COMMISSIONER OF INCOME TAX Vs. ZENITH STEEL PIPES LIMITED

JUDGEMENT

(1.) THE following three questions are referred to for our determination by the Tribunal :

(2.) QUESTIONS Nos. 1 and 2 are referred to at the instance of the Revenue while question No. 3 is referred to at the instance of the assessee.

(3.) FOR the asst. year 1966 67, the capital employed in the business has to be computed as on 1st May, 1964. Out of the profits for the period ending 30th April, 1964, the assessee company provided a sum of Rs. 7,86,610 as depreciation. When this amount of depreciation is totalled up with the last year's depreciation amount of Rs. 4,86,298 then the total depreciation provided in the two years will be Rs. 12,72,908. Such depreciation was provided by the company as it was following the straight line method of depreciation. From the surplus profits for this year a sum of Rs. 29,50,000 was provided as general reserve and when this amount of general reserve is added to the last year's general reserve of Rs. 7,50,000, they aggregate to Rs. 37,00,000. At the time of assessment the ITO took the view that for these years an aggregate depreciation of Rs. 27,59,923 ought to have been provided. He, therefore, took the view that the sum of Rs. 14,87,015 (the difference between Rs. 27,59,923 actually allowed and Rs. 12,72,908 written off in the books of account of the assessee) was to be deducted from the total amount of general reserve of Rs. 37,00,000 for the purpose of computation of capital. He rejected the contention of the assessee that the entire amount standing to the credit of the general reserve ought to be taken into account for computation of capital. Aggrieved by the orders passed by the ITO in respect of the two years appeals were preferred by the assessee company before the AAC. It was contended before the AAC on behalf of the assessee that, having regard to the provisions of cl. (iii) of r. 1 of the Second Schedule to the Act, before a reduction could be made in respect of any amount from the item of other reserves the following two conditions ought to be fulfilled : (1) that the amount in question should have been allowed as reduction ; and (2) such amount should have been credited to other reserves. So far as the first condition was concerned, it was urged that such allowance as reduction ought to have been made in fact prior to the crucial date, i.e., 1st May, 1963, in the first year and 1st May, 1964, in the second year. So far as the second condition was concerned, it was urged that the word "credited" indicated a deliberate act on the part of the assessee which was absent in the present case. Both these contentions were rejected by the AAC. He, however, noticed that there was some factual mistake in the order passed by the ITO in the matter of depreciation actually allowed to the assessee and he, therefore, rectified the said mistake. According to him the depreciation actually allowed to the assessee in respect of the period ending 1st May, 1963, was Rs. 10,54,410 instead of Rs. 17,39,255 as determined by the ITO in the present case. Thus, the difference between the depreciation actually allowed in the income tax assessment and the depreciation written off in the books of account for the period ending 30th April, 1963, was Rs. 5,68,112 (i.e., Rs. 10,54,410 minus Rs. 4,86,298). He was, therefore, of the view that the amount standing to the credit of the general reserve in that year, viz., Rs. 7,50,000 was liable to be reduced by Rs. 5,68,112 in computation of capital for the purpose of surtax. For the year ending 30th April, 1964, he took the view that the difference between the depreciation actually allowed in the income tax assessment and the depreciation written off in the books of the assessee for the asst. year 1965 66 was Rs. 15,21,357 and directed that the said amount ought to be deducted from the account of general reserve as on 1st May, 1964. Aggrieved by the orders passed by the AAC two separate appeals were preferred by the assessee for the two years before the Tribunal.