Law:

Section:

Section 4, read with rule 1(iii) of the Second Schedule, to the Companies (Profits) Surtax Act, 1964 - Capital - Computation of - Whether amount taken to general reserve consisting of profits eligible for relief under section 80J was includible for purposes of computing capital of company within meaning of rule 1(iii) of Second Schedule - Held, yes Facts The ITO, in making the capital computation under the Surtax Act, excluded two amounts shown for General Reserve No. 1 and General Reserve No. 2. On appeal, the AAC upheld the assessee's claim that the two amounts shown in the balance sheet as on 31-5-1967 on which date the year of the assessee-company ended, should also be included as a reserve. As far as the amount taken to General Reserve No. 1 was concerned, the Tribunal following the decision of the Supreme Court in CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566, held that the amount would form part of the reserve as on 1-6-1967 and would, therefore, have to be taken into account in computing the capital of the company. As regards the other amounts taken to General Reserve No. 2, the Tribunal held that the said amount also should be included for purposes of computation of capital within the meaning of rule 1(iii) of the Second Schedule to the Act. On reference: Held The department's contention 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) was to be rejected in view of the decision of the Kerala High Court in CIT v. Travancore Electro Chemical Industries Ltd. [1987] 167 ITR 359 wherein it was held that in computing the capital of the company for the purpose of surtax, a diminution of capital in proportion to the deductions allowed under sections 80M and 80G under rule 4 of the Second Schedule was not permissible. Hence, the Tribunal's finding that this amount had to be considered in computing the capital of the company was correct. Cases referred to CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566 (SC), CIT v. Travancore Electro Chemical Industries Ltd. [1987] 167 ITR 359 (Ker.) and CIT v. Premier Cotton Spg. Mills Ltd. [1981] 128 ITR…

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