B. P. JEEVAN REDDY, J. - (1.) THESE two appeals - one by the Assessee (Civil Appeal No. 2231 of 1977) and the other by the Revenue (Civil Appeal No. 2143 (NT) of 1977) are preferred against the judgment of the Gujarat High Court in Income-tax Reference No. 4/ 73. The matter arises under the Companies (Profits) Sur-tax Act, 1964. It relates to computation of the capital of the assessee-company. The assessment year is 1964-65.
(2.) FOUR questions were referred by the Income-tax Appellate Tribunal, Ahmedabad under S. 256(l) of the Act, two at the instance of the assessee and two at the instance of the revenue. The questions referred at the instance of the assessee are : (1) "Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that there was a mistake apparent from the record in its order dated 1-7-1971 and in passing its miscellaneous order dated 15-2-1972?" (2) "If the answer to the Question No. (1) is in positive, whether on the facts and in the circumstances of the case, the Tribunal was justified in directing that the following amounts should be excluded in computing the capital of the company under the provisions of R. 1 of the Second Schedule of the Companies (Profits) Surtax Act, 1964:- JUDGEMENT_624_1_1993Html1.htm The assessee is a Private Limited Company known' as Karamchand Premchand Private Limited, Ahmedabad which was subsequently renamed as Shahibaug Entrepreneures Private Limited, Ahmedabad. For the assessment year 1964-65, the assessee filed a return under the Act for the period ending 31-3-1964 disclosing its chargeable profits at Rs. 67,001 / -. The Income-tax Officer did not agree with the several claims made in the return. He determined the chargeable profits at Rs. 4,72,534/ - and the net tax payable at Rs. 1,86,338.44p. An appeal preferred by the assessee was dismissed by the Appellate Assistant Commissioner of Super-Profit-Tax A-Range, Ahmedabad. The assessee then carried the matter to Income-tax Appellate Tribunal. By its order dated 1/07/1971 the Tribunal allowed the appeal allowing several claims of the assessee. Soon thereafter, the revenue filed an application bringing to the notice of the Tribunal the Explanation appended to R. I in the Second Schedule to the Act. The Tribunal allowed the application on 15-2-1972. It held that several items which were treated by it as reserves in its order dated 1/07/1971 could not have been treated as such and that they ought to have been treated as provisions. It is against the said order that the assessee as well the revenue both applied for referring certain questions of law for the opinion of the High Court. The Companies (Profits) Sur-tax Act, 1964 was enacted by Parliament with a view to impose a special tax on the profits of certain companies. S. 4 contains the charging provision. It says: "4. Charge of tax --- Subject to the provisions contained in this Act, there shall be charged on every company for every assessment year commencing on and from the 1 st day of April, 1964, a tax (in this Act referred to as the Surtax) in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the Third Schedule."
(3.) THE expression 'chargeable profits' is defined in Cl. (5) of the S. 2. According to it, chargeable profits' means "the total income of an assessment computed under the Income-tax Act, 1961 for any previous year or years as the case may be and adjusted in accordance with the provisions of the First Schedule." THE expression "statutory deduction" is defined in Cl. (8) of S. 2. Omitting the provisions which are not necessary for our purpose the definition reads as follows : "Statutory deduction" means an amount equal to ten per cent of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of two hundred thousand rupees, whichever is greater." THE Second Schedule contains the Rules for computing the capital of a company for the purposes of the Act. It would be appropriate to read the entire R. 1 including the explanation at this stage. "1. Subject to the other provisions contained in this Schedule, the capital of a company shall be the aggregate of the amounts, as on the first day of the previous year relevant to the assessment year, of - (i) its paid-up share capital; (ii) its reserves, if any, created under the proviso (b) to Cl. (vi-b) of sub-sec. (2) of S. 10 of the Indian Income-tax Act, 1961 (XLIII of 1961); (iii) its other reserves as reduced by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the Indian Income-tax Act, 1922 (XI of 1922), or the Income-tax Act, (XLIII of 1961); (iv) the debentures, if any, issued by it to the public: Provided that according to the terms and conditions of issue of such debentures, they are not redeemable before the expiry of a period of seven years from the date of issue thereof-, and; (v) any moneys borrowed by it from Government or the Industrial Finance Corporation of India or the Industrial Credit and Investment Corporation of India or any other financial institution which the Central Government may notify in this behalf in the Official Gazette or any banking institution (not being a financial institution notified as aforesaid) or any person in a country outside India: Provided that such moneys are borrowed for the creation of a capital asset in India and the agreement under which such moneys are borrowed provides for the repayment thereof during a period of not less than seven years. Explanation.- For the removal of doubts it is hereby declared that any amount standing to the credit of any account in the books of a company as on the first day of the previous year relevant to the assessment year which is of the nature of item (5) or item (6) or item (7) under the heading "RESERVES AND SURPLUS" or of any item under the heading "CURRENT LIABILITIES AND PROVISIONS" in the column relating to "Liabilities" in the "Form of Balance-sheet" given in Part I of Schedule VI to the Companies Act, 1956 (1 of 1956), shall not be regarded as reserve for the purposes of computation of the capital of a company under the provisions of this Schedule." A reading of R. 1 shows that subject to the other provisions contained in the said Schedule, the capital of a company shall be the aggregate of the several amounts mentioned in the Rule as on the 1st day of the previous year relevant to the assessment year, The items which have to be so aggregated include the paid-up share capital, reserves mentioned in Cls. (ii) and (iii) debentures mentioned in Cl. (iv) and the borrowed amounts mentioned in Cl. (v). The Explanation appended to the Rule is clarificatory in nature. It refers to the form of balance-sheet given in part one of Schedule VI to the Companies Act, 1956 and says that any amount standing to the credit of any account in the books of a company (as on the first day of the previous year relevant to the assessment year) which is of the nature of item 5 or item 6 or item7 under the heading "RESERVES AND SURPLUS" or of any item under the heading "CURRENT LIABILITIES AND PROVISIONS" in the column relating to liabilities shall not be regarded as reserves for the purposes of the Act. The distinction between reserves and provision has been dealt with exhaustively by this Court in Vazir Sultan Tobacco Company Limited v. Commr. of Income-tax, A.P., (1981) 132 ITR 559 : (AIR 1981 SC 2105). It indeed follows the principles enunciated in the earlier decisions of this Court in Metal Box Company of India Ltd. v. Their Workmen, (1969) 73 ITR 53: (AIR 1969 SC 612) and CIT v. Century Spinning and Manufacturing Company Limited, (1953) 24 ITR 499: (AIR 1953 SC 501). Applying the principles flowing from the said decision, that the questions arising herein have to be answered. ;