Commissioner of Income-tax Vs. George Williamson (Assam) Ltd. - Court Judgment

Excerpt:
- - the words 'subject to the other provisions contained in rule 1 of the second schedule' clearly suggest that the provisions therein for computation of the capital of the company is subject to other rules of the second schedule. d. biswas, j. 1. this appeal under section 260a of the income-tax act, 1961, is directed against the order dated april 4, 2000, passed by the income-tax appellate tribunal, guwahati bench, guwahati, in s.t.a. nos. 1, 2, 3, 4 and 5 (gauhati) of 1993. the revenue challenged the aforesaid order on the ground that the learned tribunal erred in law and fact in affirming the decision of the commissioner of surtax (appeals) in including a sum of rs. 1,43,89,055 as difference between the value of the assets and considerationpaid for computing the capital to determine the statutory deduction under the provisions of section 2(8) of the companies (profits) surtax act, 1964. at the time of admission, the following questions were formulated for consideration in this appeal : '(1) whether, on the.....

Judgment:

D. Biswas, J.

1. This appeal under Section 260A of the Income-tax Act, 1961, is directed against the order dated April 4, 2000, passed by the Income-tax Appellate Tribunal, Guwahati Bench, Guwahati, in S.T.A. Nos. 1, 2, 3, 4 and 5 (Gauhati) of 1993. The Revenue challenged the aforesaid order on the ground that the learned Tribunal erred in law and fact in affirming the decision of the Commissioner of Surtax (Appeals) in including a sum of Rs. 1,43,89,055 as difference between the value of the assets and consideration

paid for computing the capital to determine the statutory deduction under the provisions of Section 2(8) of the Companies (Profits) Surtax Act, 1964. At the time of admission, the following questions were formulated for consideration in this appeal :

'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified and correct in law in treating the amount of Rs. 1,43,89,055 as capital reserve forming part of the capital of the assessee under Rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, read with Explanation 1 to Rule 2 of the said Second Schedule ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified and correct in law in upholding the direction given by the Commissioner of Surtax (Appeals) to the Assessing Officer to include the sum of Rs. 1,43,89,055 in the assessee's capital to determine the statutory deduction for the purpose of its surtax assessment under the Companies (Profits) Surtax Act, 1964 ?'

2. We have heard Mr. U. Bhuyan, learned standing counsel for the Revenue, and Dr. A.K. Saraf, learned senior counsel assisted by Mr. S.K. Agarwal, learned counsel for the assessee.

3. The Companies (Profits) Surtax Act, 1964, was enacted with a view to impose a special tax on the profits of certain companies. The 'chargeable profits' defined in Sub-section (5) of Section 2 of the Act of 1964 means the total income of an assessee computed under the Income-tax Act of 1961, for the relevant year, after adjustment in accordance with the provisions of the First Schedule. The First Schedule of the Act provides the method for computation of the 'chargeable profits'. The chargeable profits are the total income computed under the Income-tax Act after deductions admissible under Rule 1 of the First Schedule. The Second Schedule provides the procedure for computation of capital of the company for the purposes of surtax. The Second Schedule permits statutory deduction as defined in Sub-section (8) of Section 2. Ten per cent, of the capital of a company computed in accordance with the provisions of the Second Schedule, or an amount of two hundred thousand rupees, whichever is greater, is the statutory deduction permissible under the Second Schedule. Section 4 is the charging section. This section provides for levy of surtax at the rate or rates specified in the Third Schedule on the chargeable profits of the relevant year in excess of the statutory deduction.

4. The respondent, George Williamson (Assam) Ltd., operating in India, acquired twelve sterling tea companies in accordance with a scheme of arrangement for amalgamation under the provisions of Sections 391, 392, 393 and 394 of the Companies Act, 1956. The consideration was determined and passed over with the approval of the Reserve Bank of India. The consideration paid fell short of the book value of the net assets. The difference between the book value of the net assets and the considerations, as determined by the Reserve

Bank of India, is Rs. 1,43,89,055. The Assessment Officer did not consider this amount while computing the capital under the provisions of the Second Schedule.

