 19(1) of the Super Profits Tax Act, 1963: 1. "Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,32,595 represented reserves as contemplated under Rule 1 of the Second Schedule to the Super Profits Tax Act, 1963 ? 2. Whether, on the facts and in the circumstances of the case, the sum of Rs. 6,150 was not part of reserve under Rule 1 of the Second Schedule to the Super Profits Tax Act, 1963 ?" It is necessary at this stage to refer to the relevant provisions of the Super Profits Tax Act, 1963. Section 4 levies a tax called "super profits tax" on every company for every assessment year commencing on and from 1st day of April, 1963, in respect of so much of its chargeable profits of the previous year as exceed the standard deduction at the rate or rates specified in the Third Schedule. Section 2(5) defines "chargeable profits" as the total income of an assessee computed under the Income-tax Act, 1961, for any previous year and adjusted in accordance with the provisions of the First Schedule. Section 2(9) defines "standard deduction" as meaning an amount equal to 6% of the capital of the company as computed in accordance with the provisions of the Second Schedule or an amount of Rs. 50,000, whichever is greater. Schedule 1 sets out the rules for computing the chargeable profits. Rule 1 provides that the income, profits and gains under certain heads shall be excluded from the total income computed under the Income-tax Act for the year while computing the chargeable profits of a previous year. The Second Schedule sets out the rules for computing the capital of a company for the purpose of super profits tax. Rule 1 of that Schedule which comes up for consideration in this case is as follows : "Subject to the other provisions contained in this Schedule, the capital of a company shall be the sum of the amounts, as on the first day of the previous year relevant to the assessment year, of its paid up share capital and of its reserve, if any, created under the proviso (b) to Clause (vib) of Sub-section (2) of Section 10 of the Indian Income-tax Act, 1922 (11 of 1922), or under Sub-section (3) of Section 34 of the Income-tax Act, 1961 (43 of 1961), and of its other reserves in so far as the amounts credited to such other reserves have not been allowed in computing its profits for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or the Income-tax Act, 1961 (43 of 1961), diminished by the amount by which the cost to it of the assets the income from which in accordance with Clause (iii) or Clause (vi) or Clause (vii) of Rule 1 of the First Schedule is not includible in its chargeable profits, exceeds the aggregate of: (i) any money borrowed by it which remains outstanding ; (ii) the amount of any fund, any surplus and any such reserve as is not to be taken into account in computing the capital under this rule. Explanation 1.--A paid up share capital or reserve brought into existence by creating or increasing (by re-valuation or otherwise) any book asset is not capital for computing the capital of a company for the purposes of this Act. Explanation 2.--Any premium received in cash by the company on the issue of its shares standing to the credit of the share premium account shall be regarded as forming part of its paid up share capital. Explanation 3.--Where a company has different previous years in respect of its income, profits and gains, the computation of capital under Rule 1 and Rule 2 of this Schedule shall be made with reference to the previous year which commenced first." ;