Law: Income Tax Act, 1961

Section: 256

Income tax-----Company---Super profits tax---Surtax---Computation of capital---Meaning of "fund"---Provision for taxation---Not a "fund"---Not deductible from cost of excluded investments---Super Profits Tax Act, 1963, Sched. II--¬Companies (Profits) Surtax Act, 1964, Sched. II---Circular No. I.P. (XV-5) of 1968, dated 23-1-1968---[Duncan Brothers & Co. Ltd. v. CIT (1978) 111 ITR 885 reversed]. Under both the Super Profits Tax Act, 1963, and the Companies (Profits) Surtax Act, 1964, tax is levied on the chargeable profits of the company as exceed the standard deduction or the statutory deduction. Such deduction has to be worked out at the prescribed percentage of the capital of the assessee-company. The computation of capital for purposes of these two Acts has to be made in accordance with the provisions of Second Schedule in both these Acts. Since the Second Schedule to both these Acts pertains to computing the capital of a company for the purposes of that under these Acts, the terms used in the Second Schedule need to be interpreted in. the context of the balance-sheet of a company and its profit and loss account which will necessarily have to be looked into to ascertain the company's capital and its profits. The terms used must, therefore, be read in the light of the provisions of the Companies Act, 1956, and their meaning in accounting parlance. The form of the balance-sheet of a company prescribed under Schedule VI to the Companies Act, 1956, under the column "reserves and surplus" contains a note to the following effect: "The word 'fund' in relation to any 'reserve' should be used only where such reserve is specifically represented by earmarked investments". The juxtaposition of funds with surplus and reserves clearly refers to accounting language and the manner in which these three terms are understood in accounting practice. Where the assessee has earned income from dividends as envisaged in clause (viii) of rule 1 of the Second Schedule to the 1963 and the 1964 Acts, a provision for taxation cannot be considered to be a fund. Circular No. I.P. (XV-5) of 1968, dated January 23, 1968, of the Central Board of Direct Taxes deals with the treatment of…

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