5. The assessee preferred appeals against the assessments made under Sub-section (2) of Section 6 of the Act of 1964. The Commissioner (Appeals) disposed of all the appeals on different dates directing the Assessment Officer to recompute the chargeable profits considering the aforesaid amount as capital reserve for the purpose of surtax assessment.

6. Aggrieved thereby, the Revenue preferred the above mentioned five appeals before the Income-tax Appellate Tribunal, Guwahati Bench. The Income-tax Appellate Tribunal by a common judgment dated April 4, 2000, disposed of all the five appeals affirming the direction given by the Commissioner of Surtax (Appeals).

7. The appellant's contention before this court is that the capital reserve of the nature at hand cannot be treated as a component of the capital under Sub-rule (iii) of Rule 1 of the Second Schedule. Mr. Bhuyan, learned counsel argued that the provisions of Sub-rule (iii) of Rule 1 have to be read with Explanation 1 to Rule 2 of the Second Schedule.

8. Before the questions raised by Shri Bhuyan, learned counsel are addressed, it would be apposite to mention here that the Commissioner of Income-tax (Appeals) and the learned Tribunal rejected the plea of the appellant on the ground that the company took over not only the assets of the erstwhile Sterling Tea Company, but also the liabilities and, therefore, the shortfall between the price paid and the book value of the assets acquired could not but be treated as 'other capital reserve' in accordance with the normal accounting principles. The learned Tribunal agreeing with the views of the Commissioner further held that at the time of taking over no exercise was taken to tally the assets and the Reserve Bank of India also approved the consideration paid in a lump sum. According to the learned Tribunal, the words 'brought into existence' cannot be read in isolation of the words 'by creating or increasing (by valuation or otherwise) any book asset' occurring in Explanation 1 to Rule 2 of the Second Schedule.

9. We have considered the matter in depth. The words 'subject to the other provisions contained in Rule 1 of the Second Schedule' clearly suggest that the provisions therein for computation of the capital of the company is subject to other rules of the Second Schedule. Sub-rule (iii) of Rule 1 provides for other reserves as reduced by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company under the Indian Income-tax Act. This provision is further qualified by Explanation 1 to Rule 2 which provides that reserves brought into existence by creating or increasing (by valuation or otherwise) any book asset is not a capital for computing the capital of the company for the purposes of the Act. The assessee in

the instant case acted on the net value of the assets as appearing in the books of the sterling tea company resulting in difference between the book value and the consideration paid. This difference of Rs. 1,43,89,055 had to be treated as other reserves to fill in the gap between the book value of the net assets and the consideration paid. By this exercise, on the part of the assessee, the reserve equivalent to shortfall was brought into existence by the assessee. Had there been no shortfall between the book value of the assets acquired and the price paid, the question of creation of other reserves would not have arisen. The shortfall obviously occasioned the creation of other reserves. In the books of account of the assessee, the book value of the assets in normal course should have been less by Rs. 1,43,89,055 than what is reflected in the books of account of the Sterling Tea Companies. The assessee after acquisition of the companies disclosed the same book value of the assets as reflected in the books of the sterling tea companies and in the process has brought into existence the amount of reserves. The assessee obviously received benefits in the computation of income-tax on account of this, and as such, this reserve, in our opinion, cannot be treated as a component of the capital for the purpose of surtax assessment. In other words, the reserve created was not subjected to income-tax. Though, on the face of it, the reserve is covered by the provisions of Sub-rule (iii) of Rule 1, when read with the Explanation 1 to Rule 2, a different situation arises. In our opinion, the reserve created by the assessee on the shortfall between the net value of the assets and the consideration paid even if not taxed under the Income-tax Act will not get any exemption in view of the provisions in Explanation 1 to Rule 2, The decisions of the Commissioner of Income-tax (Appeals) and of the learned Tribunal, therefore, are not tenable in law. The Assessment Officer was right in not taking into consideration this amount while computing the capital under the provisions of the Second Schedule to the Act of 1964. Accordingly, we answer the questions in negative in favour of the Revenue.

10. In the result, all these five appeals, accordingly, stand allowed.