1992 (3) TMI 156 - AT - Income Tax

Tribunal decision on capital base reduction, depreciation, and limitation plea for assessment years 1982-85

The Tribunal partially allowed the assessee's appeals for the assessment years 1982-83 and 1984-85, setting aside the CIT's directions to reduce the ... Claiming Depreciation, General Reserve Issues Involved:1. Excess depreciation allowed in income-tax assessments.2. Reduction of capital base by excess depreciation.3. Provision for taxation and proposed dividends.4. Reduction of capital base by income-tax liability excess.5. Reduction of capital base by investment allowance excess.6. Limitation under Section 16(2)(b) of the Surtax Act.Detailed Analysis:1. Excess Depreciation Allowed in Income-Tax Assessments:The assessee followed the straight-line method of charging depreciation, resulting in lower depreciation booked in the accounts compared to what was allowed in income-tax assessments. The excess depreciation allowed in income-tax assessments over the booked depreciation was noted for several years, leading to a progressive shortfall in depreciation booked.2. Reduction of Capital Base by Excess Depreciation:The Commissioner of Income-tax (CIT) directed the reduction of the capital base by the aggregate excess depreciation allowed for income-tax purposes, following the precedent set by the Bombay High Court in CIT v. Zenith Steel Pipes Ltd. The assessee argued against this reduction, claiming the right to attribute the excess depreciation to provisions for taxation or proposed dividends instead of reducing the reserves.3. Provision for Taxation and Proposed Dividends:The Tribunal analyzed the legal requirements under the Companies Act, 1956, and the Surtax Act. It concluded that the provision for taxation and proposed dividends must be made adequately and cannot be reduced by the excess depreciation allowed in income-tax assessments. The Tribunal emphasized the statutory obligations to present a true and fair view of the company's financial state, as mandated by Sections 210 and 211 of the Companies Act.4. Reduction of Capital Base by Income-Tax Liability Excess:For the assessment year 1982-83, the CIT directed the reduction of the capital base by the amount of income-tax liability determined in excess of the book liability. The Tribunal found this direction unjustified, citing Rule 1A's reasonableness requirement and following the ITAT Madras Bench's decision in Lakshmi Mills Co. Ltd. v. IAC. The Tribunal set aside the CIT's order on this issue and restored the original assessment.5. Reduction of Capital Base by Investment Allowance Excess:For the assessment year 1984-85, the lower authorities reduced the capital base by the investment allowance allowed in excess of the reserve. The Tribunal found no legal warrant for this reduction, noting that Rule 1(iii) of the Second Schedule does not apply to reserves specified in Rule 1(ii), which includes the investment allowance reserve. The Tribunal directed the assessing officer to recompute the capital base without this reduction.6. Limitation under Section 16(2)(b) of the Surtax Act:The assessee's plea of limitation for the CIT's revision order was rejected. The Tribunal noted that the surtax assessments were made after the amendment of Section 16(2)(b) by the Taxation Laws (Amendment) Act, 1984, which allowed for revision orders to be passed within two years from the end of the financial year in which the original order was passed. The CIT's revision order dated 7-3-1988 was within the permissible period.Conclusion:The Tribunal allowed the assessee's appeals in part for the assessment years 1982-83 and 1984-85, setting aside the CIT's directions on reducing the capital base by income-tax liability excess and investment allowance excess, respectively. The appeal for the assessment year 1983-84 was dismissed. The Tribunal upheld the reduction of the capital base by excess depreciation allowed in income-tax assessments and rejected the assessee's plea of limitation.