JUDGMENT
C.S.P. Singh, J.
1. The assessee is a limited company. The Parliament passed the C.(P.)S.T. Act, 1964. It received the assent of the President on 2nd of May, 1964. Section 4 of the Act brought to tax the chargeable profits of a company for every assessment year commencing from the 1st of
April, 1964, The chargeable profit that was subjected to tax was the amount which exceeded the statutory deduction. Section 2(8) defined statutory deduction as meaning an amount equal to ten per cent. of the capital of the company calculated in accordance with the provisions of the Second Schedule to the Act.
2. The chargeable profits were, in view of Section 2(5), to be calculated on the basis of the income of an assessee computed under the I.T. Act, 1961, for a previous year or years adjusted according to the provisions of the First Schedule. The First Schedule set out the various exclusions which were to be made from the income computed for the purposes of the I.T. Act. The Second Schedule set out the manner of computing the capital of a company for the purposes of surtax. For the assessment year 1965-66, for which the previous year of the assessee was from August 1, 1963, to 31st July, 1964, the assessee claimed that an amount of Rs. 3,03,114, which was shown in its balance-sheet as an initial depreciation reserve should be treated as a part of the capital. A claim was also put forward that an excess depreciation reserve of Rs. 1,89,055 should also go into the computation of the capital employed by the assessee. The 1TO disallowed this claim but accepted that in respect of Rs. 3,03,114. An appeal was filed before the AAC. It was contended that the excess provision of depreciation made by the assessee over that admissible under the I.T. Act was in the nature of a reserve and should be treated as such. The AAC rejected this contention relying on Expln. I to Rule 1 of the Second Schedule. As regards the claim for Rs. 3,03,114 which was shown as a reserve representing the initial depreciation allowed by the ITO, the AAC held that as this amount had been allowed under the I.T. Act while computing the income of the assessee, it could not be included in the capital calculation of the assessee in view of r, l(iii) of the Second Schedule. The assessee appealed to the Tribunal which failed. Now, the Tribunal has, at the instance of the assessee, referred the following two questions for the opinion of this court :
” 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount of Rs. 1,89,055 being excess provision for depreciation was not liable to be treated as a reserve for computing the capital of the assessee-company under the Second Schedule to the Act ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 3,03,114 standing to the credit of the initial depreciation reserve account was not liable to be treated as a reserve, while computing the capital of the assessee under the Second Schedule to the Act ? ”
3. So far as the first question is concerned that is no longer res integra for the matter stands covered by the decision of this court in CIT v. Hind Lamps Ltd. [1973] 90 ITR 487. In that case, it was held that any excess amount by way of depreciation over that allowed by the I.T. authorities as depreciation, cannot be allowed unless there is sufficient evidence to show that the amount was set apart for future use. In the present case, from a perusal of the balance-sheet at page 36, it appears that the amount of Rs. 1,89,055 is an adjustment entry. For, in the note of the auditors appearing at page 29, it is stated that this entry was made in the depreciation provision to bring the written down value of the fixed assets in line with the basis provided in Section 350 of the Companies Act, 1956. As a result of this adjustment, the amount was transferred to a general reserve. Similar was the position in Hind Lamps’ case [1973] 90 ITR 487 (All). This being so, as this amount was not set apart for any future use it could not be treated as a reserve for the purpose of Rule 1(iii) of the Second Schedule.
4. The next question now calls for consideration. We will extract Rule 1(iii) of the Second Schedule and the Explanation thereto to facilitate the answer :
” 1. Subject to the other provisions contained in this Schedule, the capital of a company shall be the aggregate of the amounts, as on the first day of the previous year relevant to the assessment year of–……
(iii) its 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 for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or the Income-tax Act, 1961 (43 of 1961) ;……
Explanation.–For the removal of doubts it is hereby declared that any amount standing to the credit of any account in the books of a company as on the first day of the previous year relevant to the assessment year which is of the nature of item (5) or item (6) or item (7) under the heading ‘ RESERVES AND SURPLUS ‘ or of any item under the heading ‘ CURRENT LIABILITIES AND PROVISIONS ‘ in the column relating to ‘ Liabilities ‘ in the ‘ Form of Balance-sheet ‘ given in Part I of Schedule VI to the Companies Act, 1956 (1 of 1956), shall not be regarded as a reserve for the purposes of computation of the capital of a company under the provisions of this Schedule.”
5. The claim for treating the initial depreciation reserve is sought to be founded on Rule 1(iii) of the Second Schedule. Before, however, a reserve can be added to the capital it is to be reduced by the amounts which are credited to such reserve and which have been allowed as deduction in computing the income of the company. The fact that the amount was so credited is apparent from the balance-sheet itself. There is also no dispute that like amounts were allowed while computing the income of the company for the purposes of income-tax. This being so the amount of
Rs. 3,03,114 will have to be reduced by the depreciation already allowed, and as the depreciation allowed is equal to the initial depreciation reserve, no addition can be made under this head for swelling the capital employed by the assessee.
6. Counsel for the department urged that the assessee’s claim stands defeated also by the Explanation to the rule which has already been quoted above. However, on the view that we have taken, it is not necessary to express any opinion on this aspect.
7. Both the questions referred are answered in the negative, in favour of the department and against the assessee. The department is entitled to costs which are assessed at Rs. 200. Counsel’s fee is assessed at the same figure.