ORDER
R.L. Sangani, Judicial Member
1. This appeal by the assessee relating to the asst. year 1983-84 arises out of proceedings for assessment under the Companies (Profits) Surtax Act, 1964.
2. The assessee company had debited to profit and loss account an amount of Rs. 23,28,708 being depreciation on assets used for business. The said amount represented depreciation as calculated on the basis of what is known as, “straightline method”. However, under the provisions of the Income-tax Act, 1961 the assessee was entitled to depreciation of Rs. 42,56,761 and the said depreciation was allowed to the assessee in the assessment under the Income-tax Act, 1961. The 1AC(A) observed that since the depreciation allowed in the assessment for income-tax was more than the depreciation mentioned in the books of accounts of the assessee, the general reserve would get reduced by the difference between the two figures which came to Rs. 19,28,053. Consequently, in the computation for sur-tax he reduced the general reserve as shown in the balance sheet by the above mentioned amount for determining the capital of the company. The Commissioner of Sur-tax. (Appeals) before whom the assessee filed appeal confirmed the order of the I AC(A) observing that since the total income assessed under Income-tax Act would form basis for computation of chargeable profits and since in said assessed income depreciation of Rs. 42,56,761 had been actually allowed there was no reason why the reserve should not be reduced by the difference of Rs. 19,28,053 because the said excess depreciation would go to reduce the profit and consequently the reserve. He referred to the decision of Calcutta High Court in Upper Ganges Sugar Mills Ltd. v. CIT [1981] 129 ITR 438.The assessee has now come in further appeal before the Tribunal.
3. The learned counsel for the assessee has drawn our attention to provisions of Section 4 read with Section 2(5) and 2(8) of the Companies (Profits) Surtax Act, 1964 and also the provisions of First Schedule and Second Schedule of said Act and has submitted that there was no provision under which the general reserve as shown in the balance sheet of the company could be reduced in computation of surtax on the above facts. It was further submitted that decision of Calcutta High Court was distinguishable on facts and the principle laid down therein was not applicable. The learned Departmental Representative, on the other hand, submitted that since profits had been reduced because of allowance of higher amount of depreciation, the reserves as shown in the balance sheet were bound to be reduced by the difference between the depreciation allowed in the income-tax proceedings and depreciation as actually provided in the books.
4. We have considered the rival submissions and facts on record. Section 4 of the Act lays down that subject to the provisions contained in the Act there shall be charged on every company sur-tax in respect of so much of its chargeable profits of the previous year as exceed the statutory deduction at the rate or rates specified in the Third Schedule. It is clear from this provision that there are three ingredients in the processing of sur-tax. Chargeable profit which is one of them is the tax base. Chargeable profits are equivalent to the total income of the company as determined under the Income-tax Act, as adjusted for the purposes of sur-tax in three-fold ways specified in Rules 1 to 3 of the First Schedule to the Act, two of which are by way of deduction from total income while the third is by way of addition to the total income. The resultant sum arrived at, on such adjustment would be ‘chargeable profits’. The second ingredient in the process of determination of sur-tax is statutory deduction. The charge of sur-tax arises only if the sum of the “chargeable profits” exceeds the statutory deduction; and the incidence is on such excess, if any. The result is that if the statutory deduction is more than the sum of chargeable profits there is no liability to sur-tax. As far as the statutory deduction is concerned, the same is computed at 15% of the capital of the company, or Rs. 2 lakhs whichever is greater. Thus, the capital is the third ingredient in the computation of sur-tax. The rules of computation of chargeable profits are enumerated in the First Schedule to the Act while the rules for computation of capital are set forth in the Second Schedule to the Act. The rate at which the sur-tax is to be levied is provided in the Third Schedule. It is clear from the above analysis regarding computation of sur-tax, that as far as determination of chargeable profits is concerned, we have to follow the rules laid down in the First Schedule while as far as determination of capital was concerned, we have to follow the rules in the Second Schedule. Only those adjustments can be made in the chargeable profits as are mentioned in the First Schedule and only those adjustments can be made in the computation of capital as are laid down in Second Schedule.
