COMMISSIONER OF INCOME TAX Vs. INDIAN TELEPHONE INDUSTRIES

JUDGEMENT

(1.) The assessee is a public sector Company to which the Uttar Pradesh Government granted some land free of cost and that had not been included in the books of account. On the advice of the statutory auditors and the Company Law Board, the assessee got the land valued and debited to land account by giving a corresponding entry in capital reserve account amounting to Rs. 6,11,415/-. The assessee included the value of this asset in the sur-tax assessment for the purpose of working capital base. The Sur Tax Officer rejected the claim of the assessee by applying Explanation 1 to Rule 2 of the Second Schedule to The Companies (Profits) Sur Tax Act, 1964 ('Act' for short). He also reduced capital base with reference to income exempt from tax under Section 80-I of the Income Tax Act.

(2.) On appeal, the Commissioner (Appeals) held that the explanation had no application to the case, and in his view a book asset would be an intangible asset such as goodwill. He also held that the reserve had not been brought into existence by revaluing or by creating a book-asset but by including the value of an asset which was brought into accounts so as to truly reflect the state of affairs and therefore he directed the Surtax Officer to include the capital reserve of Rs. 6,11,415/- for working out capital base. He upheld the assessee's contention in regard to the reduction of capital by excluding income under Section 80-I of the Income Tax Act and thus allowed the appeal.

(3.) On further appeal against this order by the Revenue, the Tribunal held that this is not a case where Reserve is brought into existence by creating or revaluing any existing asset already included in the list of book assets and all that the assessee did was only to reflect in the books of account an asset which had not been so done earlier, and this being a valuable asset its value had to be reflected in the books of account and agreed with the reasons given by the Commissioner in this regard. The Tribunal also upheld the finding of the Commissioner that the Sur-tax Officer was not justified in reducing the capital base with reference to income exempted under Section 80-I of the Act, and dismissed the appeal.