Development rebate reserve transferred to profit and loss account not excluded from capital base under Companies (Profits) Surtax Act, 1964, r. 1(iii). Sums drawn from general reserve for dividends excluded from general reserve account in computing capital base.

( 1 ) IN this reference under s. 18 of the Companies (Profits) Surtax Act, 1964, read with s. 256 (1) of the I. T. Act, 1961, the Income-tax Appellate Tribunal referred for the opinion of this court two questions - one at the instance of the Commissioner of Income-tax and another at the instance of the assessee. The two questions are extracted :

( 2 ) QUESTION at the instance of the Commissioner of Income-tax :"1. Whether, on the facts and circumstances of the case, r. 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, is applicable to deduction under s. 80 or to income exempt under section 10 of the Act only for computing the capital and ascertaining the standard deduction ?"

( 3 ) QUESTION at the instance of the assessee :"2. Whether, on the facts and circumstances of the case, the development rebate reserve transferred to the general reserve at the end of the statutory period is to be excluded from other reserves under rule 1 (iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, for the purpose of computation of capital base ?"

( 4 ) COUNSEL for both sides represented that the answer to the first question is covered by a decision of this court in CIT v. Indian Detonators Ltd. [1983] 143 ITR 547 in favour of the assessee. We, accordingly, answer the question referred to us at the instance of the Commissioner, in favour of the assessee and against the Revenue, upholding the view taken by the Income-tax Appellate Tribunal.

( 5 ) AS regards question No. 2 referred to us at the instance of the assessee, it may be relevant to notice a few facts. The assessee-company claimed deduction in its income-tax assessment in respect of development rebate under s. 33 of the I. T. Act and for that purpose created the required reserve. After the expiry of the statutory period of eight years, the assessee-company had written back the reserves. In its surtax assessment, the assessee claimed that under Schedule II to the Companies (Profits) Surtax Act, 1964 (for short "the Surtax Act"), the capital employed in the business should be computed taking, inter alia, into account, the entire balance standing to the credit of the general reserve account on the opening day of the accounting years 1972-73, 1973-74 and 1974-75. The ITO was of the view that the general reserve account included sums of Rs. 23,37,630, Rs. 50,87,630 and Rs. 55,87,630 which was the aggregate of the development rebate reserve transferred by the assessee to the general reserve account. The ITO held that the development rebate reserve forming part of the general reserve account was allowed as a deduction in computing the total income of the assessee for the relevant assessment years and, consequently, it fell to be excluded by reason of r. 1 (iii) of the Second Schedule to the Surtax Act. In this view, the ITO excluded the above mentioned sums while computing the capital for the purpose of the Surtax Act. The assessee appealed to the AAC who allowed the appeal on the short ground that the development rebate reserve forming part of the general reserve was not allowed as a deduction in computing the total income. According to the AAC, what was allowed in the computation of total income was development rebate under s. 33 of the Act and the development rebate reserve is entirely distinct from the statutory allowance given to the assessee by way of development rebate. The AAC, therefore held that the ITO was in error in excluding the aforementioned sums. Aggrieved by the orders of the AAC, the ITO filed appeals for all the three assessment years before the Income-tax Appellate Tribunal. The Tribunal reserved the orders of the AAC and upheld the Departments contention that to the extent the development rebate reserve formed part of the general reserve, it was liable to be excluded in the computation of capital. In that view, the Tribunal set aside the order of the AAC on this point and restored the ITOs order. The assessee thereupon re