Income Tax Appellate Tribunal - Pune
Kirloskar Cummins Ltd. vs Surtax Officer on 30 June, 1992
Equivalent citations: [1992]43ITD232(PUNE)
ORDER
R.P. Garg, Accountant Member
1. These appeals are by the assessee against the order of the Commissioner of Surtax (Appeals) for the assessment years 1981-82 to1987-88. Since there is a common dispute, all the appeals are being disposed of by this consolidated order, for the sake of convenience.
2. The only dispute in these appeals is against the order of the CST (Appeals) in upholding the decision of the STO in reducing the capital base by the difference in depreciation as per income-tax records and depreciation as per books. The contention of the learned counsel for the assessee is that the profit made available for appropriation is a mass of profit which included depreciation difference and there was no indication either Under the Surtax Act, or under the Companies Act, as to which part of the mass profit should be appropriated first and, therefore, applying the general law the choice would be left with the assessee. The contention of the assessee was not accepted by the CST (Appeals). According to him, the matter stands covered by the decision of the Bombay High Court in the case of CIT v. Zenith Steel Pipes Ltd. [1978] 112 1TR 215 and also the later case reported in CIT v. Zenith Steel Pipes Ltd. [1990] 181 ITR 291 48 Taxman 93. He, however, accepted the contention of the assessee that to the extent that the difference between the depreciation actually allowed and claimed in the books, which has been actually capitalised by the assessee by way of issue of bonus shares, would form part of the capital and directed the STO to ascertain the said excess. Taking support from the decision of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 7 Taxman 28. and the fact that no evidence has been shown by the assessee that the difference between the depreciation claimed in the books and the depreciation actually allowed was either separated from the general mass of profits, or earmarked for the various appropriations, he held that it would be reasonable to presume that the appropriation, if any, made out of the profits/general reserve, would normally be out of the profits of that year or the general reserve as existing at the beginning of the year and that only if there is any shortage, such shortage would be out of the difference in the depreciation.
3. The learned counsel for the assessee reiterated his contentions which were advanced before the CST (Appeals) and submitted that the difference in depreciation was not liable to be reduced from the general reserve.
According to him, the assessee had declared dividend and also created investment allowance reserve out of the general mass of profit before transferring the amount to the general reserve and unless anything prescribed to the contrary, the right of appropriation should be given to the assessee. The amount of dividend declared and the investment, allowance created were much more than the difference in the amount of depreciation allowed under the Income-tax Act and debited in the books of account and, therefore, nothing should have been excluded from the general reserve. He further submitted that the CST (Appeals), having accepted the claim of the assessee for the issuance of the bonus shares out of such difference of depreciation, was not justified in rejecting the 48 Taxman 93. 1.7 Taxman 28. assessee's claim for the dividend and investment allowance, having gone out of the differential depreciation. In any case, he submitted that only the amount of the respective years' difference should be deducted and not the cumulative difference of all the years.
4. The learned Departmental Representative, on the other hand, supported the orders of the departmental authorities and submitted that the matter is squarely covered by the two decisions of the Bombay High Court, referred to by the CST (Appeals). He further submitted that in view of the said decisions, there is no scope for any further arguments and these amounts have to be deducted from the general reserve, while computing the capital of the assessee under the provisions of the Companies (Profits) Surtax Act.
