Law:

Section:

Rule 1(iii) of the second schedule of the companies (profits) surtax act, 1964-Capital-Computation of-Whether development rebate reserve transferred to profit and loss appropriation account is to be excluded from 'other reserves' in view of rule 1(iii) for purpose of computation of capital base-Held, no Facts In its income-tax assessment, the assessee-company had claimed development rebate under section 33 of the Income-tax Act, 1961, and for that purpose created the required reserve, i.e., the development rebate reserve. After the expiry of the statutory period, the assessee-company had written back the above said reserve. In its surtax assessment, the assessee claimed that the capital employed in the business should be computed after taking, inter alia, into account the entire balance standing to the credit of the general reserve account on the opening day of the relevant accounting year. The ITO held that since the development rebate reserve, forming part of the general reserve account, had been allowed as a deduction in computing the total income of the assessee, it was to be excluded from capital computation by reason of rule 1(iii) of the Second Schedule. On appeal, the A AC held that what was allowed in the computation of total income was development rebate under section 33 of the Income-tax Act and the development rebate reserve was entirely distinct from the statutory allowance given to the assessee by way of development rebate. The AAC, therefore, reversed the ITO's order. On appeal by the revenue, the Tribunal reversed the AAC's order and upheld the ITO's order. On reference: Held The development rebate reserve for the relevant assessment year was not transferred to the general reserve account, but to the profit and loss appropriation account. Once the development rebate. reserve was transferred to the profit and loss appropriation account, it followed that it formed part of the profit available to the assessee for the purpose of making various allocations towards reserves and payment of dividends. The allocation made by the assessee towards general reserve for each of the relevant assessment years had nothing to do with development rebate reserve…

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