SUHAS CHANDRA SEN, J. - (1.) THE following question of law has been referred to this Court by the Tribunal under s. 256(1) of the IT Act: "Whether, on the facts and in the circumstances of the case, the sum of Rs. 9,21,233 was a reserve within the meaning of the Second Schedule to the Companies (Profits) Surtax Act, 1964, and was rightly included by the ITO in computing the capital under the said Schedule ?"
(2.) THE assessment year involved in this reference is the asst. yr. 1974-75, for which the relevant accounting period is the year ended on 25th Dec., 1973. The facts of the case, as found by the Tribunal, are stated as under : The General Reserve as on the first day of the relevant previous year included a sum of Rs. 9,21,238 which was credited to the General Reserve in the year 1971. The assessee had, earlier, taken a dollar loan from the Export-Import Bank, Washington, and purchased plant and machinery for its "Chemex" unit. The loan was being repaid with interest on deferred payment basis in instalments. In 1971, the dollar was devalued and the assessee gained a sum of Rs. 9,21,238 on account of it. In its accounts for that year, the assessee had reduced its loan liability by this amount but, instead of correspondingly crediting plant and machinery account with this amount, the General Reserve was credited. In the corresponding income-tax assessment, the written down value of plant and machinery was reduced by Rs. 9,21,238 in terms of s. 43A of the IT Act, 1961. The CIT was of the view that: "The increase of Rs. 9,21,238 in the General Reserve cannot be said to have come out of the company's taxed profits as provided in cl. (iii) of r. 1 of the Second Schedule and hence this appreciation in the General Reserve should have been ignored for the purpose of computation of capital for levy of surtax."
(3.) THE CIT was of the further view that the order of the ITO was erroneous and prejudicial to the interests of the Revenue. He, therefore, issued a notice upon the assessee to show cause why an order under s. 16 of the Companies (Profits) Surtax Act, 1964, should not be passed.;