1994 (2) TMI 128 - AT - Income Tax

Tribunal Decision: Inclusion of Development Allowance in Capital Base

The Tribunal allowed the appeals in part, directing the inclusion of the development allowance reserve in the capital base under Rule 1(iii) of the ... Assessment Year, Computation Of Capital, Development Allowance, Income Tax Act, Intercorporate Dividends, Set Off, Total Income Issues Involved:1. Development Allowance Reserve2. Application of Rule 2(ii) of the Second Schedule of the Companies (Profits) Surtax Act, 19643. Levy of Interest under Section 7 of the ActIssue No. 1: Development Allowance ReserveThe primary issue was whether the development allowance reserve could be included in the capital base under Rule 1(ii) or Rule 1(iii) of the Second Schedule of the Companies (Profits) Surtax Act, 1964. The assessee, a company engaged in manufacturing tea, created a development allowance reserve of Rs. 73,000 as per Section 33A of the Income-tax Act, 1961. The assessee argued for its inclusion in the capital base, citing the ITAT Cochin Bench's decision in Peermedu Tea Co. Ltd.The Assessing Officer rejected this argument, relying on the ITAT Madras Bench's decision in Manjushree Plantations Ltd. The CIT(A) upheld this rejection, stating that the reserve could not be equated with a fund under Rule 2(ii).The Tribunal first examined whether the development allowance reserve could be included under Rule 1(ii). It noted that although the reserve was similar to development rebate and investment allowance reserves, it was not explicitly included in Rule 1(ii). This omission, whether intentional or an oversight by Parliament, meant that the reserve could not be included under Rule 1(ii).The Tribunal then considered whether the reserve could be included under Rule 1(iii) as 'other reserves.' It concluded that the development allowance reserve met the criteria for a reserve as outlined by the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT. The reserve was created by the Board of Directors and was intended for a specific purpose, complying with statutory requirements. Therefore, the Tribunal held that the development allowance reserve should be included in the capital base under Rule 1(iii).Issue No. 2: Application of Rule 2(ii) of the Second Schedule of the Companies (Profits) Surtax Act, 1964This issue involved whether the surplus in the Profit & Loss Account (Rs. 63,549) and the provision for taxation (Rs. 47,72,887) should be deducted from the cost of investments for computing the capital base.The assessee argued that both the surplus and the provision for taxation should be deducted from the cost of shares, thus preventing any reduction in the capital base. The Assessing Officer and CIT(A) rejected this argument, relying on the Madras High Court's decision in Madras Motor & General Insurance Co. Ltd.The Tribunal analyzed the general scheme of the Companies (Profits) Surtax Act, noting that Rule 2 of the Second Schedule required a downward revision of the capital base in specific circumstances. The Tribunal rejected the assessee's argument that the provision for taxation should be considered a 'fund' under Rule 2(ii), stating that such an interpretation would allow the provision for taxation to enter the capital base through a backdoor, which was not the legislative intent.However, the Tribunal agreed with the assessee that the surplus in the Profit & Loss Account should be set off against the cost of shares, as it fell under the term 'any surplus' in Rule 2(ii). Therefore, the Tribunal directed that the surplus of Rs. 63,549 be deducted from the cost of shares, reducing the capital base by Rs. 5,14,612.Issue No. 3: Levy of Interest under Section 7 of the ActThis issue was deemed consequential and the related grounds were dismissed.Assessment Year 1985-86The findings for the assessment year 1983-84 were applied to the assessment year 1985-86 as well.ConclusionThe appeals were allowed in part, with specific directions for recomputing the capital base by including the development allowance reserve and adjusting the surplus in the Profit & Loss Account against the cost of shares. The provision for taxation was not allowed to be deducted from the cost of investments.