5. In the present case, the dispute relates to computation of capital and as such we have to look to the provisions of Second Schedule.
Rule 1 of the Second Schedule lays down that the capital of the company shall be the aggregate of the amounts as on the first day of the previous year relevant to the assessment year, of (1) its paid up share capital, (2) its reserves, if any, created under certain provisions of the Income-tax Act, 1922 and (3) its other reserves as reduced by the amounts credited to such reserves as have been allowed as deduction in computing the income of the company for the purposes of Income-tax Act. In the present case, no such amounts have been credited to the reserves and as such the reserves are not liable to be reduced by any amount. There is no provision in the Second Schedule under which difference in the depreciation actually allowed under the Income-tax Act and depreciation as provided in the books of accounts could be deducted from the reserves which have been created out of profits (after payment of tax). Merc fact that profits as assessed under the Income-tax Act were less than the profits determined in the books would not entitle the Assessing Officer to reduce the reserves when there is no specific provision in the Second Schedule to that effect. The reserves as created in the books could be reduced only by such amounts as are mentioned in the rules in the Second Schedule. No reduction as is not provided for in Second Schedule could be made from the reserves for computing the capital. The Second Schedule is a complete code by itself for computation of capital and as such no reduction can be made for which there is no express basis in the rules in the Second Schedule. Since there is no provision in the Second Schedule for deducting the difference between the depreciation allowed under the Income-tax Act and depreciation as provided in the books of accounts, no such deduction can be made in computation of capital for determining sur-tax. Consequently, the order of the IAC(A) cannot be sustained.
6. The decision of the Calcutta High Court in Upper Ganges Sugar Mills Ltd.’ s case (supra) on which the learned Commissioner of Surtax (Appeals) has relied is not applicable to the facts of the case. In that case, the assessee had been claiming depreciation according to the written down value method upto the earlier assessment year but in the year under consideration it changed the said method and adopted the straightline method and adjusted the excess depreciation as computed under Section 205(2)(b) of the Companies Act, 1956. On the facts of the said case Explanation 1 to Rule 2 of Second Schedule was attracted under which a reserve brought into existence by creating or increasing (by revaluation or otherwise) in book assets was not capital for computing the capital of the company for the purpose of the Act. To the facts of that case Explanation 1 clearly applied and the decision was given on the basis of said Explanation. As far as the facts of our case are concerned, the said Explanation was not applicable. In fact, as already stated there is no provision in the Second Schedule under which an adjustment in respect of the difference between the depreciation allowed under the Income-tax Act and depreciation as provided in the books could be made.
7. In this connection, we may refer to the decision of the Andhra Pradesh High Court in CIT v. Vazir Sultan Tobacco Co. Ltd. [1988] 169 ITR 555 to which our attention was drawn by the learned counsel for the assessee. It is expressly mentioned that the provision made by the assessee in its accounts for depreciation, far in excess of the depreciation allowable under the Income-tax Act, 1961, called depreciation reserve, which was created out of profits of the company after deduction of tax, with a view to provide for unforeseen contingencies, is a reserve falling within the expression “other reserves” in Clause (in) of Rule 1 of Schedule 2 to the Companies (Profits) Surtax Act, 1964 and was includible in computing the capital of the assessee for the purposes of sur-tax. This decision emphasises the fact that the expression “other reserves” in Rule 1 of Second Schedule included those reserves which were created out of profits of the company after deduction of tax. The reserves in our case are created out of profits after deduction of tax, and, as already stated, they are not liable to be reduced by the difference in the depreciation actually allowed in the assessment proceedings and depreciation as provided for in the books of accounts.
8. For reasons stated above, we set aside the order of IAC (Assessment) deducting the difference between the depreciation allowed under the Income-tax Act and depreciation as provided in the books of accounts from the reserves in the computation of capital.
9. The appeal is allowed.