1978 (8) TMI 12 - HC - Income Tax

Court rules provision for taxation deductible under Companies Surtax Act.

Duncan Brothers And Company Limited Versus Commissioner Of Income-Tax, Central, Calcutta

The court held that a provision for taxation is not a reserve for computing capital under the Companies (Profits) Surtax Act, 1964. The issue of ... Company, Surtax Issues Involved:1. Inclusion of provision for taxation as a reserve or surplus in the computation of capital.2. Deductibility of provision for taxation from the cost of investments.3. Entitlement to deduction of provision for taxation from the cost of investments under clause (ii) of rule 2 of the Second Schedule of the Companies (Profits) Surtax Act, 1964.Detailed Analysis:Issue 1: Inclusion of Provision for Taxation as a Reserve or SurplusThe primary issue was whether the provision for taxation could be considered a reserve or surplus for the purpose of computing capital under rule 1 of the First Schedule of the Companies (Profits) Surtax Act, 1964. The court held that a provision for taxation is not a reserve within the meaning of the Act. This decision was influenced by a prior ruling in Duncan Brothers and Co. Ltd. v. CIT [1978] 111 ITR 885, where it was held that a provision for taxation does not form part of the capital of a company under the Second Schedule to the Super Profits Tax Act, 1963. Consequently, question No. 1 was answered in the affirmative and in favor of the revenue.Issue 2: Deductibility of Provision for Taxation from the Cost of InvestmentsThe second issue was whether the Tribunal erred in not deciding the claim regarding the deductibility of the provision for taxation from the cost of investments under clause (ii) of rule 2 of the Second Schedule to the Act. The court noted that the assessee had raised this point before the ITO and the AAC, and it was a matter that should have been addressed by the Tribunal. The Tribunal's failure to discuss this point led to the conclusion that the question was still open for consideration. The court referred to the Supreme Court decision in CIT v. Scindia Steam Navigation Co. Ltd. [1961] 42 ITR 589, which allows the High Court to deal with questions not expressly addressed by the Tribunal if they were raised during the proceedings.Issue 3: Entitlement to Deduction of Provision for Taxation from the Cost of InvestmentsThe court reframed question No. 3 to determine if the company is entitled to the deduction of provision for taxation from its cost of investment under clause (ii) of rule 2 of the Second Schedule of the Companies (Profits) Surtax Act, 1964. The court held that the provision for taxation constitutes a fund within the meaning of the rule, following the precedent set in Duncan Brothers & Co. Ltd. v. CIT [1978] 111 ITR 885. The court also referenced a circular from the Central Board of Revenue, which supported the interpretation that a provision for taxation could be considered a fund. Consequently, question No. 3 was answered in the affirmative and in favor of the assessee.Conclusion:- Question No. 1: Answered in the affirmative and in favor of the revenue.- Question No. 2: Not answered, as question No. 3 was held to arise from the Tribunal's order.- Question No. 3 (Reframed): Answered in the affirmative and in favor of the assessee.The Tribunal is directed to compute the capital by first determining the amount under rule 1 of the Second Schedule, then adjusting for the cost of assets whose income is excluded from the total income, and finally diminishing the capital by the excess cost of such investments over the amount of the funds.