Madras High Court
Commissioner Of Income-Tax, Tamil ... vs Peirce Leslie And Co. Ltd. on 17 January, 1983
Equivalent citations: [1984]147ITR157(MAD)
JUDGMENT Balasubrahmanyan, J.
1. This reference arises out of an assessment under the Companies (Profits) Surtax Act, 1964. The following two questions have been formulated for our opinion :
"1. Whether, on the facts and in the circumstance of the case, the assessee could be allowed to raise the point before the Tribunal that rule 3 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, should be taken note of in ascertaining the amount of its paid up capital ?
2. Whether, on the facts and in the circumstances of the case, Rs. 15,56,786, being the difference between the depreciation adjusted in the books of the assessee up to November 30, 1965, and the corresponding deductions allowed in the corresponding assessment to income-tax in respect of the assessee's trade investments, is to be considered as reserve for the purpose of computing the capital base for ascertaining the statutory deduction ?"
2. The first question raised at the instance of the Department directs an inquiry as to the scope of the appellate jurisdiction of the Tribunal in cases arising under the Companies (Profits) Surtax Act, 1964. Section 12 of this Act provides for an appeal to the Tribunal from an order passed by the AAC. Section 12(7) of the Act enacts that in hearing and making an order on any appeal before it, the Appellate Tribunal shall exercise the same powers and follow the same procedure as it exercise and follows in hearing and making an order on any appeal under the I.T. Act 1961. This provision obviously intends a reference to be made to s. 254(1) of the I.T. Act, 1961. This latter section enacts that the Tribunal may, after giving both parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The expression "thereon", when expanded, means "on the appeal".
3. The scope of the power of the Appellate Tribunal has, therefore, to be spelt out from the terms of s. 254(1) of the I.T. Act, read with s. 12(7) of the Companies (Profits) Surtax Act, 1964. There is a plethora of case law in the law reports dealing with the scope of the Tribunal's appellate powers.
4. The question touching the appellate jurisdiction of the Tribunal has arisen in the present case in the following circumstances. the surtax assessee in this case is a sterling company. The figures in the companies balance-sheet are drawn up in terms of pound sterling. For the purpose of assessment under the surtax Act, the officer determined the capital of this company in terms of rupees, by applying the exchange rate of Rs. 21 to a pound to the figures found in the company's balance-sheet and on that basis converted the sterling figures in the balance-sheet into their rupee equivalents. The Commissioner considered that the officer had applied a wrong rate of exchange. He accordingly set aside the order of the ITO and directed him to redo the assessment by recomputing the capital by applying the exchange ratio of 1s. 6d. to the rupee. The assessee appealed to the Tribunal against the Commissioners order in the revision. At the hearing of the appeal, the assessee did not dispute the Commissioners direction to apply the exchange rate of 1s. 6d. to a rupee as the appropriate conversion rate of sterling into rupee. However, the learned counsel for the assessee urged before the Tribunal that this rupee sterling ratio was changed half way through the relevant previous year because of the devaluation of the rupee. It was pointed out that subsequent to the devaluation of the rupee the rupee sterling exchange rate became 21 rupee to the pound. On these facts it was urged for the assessee that the conversion of the sterling figures into rupee equivalents must be done on a time basis, having regard to the devaluation of the rupee almost right in the middle of the previous year.
5. The Tribunal entertained these contentions of the assessee, despite that fact that they had not been urged either at the assessment stage or at the stage of revision by the Commissioner. The objection of the Department before us is that the Tribunal was in error in entertaining this new plea urged for the first time by the assessee at the stage of appeal before the Tribunal. The contention is that the Tribunal has no power to entertain any fresh point which has not been mooted at the prior stage of the proceedings.
6. We must reject, as untenable, the contentions put forward by the Department on the scope of the Tribunal's appellate jurisdiction. In a recent judgment of a Full Bench of this court in a group of sales tax cases, it was held that the Sales Tax Appellate Tribunal has the power to entertain a new point which had not been raised earlier : (vide State of Tamil Nadu v. Arulmurugan and Co. [1982] 51 STC 381).
7. On the basis that sales tax enactments are in pari material with the I.T. Act, in so far as the powers of the appellate bodies are concerned, there have been subsequent decisions of this court which have adopted the Full Bench ruling and applied the principle of that judgment for defining the scope of the jurisdiction of the Income-tax Appellate Tribunal in appeals arising under the I.T. Act and other direct taxes enactments : (CIT v. Indian Express (Madurai) Pvt. Ltd. [1983] 140 ITR 705 (Mad)). Following these decisions, we must hold that the Tribunal has power to entertain a new point in the appeal.
