Commissioner Of Income-Tax - Applicant(S v. M/S.krishnonic Pvt. Ltd. - Respondent(S

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SUR TAX REFERENCE No. 1 of 1998 For Approval and Signature: HONOURABLE MR.JUSTICE JAYANT PATELHONOURABLE MR.JUSTICE AKIL KURESHI =========================================================1[Whether Reporters of Local Papers may be allowed ]to see the judgment ?1[Whether Reporters of Local Papers may be allowed ]to see the judgment ? 2To be referred to the Reporter or not ? 3[Whether their Lordships wish to see the fair copy ]of the judgment ?of the judgment ? Whether this case involves a substantial question of law as to the interpretation of the of law as to the interpretation of the 4constitution of India, 1950 or any order made thereunder ?constitution of India, 1950 or any order made thereunder ? 5[Whether it is to be circulated to the civil judge ]?? =========================================================COMMISSIONER OF INCOME-TAX - Applicant(s) Versus M/S.KRISHNONIC PVT. LTD. - Respondent(s) ========================================================= Appearance :MR MANISH R BHATTfor Applicant(s) : 1,SERVED BY RPAD - (N) for Respondent(s) : 1,========================================================= CORAM :HONOURABLE MR.JUSTICE JAYANT PATEL and HONOURABLE MR.JUSTICE AKIL KURESHI Date : 02/07/2008 ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE JAYANT PATEL) 1. The question referred to this Court reads as under :under : “Whether,the Appellate Tribunal is right in law and on facts in confirming the order passed by the Commissioner of Income-tax (Appeals) directing the Assessing Officer to compute the capital employed by treating the sum brought forward from profit and loss appropriation account as reserve?”forward from profit and loss appropriation account as reserve?” 2. In order to examine the question, the relevant facts are as under:facts are as under: 3. The Assessee is a Private Limited Company registered under the Companies Act and the provisions of the Companies (Profits)Surtax Act, 1964(here-in-after referred to as “the Surtax Act” for convenience) are applicable. It appears that for the assessment year of 1986-1987, the Assessing Officer vide order dated 31.7.1989 did not allow the inclusion of the amount shown as Reserve to be treated as part of the capital to the Assessing Company on the basis that such amount represented the balance brought forward in the Profit and Loss Appropriation Account from the earlier year. The Assessing Officer registered under the Companies Act and the provisions of the Companies (Profits)Surtax Act, 1964(here-in-after referred to as “the Surtax Act” for convenience) are applicable. It appears that for the assessment year of 1986-1987, the Assessing Officer vide order dated 31.7.1989 did not allow the inclusion of the amount shown as Reserve to be treated as part of the capital to the Assessing Company on the basis that such amount represented the balance brought forward in the Profit and Loss Appropriation Account from the earlier year. The Assessing Officer extracted certain observations from the Director's report dated 14.6.1985 to the shareholders and considered that as in the subsequent year, a part of the amount is SUTR/1/1998 utilised for declaring dividend, the same can be termed as Reserve towards the provisions made for distribution of the dividend. The Assessing Officer after extracting the Director's report observed that the balance has been transferred termed as Reserve towards the provisions made for distribution of the dividend. The Assessing Officer after extracting the Director's report observed that the balance has been transferred extracted certain observations from the Director's report dated 14.6.1985 to the shareholders and considered that as in the subsequent year, a part of the amount is SUTR/1/1998 utilised for declaring dividend, the same can be termed as Reserve towards the provisions made for distribution of the dividend. The Assessing Officer after extracting the Director's report observed that the balance has been transferred termed as Reserve towards the provisions made for distribution of the dividend. The Assessing Officer after extracting the Director's report observed that the balance has been transferred to the balance-sheet but same has not been earmarked for specific purpose for a specific occasion other than distribution of dividend and therefore, ultimately order of disallowing came to be passed.earmarked for specific purpose for a specific occasion other than distribution of dividend and therefore, ultimately order of disallowing came to be passed. 4. In appeal before the Commissioner of Income-tax(Appeals), the factual findings recorded at para.2.2 reads as under :tax(Appeals), the factual findings recorded at para.2.2 reads as under : “the unappropriated balance in the Profit & Loss Account which does not represent any liability or provision for any contingency has to be teated as reserve for the purpose of Sur-tax Act.” Account which does not represent any liability or provision for any contingency has to be teated as reserve for the purpose of Sur-tax Act.” 5. Based on the same, the Commissioner (Appeals) allowed the appeal. The Tribunal concurred with the factual findings of Commissioner(Appeals) and found that the Reserve has to be treated for the purpose of the Surtax Act and confirmed the order of Commissioner (Appeals). Under these circumstances, the present reference for the aforesaid question.allowed the appeal. The Tribunal concurred with the factual findings of Commissioner(Appeals) and found that the Reserve has to be treated for the purpose of the Surtax Act and confirmed the order of Commissioner (Appeals). Under these circumstances, the present reference for the aforesaid question. 6. Provisions of the Surtax Act if read with the decision of the Apex Court in case of National decision of the Apex Court in case of National Rayon Corporation Ltd. v. Commissioner of Income-tax reported at 227 ITR 764, it is clear Income-tax reported at 227 ITR 764, it is clear that if the reserve and surplus is created with specific purpose or for a particular contingency, it may stand on a different consideration for exclusion in the capital for the purpose of the Surtax Act. However, if the Reserve is in absence of any such provision, it is to be considered as a part of the capital for the purpose of the Surtax Act.the purpose of the Surtax Act. 7. As observed earlier, the factual findings of two authorities below namely Commissioner(Appeals) authorities below namely Commissioner(Appeals) as well as of the Tribunal is that the Reserve is not created against any contingency or any particular provision. It is not the contention of the learned Counsel for the Revenue that such findings of fact of both the lower authorities is perverse to the record nor any material is brought to the notice of this Court for such purpose. Therefore, it appears to us that the Tribunal was right in confirming the order of Commissioner of Income-tax (Appeals) for directing the Assessing Officer to compute the capital employed by treating the sum brought forward from the Profit and Loss Appropriation Act as Reserve. Act as Reserve. 8. Hence, we answer the question in affirmative in favour of Assessee and against the Revenue.favour of Assessee and against the Revenue. 9. Disposed of accordingly. (raghu) (Jayant Patel,J.) (Akil Kureshi,J.)