1992 (10) TMI 20 - HC - Income Tax

Court upholds assessment under Companies Surtax Act for 1966-67, distinguishes between reserves and provisions.

The court upheld the validity of the assessment under the Companies (Profits) Surtax Act for the assessment year 1966-67, ruling in favor of the Revenue. ... Company, Limitation, Reserves And Provisions, Surtax, Surtax Assessment Issues:1. Validity of assessment under the Companies (Profits) Surtax Act for the assessment year 1966-67.2. Inclusion of balances in various accounts in computing the capital.3. Treatment of reserves and provisions in the assessment.Issue 1: Validity of assessment under the Companies (Profits) Surtax Act for the assessment year 1966-67:The court addressed the question of whether the assessment made under section 6 of the Companies (Profits) Surtax Act for the assessment year 1966-67, beyond the period of four years from the end of the assessment year, was valid in law. The court referred to a previous case where it was held that there is no specific time limit for completing an assessment, but it should be done within a reasonable period. In the present case, the assessment under the Surtax Act was completed within 15 days of the income-tax assessment, which was deemed reasonable. Therefore, the court answered this question in the affirmative and in favor of the Revenue.Issue 2: Inclusion of balances in various accounts in computing the capital:a. Foreign Taxation Reserve: The court examined the balance in the foreign taxation reserve and determined that it was in the nature of a 'reserve' and not a 'provision' as there was no established liability towards excess profits tax payable in Pakistan. Citing a Supreme Court judgment, the court ruled in favor of the assessee.b. Reserve for Doubtful Debts and Contingency Reserve: The court agreed with the Tribunal's findings that the balances in these accounts were reserves and not provisions, as they were not created for meeting known liabilities. The court referred to relevant case law and answered these questions in favor of the assessee.Issue 3: Treatment of reserves and provisions in the assessment:a. The court addressed questions related to the treatment of reserves and provisions in the assessment, emphasizing the distinction between reserves and provisions based on established liabilities. The court relied on Supreme Court judgments and Tribunal findings to determine the nature of various accounts and answered the questions accordingly.b. The court also analyzed the calculation of surpluses and reserves not to be considered in computing capital under the Companies (Profits) Surtax Act. It discussed the application of rules and case law to determine the treatment of surplus amounts and provisions for taxation in the capital computation, ultimately ruling in favor of the assessee based on the specific circumstances of the case.In conclusion, the court provided detailed analyses and rulings on each issue raised in the reference under section 256(1) of the Income-tax Act, 1961, addressing concerns related to assessments, inclusion of balances in computing capital, and the treatment of reserves and provisions in the assessment process.