8. We may, therefore, point out that the while entertaining the new plea put forward by the assessee, the Tribunal did not themselves enter into the merits of the question at issue, but remanded the matter to the Commissioner for a fuller consideration. Mr. Jayaraman made a minor grievance of the Tribunal's decision to remit the matter to the Commissioner. We, however, do not see how there can be any possibly objection to the Tribunal remanding a matter, when no exception can be taken, on the ground of jurisdiction to the Tribunal themselves disposing of the merits of the contentions. when the Tribunal have jurisdiction to do by way of disposal on merits, the Tribunal certainly have jurisdiction to do by way of a remittal order. Our answer to the first question, therefore, is against the Department.
9. The order question of law reference by the Tribunal is at the instance of the assessee. It calls for our decision, on merits, in regard to an aspect of computation of the capital of the company under the Second Schedule to the Surtax Act. The rules in this Schedule lay down how the capital of the assessee-company should be computed for purposes of working out the statutory deduction. Broadly speaking, the capital of the company is ascertained by adding, to its paid up capital, the company's reserves. The contention of the assessee-company in this case is that reserves in the Second Schedule to the Act are not necessarily limited to reserves which are created by the company openly and which figure on the liabilities side of the balance-sheet. Accordingly to the assessee, even reserves which are popularly called "secret reserves" must be reckoned for the purpose of capital computations.
10. It appears that this company has been making a provision for depreciation year by year and charging it to profit and loss account at rates higher than the rates granted to the company's depreciable assets under our I.T. Act. To the extent, therefore, an excess provision has been made by the company every year and charged to profit and loss, to that extent there has been "secret reserve" built up for the company.
11. As respects another item in the balance-sheet namely, trade investment figuring on the assets side of the balance-sheet as at November 30, 1965, the assessee-company claimed that they were shown at a valuation much lower than their real value. The claim of the assessee was that in this fashion also a "secret reserve" had been created which is not discernible on the surface from the figures displayed in the balance-sheet.
12. It was the contention of the assessee before the departmental authorities that these "secret reserves" have got to be ferreted out from the balance-sheet and taken into consideration for the purpose of calculating the capital base under the second schedule to the surtax Act. The Commissioner, however, did not accept this contention. Accordingly, in the appeal against the order of the Commissioner, the assessee raised the question of "secret reserve" also. The Tribunal, however rejected the assessee's contention.
13. In our opinion, the Tribunal was correct in doing so. The answer to the question is not bereft of authority. In English Electric Co. of India Ltd. v. CIT , this question has been dealt with. As in the present case, so too in the decision rendered by the Division Bench in the reported case, the company did not set about creating an actual reserve as respects the excess provision for depreciation made in the earlier years. The court held that in the absence of creation of a specific reserve for this purpose, the assessee would not be entitled to a pro tanto addition to the capital base.
14. To the same effect is a judgment of the Mysore High Court in Mysore Electrical Industries Ltd. v. Commissioner of Surtax [1971] 80 ITR 571. In that case, an excess provision for depreciation was claimed as a reserve in the computation of the capital under the Second Schedule to the Surtax Act. Rejecting this claim, the Mysore High Court observed as follows (p. 573) :
15. The amount of Rs. 1,03,162.... is said to be the difference between the depreciation computed by the assessee on its assets and the depreciation allowed by the income-tax authorities. It was urged that to the extent of the difference, the value of the assets is enhanced and, therefore, the said item should be regarded as reserve. We are unable to acceded to the said contention. The balance-sheet of the company does not show any such item as reserve'."
16. In the latest decision of the Supreme Court in Vazir Sultan's case , it was held that reserve whether general or specific, can be called a reserve only if the amount in question is kept apart of the requisite purpose. The court further observed that someone possessing accredited authority in the company must clearly indicate that a portion of the undistributed profits has been specifically earmarked or separated from the general mass of profits with a view to constituting it either as a general reserve or as a specific reserve. The court also referred to the importance of going into the surrounding circumstances of appropriation of profits for the purpose of ascertaining whether the amount earmarked or set apart is in fact a reserve to be utilised in future for any specific purpose or on any specific occasion.
17. In view of the clear enunciation by the Supreme Court of the nature of the "reserve" and the pre-condition for its coming into existence, we do not see how a mere excess provision for depreciation allowance accumulated over the years, can qualify for the status of a reserve. A provision in a fit of absent-mindedness, or what turns out to be an over-provision by reason of subsequent events, cannot per se, be regarded as a reserve. To create a reserve there must be a positive and overt act on the part of the company. In the case of secret reserve ex hypothesis there cannot be any overt act of creating a reserve by segregating or setting apart of profits appropriate for any given purpose.
18. What we have stated about the over-provision for the depreciation allowance also applies, mutatis mutandis, to the writing down of the trade investments of the company on the assets side of the balance-sheet. Our answer to the second question of law is against the assessee. In view of the mixed results of this reference, we make no direction as to costs.