Calcutta H.C : Whether, on the facts and in the circumstances of the case and on a correct interpretation of r. 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the Tribunal was correct in holding that a diminution of the capital, in proportion to the deduction allowed under ss. 80M, 80J and 80-0 of the Act of 1961, in computing the total income of the assessee under the latter Act, was not permissible ?

AJIT K. SENGUPTA, J.:

At the instance of the CIT, West Bengal, the following questions of law have been referred to this Court under s. 256(1) of the IT Act, 1961, for the asst. yrs. 1973-74 and 1974-75.

“(1) Whether, on the facts and in the circumstances of the case and on a correct interpretation of r. 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the Tribunal was correct in holding that a diminution of the capital, in proportion to the deduction allowed under ss. 80M, 80J and 80-0 of the Act of 1961, in computing the total income of the assessee under the latter Act, was not permissible ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the amount set apart as ‘Reserve for doubtful debts and advances’ and ‘Tax equalisation reserve’ were ‘reserves’ within the meaning of r. 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, and should be included in computing the capital of the assessee under the said Schedule?”

In view of the judgment delivered today in Income-tax Reference No. 131 of 1978 in CIT vs. Britannia Biscuit Co. Ltd. (since renamed as Britannia Industries Ltd.), (1990) 182 ITR 113 the first question is answered in the affirmative and in favour of the assessee.

The second question came up for consideration in the assessee’s own case in CIT vs. Cramophone Co. of India Ltd. (1986) 52 CTR (Cal) 316 : (1986) 162 ITR 725 (Cal). Following the said decision, we answer the second question in the manner indicated hereafter.

4. On the finding of the Tribunal and following the law laid down by the Supreme Court in Vazir Sultan Tobacco Co. Ltd. vs. CIT (1981) 25 CTR (SC) 186 : (1981) 132 ITR 559, it appears to us that the amount set apart under the head “Tax equalisation reserve” is wholly in excess of the amount that may be reasonably necessary for meeting the known or existing tax liability and this excess is to be treated as a reserve and included in the capital computation. We answer the common question for the asst. yrs. 1973-74 and 1974-75 in the affirmative to the extent as above and in favour of the assessee.

5. The second question, so far as it concerns the “Reserve for doubtful debts and advances”, cannot be answered as there is no finding whether the amount set apart under this head is in excess of what may be reasonably necessary to meet a known or expected liability. We remand the matter to the Tribunal to be disposed of in accordance with the principles laid down by the Supreme Court in Vazir Sultan Tobacco Co. Ltd.’s case (supra) and subsequent decisions of the Supreme Court on this issue. The Tribunal will, if necessary, call for further evidence in this matter.

6. No order as to costs.

BHAGABATI PRASAD BANERJEE, J.:

I agree.

[Citation :182 ITR 209]