Judgment:
S.K. Desai, J.
1. This is a reference at the instance of the Commissioner of Income-tax, Bombay City III, Bombay, made by the Income-tax Appellate Tribunal, Bombay Bench 'B', under section 256(1) of the Income-tax Act, 1961. The question referred to us for our consideration to be found in paragraph 5 of the reference reads as under :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the Appellate Assistant Commissioner was correct in directing the Income-tax Officer to also include the sum of Rs. 1,55,000 credited to General Reserve No. 2 for the purposes of the computation of capital within the meaning of rule 1 (iii) of the Second Schedule to the Surtax Act, 1964 ?'
2. For this assessment, we are concerned with the computation of capital under the Companies (Profits) Surtax Act, 1964. The Income-tax Officer in making the capital computation excluded two amounts, being the amounts shown for General Reserve No. 1 and General Reserve No. 2. The assessee carried the matter in appeal and contended that a sum of Rs. 5,65,000 shown in the balance-sheet as at May 31, 1967, should also be included as a reserve. It is pertinent to note at this juncture that the accounting year of the company ended on May 31, 1967. Out of the profits for that year, two amounts were appropriated, namely, Rs. 4,10,000 to General Reserve No. 1 and Rs. 1,55,000 to General Reserve No. 2 (tax free). The Appellate Assistant Commissioner accepted the assessee's contention that on June 1, 1967, (sic) which is the first day of the previous year, the General Reserves stood augmented by the aggregate figure of Rs. 5,65,000. Aggrieved by the decision of the Appellate Assistant Commissioner, the Department carried the matter further to the Tribunal.
3. The Tribunal considered the matter in two parts, the first as regards the amount of Rs. 4,10,000 taken to General Reserve No. 1 and, secondly, as to the amount of Rs. 1,55,000 taken go General Reserve No. 2.
4. As far as the amount of Rs. 4,10,000 was concerned, the Tribunal opined, with which opinion we concur, that the matter was concluded in favour of the assessee by the decision of the Supreme Court in CIT v. Mysore Electrical Industries Ltd. : [1971]80ITR566(SC) . According to the decision of the Supreme Court as applied and correctly applied by the Tribunal, the amount would form part of the reserve as on June 1, 1967, (sic) and would, therefore, have to be taken into account in computing the capital of the company.
5. As regards the sum of Rs. 1,55,000 apart from the Department's contentions in respect of the said amount which was identical with that for General Reserve NO. 1 and which, therefore, had to be repaid, the Department came out with another contention, namely, that since General Reserve No. 2 consisted of profits eligible for relief under section 80J, it would not form part of the reserves under rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act. In a number of decisions, such a contention has been rejected. One of the decisions to which our attention is drawn is CIT v. Travancore Electro Chemical Industries Ltd. : [1987]167ITR359(Ker) . In the said decision, the Kerala High Court, following its earlier decision in CIT v. Premier Cotton Spinning Mills Ltd. : [1981]128ITR694(Ker) , has observed that in computing the capital of the company for the purpose of surtax under the Companies (Profits) Surtax Act, 1964, a diminution of capital in proportion to the deductions allowed under sections 80M and 80G under rule 4 of the Second Schedule to the Act, is not permissible. There is no valid reason submitted for our consideration for refusing to follow the above decision of the Kerala High Court.
6. Thus, even as regards General Reserve No. 2, the conclusion of the Tribunal that it has to be considered in computing the capital of the company will have to be accepted as correct.
7. In the question referred to us at the instance of the Commissioner, we are only concerned with Rs. 1,55,000 taken to General Reserve No. 2 and not the aggregate amount of Rs. 5,65,000. As indicated, on this amount also, the Tribunal's approach and conclusion were correct. Accordingly, the question will have to be answered in the affirmative and in favour of the assessee.
8. The parties, however, will bear their own costs of the reference.