- (1.) This appeal, by certificate under Section 261 of the Indian Income-tax Act 1961 (for short 'the Act') granted by the Calcutta High Court, arises from a reference under Section 256(1) of the Act and Section 18 of the Companies (Profits) Sur-tax Act, 1964 (for short 'Sur-tax Act') on the question of law which was answered in negative and against the appellant thus : Whether on the facts and in the circumstances of the case the Tribunal was right in holding that a sum of Rs. 76,00,000 which was paid as dividend for the year 1962 following the General Meeting dated 31st May, 1963 out of the dividend reserve of Rs. 90,00,000 as on the 1st January, 1963 was not to be taken into account for the computation of capital as on the 1st January, 1963 in pursuance of the rules of the Second Schedule to die Companies (Profits) Sur-tax Act 1864.
(2.) The previous year relevant to the assessment year, of the paid up capital, the reserve, the debentures etc. under Rule 1 of Second Schedule to the Sur-tax Act, is the Calendar Year 1963. The assessment year is 1964-65. The position of the capital was to be considered as on the 1st day thereof i.e. 1.1.1963. The appellant claimed in its assessment a sum of Rs. 90,00,000 transferred to the dividend reserve as a reserve entering into capital computation. The assessing authority excluded this sum from the computation of the capital but on appeal the Appellate Asstt. Commissioner found it to be a reserve created out of amounts which had not been allowed as deduction for computing the profits of that year. Accordingly he held that Rs. 90,00,000 was the reserve fund qualified for inclusion under Rule 1 (111) of the Second Schedule to the Sur-tax Act. On appeal by the Revenue, the Income-tax Appellate Tribunal held that "the assessee had appropriated Rs. 76,00,000 out of the year's profit and transferred the balance of Rs. 14,00,000 to the dividend reserve" : Rs. 76,00,000 was taken as liability as on 1.1.1963 and as the creation of Rs. 90,00,000 was to be taken as reserve on 1.1.1963 only a sum of Rs. 14,00,000 has been transferred to the reserve account. Accordingly the Tribunal held that a sum of Rs. 14,00,000 would only be treated as a provision and directed modification of the capital computation accordingly. On reference at the behest of the appellant the High Court answered the question in the negative and against the assessee.
(3.) Section 4 of the Sur-tax Act, the charging section postulates that, subject to the provision contained therein, there shall be a charge on every company for very assessment year commencing on and from the 1st day of April, 1964, a tax in respect of so much of its chargeable profits of the previous year or previous years as the case may be as exceeds the statutory deduction, at the rate or rates specified in the Third Schedule. Section 2(5) defines chargeable profits as a total income of an assessee computed under the Act for any previous year or years as the case may be and adjusted in accordance with the provisions of the First Schedule. Section 2(8) accords statutory deduction, an amount equal to 10 per cent of the capital of the company as computed in accordance with the provisions of the Second Schedule or an amount of Rs. 200 thousands whichever is greater. The First Schedule provides the rules for computation of the chargeable profits. The Second Schedule gives the procedure to compute the capital of the company for the purpose of sur-tax. Rule 1 of the Second Schedule postulates that, subject to the other provisions contained in the Second 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 its paid up share capital, its reserve, if any, and 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 purpose of the Indian Income-tax Act, its debentures, if any, or any borrowed amounts. The explanation thereto provides thus : 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" of any item under the heading "Current Liabilities and Provisions" in the column relation to "Liabilities" in the "Form of Balance Sheet" given in Part I of the Schedule VI to the Companies Act,1956 (I) of 1956 shall not be regarded as a reserve for the purpose of computation of the capital of a company under the provisions of this schedule.;