Income Tax Appellate Tribunal - Bangalore
Loharu Steel Industries Ltd. vs Deputy Commissioner Of Income-Tax on 12 September, 1994
Equivalent citations: [1994]51ITD598(BANG)
ORDER
S. Bandyopadhyay, Accountant Member
1. Since the issue involved in these two surtax appeals filed by the assessee for the two successive years is common, the appeals have been consolidated and a combined order is being passed for the sake of convenience.
2. The appeals pertain to Companies (Profits) Surtax Act, 1964 and the issue involved is computation of "capital and reserves" for the purpose of determination of the standard deduction allowable. There was a search in the premises of the assessee-company which is engaged in the business of manufacture of iron and steel products. After the search, a settlement was arrived at by the assessee-company with the CIT in accordance with which the assessee offered to tax the excess amounts claimed towards burning loss. The total amount of income thus offered was Rs. 1,46,75, i 30 spread over a long period covering the assessment years 1976-77 to 1984-85. It is the contention of the assessee that this income was represented by certain assets outside its books, which were found out during the search. In the surtax assessments under consideration, the assessee claimed that the cumulative figures of extra profit in this way disclosed and offered by it for taxation, as at the beginning of the relevant previous years minus cumulative tax thereon, were to be treated as "reserve and surplus" for the purpose of computation of capital base. It appears that in the assessments, the Assessing Officer did not accept this claim of the assessee although no discussion in this regard seems to have been made by him.
3. In the appeals filed before him, the CIT(A) found that the assessee had surrendered for taxation an amount of Rs. 7,86,610 for the assessment year 1980-81 and Rs. 21,94,210 for the assessment year 1981-82 on account of excess burning loss. He stated that the concealed income of the assessee which had been surrendered in the settlement arrived at with the Department was not reflected either in the books or in the balance sheets of the assessee for either of the two years. He stated that in fact, the surrendered income had been claimed as expenditure by way of excess burning loss during these two years. By relying on the decision of the Mysore High Court in the case of Mysore Electrical Industries Ltd. v. Commissioner of Surtax [1971] 80 ITR 571 in which the importance of presence of entries in the books/balance-sheet of a company for claiming an amount as "reserve" had been highlighted, the CIT(A) negatived the contention of the assessee about inclusion of the amounts within "reserve". The CIT(A) also took into consideration the discussion made by the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 32 ITR 559 in which the parameters for considering whether concerned amounts would constitute "reserve" had been discussed. The CIT(A) finally came to the conclusion that it was clear from the facts of the case that the assessee's contention was not to be accounted inasmuch as none of the conditions laid down by the Mysore High Court and the Supreme Court for inclusion of certain amounts within "reserve" was satisfied. Finally, the CIT(A) rejected the claim of the assessee.
4. A full fledged representation was made before us by Shri Venkatesan, learned counsel for the assessee on 2-8-1994. He strongly argued that since the amounts under consideration represented the secret profits of the assessee-company, they were required to be included within "reserves" for the purpose of computation of the capital base of the company in connection with its surtax assessments. He argued that according to the balance sheet, the entire net profits for these two years had been transferred to general reserve and hence it would follow that the secret profits also should be deemed to have been transferred to the general reserve. He furthermore stated that the amounts under consideration were kept by the company itself in the form of stock. He also relied on the following decisions of different courts in support of his contention:
(i) CIT v. Century Spg. & Mfg. Co. Ltd. [1953] 24 ITR 499 (SC)
(ii) CIT v. SaranEngg. Co. Ltd. [1986] 161 ITR 741 (SC)
(iii) Siemens India Ltd. v. CIT [1994] 206 ITR 83 (Bom.).
In reply to the above arguments of Shri Venkatesan, the learned DR Shri Puniha also argued very vehemently to which we shall advert to below in the appropriate places. The proceedings were adjourned to 16-8-1994 merely for the purpose of allowing Shri Venkatesan an opportunity to submit further arguments, if any and also to refer to citations, if any, in support of his claim that even secret profits kept outside books may also be considered as "reserve" for the purpose of surtax assessment.
5. On 16-8-1994, an adjournment petition was moved by Shri Venkatesan asking for further time. This was allowed and the hearing of the appeals was finally fixed on 25-8-1994. On that date again, another adjournment petition was moved on behalf of Shri Venkatesan asking for even further adjournment. This was not allowed in view of the fact that the appeals were rather old ones and were also stay-granted appeals.
6. On going through the facts of the case, we find that the assessee wants to take the opportunity of the disclosure made by it of excess claims of burning loss, consequent on the search and seizure proceedings in its premises. Certain amounts already claimed as expenses were declared by it to represent its concealed income and the same were also offered for taxation. No evidence was however led at any stage to show that the so-called concealed income was retained in the business of the assessee in some form or other. Although the learned counsel for the assessee stated that the amounts under consideration were kept with the company in the form of stock, this contention was however not at all substantiated with any evidence. It might be quite possible for the assessee-company to have spent the amounts under consideration towards meeting expenses of various types outside its books. It was also possible for the management of the company to have secretly appropriated the concealed profit of the company. In any case, the onus lies on the assessee to establish that the concealed income was retained by the assessee in its business and continued to be utilised in the said business. The assessee has not at all discharged the said onus by adducing relevant evidence. Hence, the basic condition about consideration of any excess profit as "reserve" that such profit shall not be expended but shall be retained in the business of the assessee does not seem to have been satisfied in the present case.
7. Furthermore, it has been decided by the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. (supra) that a mass of undistributed profits cannot automatically become a reserve and furthermore that somebody possessing the requisite authority must clearly indicate that a portion thereof has been earmarked or separated from the general mass of profits with a view to constitute it either as a general reserve or a specific reserve. In the instant case, the directors of the assessee-company did not pass any resolution converting the secret profit of the assessee-company kept outside its books as a general or a specific reserve of the company. The argument taken up by the learned counsel for the assessee that the entire net profit of the assessee had been transferred to general reserve does not hold good in this case inasmuch as the said net profit represented the declared net profit as per the books of the company. Nobody knows what the company should have done about the secret profits kept outside the books. The reliance placed by the learned counsel for the assessee on the three decisions as mentioned above is of no use to the assessee inasmuch as none of the decisions support the assessee's contention that even secret profits kept outside books will also have to be treated as "reserve" without any authorisation by the directors of the company. Finally therefore, we are of the view that the arguments put forward by the assessee in this case do not at all hold good and the secret profits of the company kept outside its books can in no way be considered as part of the 'reserves' of the company for the purpose of computation of capital base for surtax purposes. We, therefore, uphold the action of the CIT(A) in refusing to entertain the claim of the assessee in this regard.
8. In the result, the appeals filed by the assessee are dismissed.