5. We have heard the parties and considered their rival submissions.
Principally, we agree with the CST (Appeals) that the matter stands covered by the decision of the Bombay High Court in Zenith Steel Pipes Ltd. 's case (supra) as also the later decision reported in Zenith Steel Pipes Ltd.'s case (supra). The difference had arisen due to the fact that the assessee provided depreciation in its books of accounts on straightline method whereas under the Income tax Act, it was allowed on reducing method. The profit which is shown as per the books of account was inclusive of difference of depreciation provided by the assessee in its books of account and as allowed under the Income-tax Act. There is no scope for the acceptance of the assessee's claim in view of the clear pronouncement of the Bombay High Court in the case of Zenith Steel Pipes Ltd. (supra), to the following effect:
The questions which are raised are in relation to these amounts and whether any part thereof is liable to be deducted merely on the ground that they are credited to 'other reserves', Le., general reserves in the present case. As the assessee-company provided lesser amount by way of depreciation than what was allowed in the computation of the income of the assessee-company for the purposes of the Income-tax Act, 1961, the difference between the amount of depreciation actually allowed to the assessee and the amount actually provided in its books, was forming part of the general reserve. It is, therefore, quite apparent that the assessee-company when it asked for deduction of depreciation for the purposes of income-tax was conscious of the fact that the depreciation provided for was insufficient as per the provisions of the Income-tax Act and, in fact, the contention of the assessee-company was accepted because the depreciation in its books of account was provided on the footing of straight-line method while in fact the depreciation to be calculated in accordance with the provisions of the Income-tax Act was much larger. For computing its income for the purposes of the Income-tax Act, such larger amount of depreciation was allowed and the excess amount, Le., the amount of difference between the amount of depreciation actually allowed for the purposes of the Income-tax Act and the amount of depreciation actually provided in the books of the assessee-company, was diverged as forming part of the general reserve and actually the amounts that were credited to the general reserve included within its item such difference between the amount of depreciation allowed for the purposes of the Income-tax Act, and the amount of depreciation actually provided in the books. Thus, on a plain interpretation of the language used in Clause (iii) of Rule 1 of the Second Schedule to the Act, it is quite apparent that if the amount of depreciation provided in the books of the assessee-company for a particular year is less than the amount of depreciation actually allowed by the Income-tax Officer for computation of the income, then the difference between these two amounts has to be deducted from the amount standing to the credit of 'other reserves', namely, general reserves, so far as the facts of this case are concerned. Thus, the Appellate Assistant Commissioner was right in taking the view that for the first year a sum of Rs. 5,68,112 ought to be deducted from the amount of general reserves of Rs. 7,50,000 and a sum of Rs. 12,52,957 ought to have been deducted from the amount of general reserve of Rs. 37,00,000 for the second year.
From the underlined portion of the aforesaid extract, it is abundantly clear that the difference to the depreciation allowed in the income-tax assessment and as provided in the books of the assessee has to be deducted from the amount standing to the credit of other reserve. It may also be stated that the fact that the assessee had declared dividend was also before Their Lordships of the Bombay High Court in the case of Zenith Steel Pipes Ltd. (supra). The aforesaid decision answers the last argument of the assessee as well, Le., it is the cumulative difference and not only the difference of the respective years has to be reduced. The Bombay High Court has upheld the exclusion of Rs. 12,52,957 which is the cumulative figure of the two years under consideration before Their Lordships of the Bombay High Court. The said figure of Rs. 12,52,957 appears to have been mistakenly typed for Rs. 15,21,357 being the difference of aggregate amount of depreciation allowed for the two years at Rs. 27,59,923 and the aggregate depreciation provided in the books of the assessee at Rs. 12,72,908 (as per the figures stated at pages 220 and 222 of the report).
6. Even otherwise, the assessee's claim that the dividend and investment allowance should have come out of the difference cannot be accepted. The dividend is declared out of the profits and not the depreciation. While dealing with the case under the Surtax Act, depreciation allowed under the Income-tax Act has to be considered. It is so considered while the chargeable profits of the company under Schedule I to the Companies (Profits) Surtax Act. Having considered the amount as depreciation, it would not be proper to hold that the dividend could be declared out of the depreciation allowed to the assessee. Similarly, the investment allowance reserve is created under Section 32A of the Income-tax Act against the chargeable income of the assessee and, if the income of the assessee falls short of the investment allowance, nothing is allowable to the assessee in that year. If there are no profits for the purposes of allowing investment allowance, there cannot be created any reserve, the reserve being a part of the allowance to the assessee under the provisions of Section 32A of the Income-tax Act. Here also, the amount of depreciation as allowed under the Income-tax Act has to be considered and not as provided for in the books. We, therefore, do not find any reason to take a contrary view. The fact that the CST (Appeals) has directed to ascertain the difference actually capitalised by the assessee by way of issue of shares would not make any difference in view of the clear pronouncement of the Bombay High Court and the reasons what we have stated hereinabove. The assessee's right to appropriate the mixed funds to the declaration of dividend for investment allowance is also not absolute and as held by Their Lordships of the Supreme Court in Sutiej Cotton Mills Ltd, v. CIT [1991] 187 ITR 182, it depends upon the facts on record and the provisions of the statute and on the facts and in the circumstances of the case, in our opinion, the view adopted by the CST (Appeals) that the appropriations having made out of the profits/general reserve would normally be out of the profits of that year or the general reserve as existing at the beginning of the year and that only if there is any shortage, such shortage would be out of the difference in the depreciation, appears to be correct.
7. In the result, the appeals of the assessee have no merit. They are, accordingly, dismissed.