1985 (6) TMI 48 - AT - Income Tax

Tribunal excludes investment costs from capital base, reduces debenture value.

The Tribunal partially allowed the appeal, confirming the exclusion of the cost of investments from the capital base as per rule 2 of the Second Schedule. ... Assessment Year, Previous Year Issues:Interpretation of rule 2 of the Second Schedule under the Companies (Profits) Surtax Act, 1964 regarding the exclusion of the cost of assets from the capital for surtax computation purposes.Detailed Analysis:Issue 1: Interpretation of rule 2 of the Second ScheduleThe appeal raised the question of whether the capital of a company for surtax computation should be reduced by the cost of assets owned by it, even if those assets did not yield any income during the previous year. The appellant argued that the reduction of capital under rule 2 of the Second Schedule should only occur when there is actual income from the assets that needs to be excluded from chargeable profits. The Income Tax Officer (ITO) disagreed and reduced the capital by the cost of assets, regardless of income. The Commissioner (Appeals) upheld the ITO's decision, stating that the mere existence of assets requiring exclusion was enough to trigger rule 2. The appellant contended that the exclusion or inclusion of assets in the capital should vary based on whether income was generated. The Tribunal analyzed the relevant rules and previous court decisions to determine the correct interpretation.Issue 2: Application of Rule 2 of the Second ScheduleThe Tribunal examined the language of rule 2, which states that the capital shall be diminished by the cost of assets, the income from which is required to be excluded from total income in computing chargeable profits. The Tribunal emphasized that the rule does not hinge on the actual receipt of income but on the type of assets and the need for exclusion under rule 1 of the First Schedule. Referring to court decisions, including the Karnataka High Court and the Calcutta High Court, the Tribunal concluded that the cost of assets should be excluded from capital even if no income was earned, as long as the assets fell under the specified categories for exclusion.Issue 3: Alternative Contention Regarding DebenturesThe appellant also argued that the debentures in Industrial Credit and Investment Corporation of India should not be included in the cost of assets for exclusion under rule 2. The Tribunal agreed with this alternative contention, stating that the debentures did not meet the criteria specified in rule 1 of the First Schedule. Therefore, the cost of investments should be reduced by the value of the debentures for determining the capital base under the Second Schedule.In conclusion, the Tribunal partially allowed the appeal, confirming the exclusion of the cost of investments from the capital base as per rule 2 of the Second Schedule and agreeing to reduce the cost by the value of debentures that did not meet the specified criteria.