COMMISSIONER OF INCOME TAX VS PFIZER LTD., 1993 PTD-BOMBAY-HIGH-COURT-INDIA 927 (1988)

Income-tax---

----Reserve---Computation of capital---Paid-up share capital---Part of share capital subscribed by foreign company in dollars which was retained in a foreign bank with the State Bank's permission---Devaluation of currency-- Increase in the rupee value of the same amount of dollars ---Assessee credited the increased sum to an account called "dollar revaluation reserve"---No book asset, held, was re-valued but constituted a reserve and was includible in the capital base---Indian Companies (Profits) Surtax Act, 1964, Second Sched., Rr.l & 2.

CIT v. Warner Hindustan Ltd. (1986) 158 ITR 51 fol.

G.S. Jetley, Mrs. Manjula Singh and K.C. Sidhwa for Applicant.

NA. Dalvi for Respondent.

JUDGMENT

S.P. BHARUCHA, J.---This reference raises, at the instance of the Revenue, the following two questions:

(1) Whether, on the facts and circumstances of the case, the gratuity reserves appearing in the balance-sheet of the assessee-company as on the first day of the respective previous years for 1967-68 to 1969-70 assessment years constituted reserves as contemplated in rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964?"

(2) Whether, on the facts and in the circumstances of the case, the dollar revaluation reserves appearing in the balance-sheet of the assessee company as on the first day of the respective years relevant to 1968-69 and 1969-70 assessment years constitute reserves which were includible in the capital base under the Second Schedule to the Companies (Profits) Surtax Act, 1964?"

Counsel are agreed that the issue in the first question is concluded by the judgment of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. SIT (1981) 132 ITR 559. The Tribunal stall assess what part of the gratuity reserve is a provision towards an existing liability and give relief in respect thereof.

The issue in the second question is contested. The facts in relation thereto are these. A part of the capital of the assessee was subscribed by Pfizer Corporation, Panama, in U.S. dollars. The same was kept deposited, with the permission of the Reserve Bank of India, with the First National City Bank of New York to be utilised for the purpose of procuring capital equipment. On June 6, 1906, the Indian rupee was devalued. Consequent thereupon, the dollar balances so held were revalued in terms of the devalued Indian rupee and the equivalent value increased by a sum of Rs. 18,22,214. In its books, the assessee credited the said sum of Rs.18,22,214 to a reserve entitled "Dollar revaluation reserve". The assessee contended that the said sum was includible in the capital base of the company for the purposes of computing the surtax payable under the Companies (Profits) Surtax Act, 1964. The Income-tax Officer rejected the contention. The assessee appealed to the Appellate Assistant Commissioner and succeeded. The Revenue then carried the matter to the Income-tax Appellate Tribunal which upheld the assessee's contention.

Under section 4 of the Companies (Profits) Surtax Act, 1964, surtax is chargeable on every company in respect of so much of its chargeable profits as exceed the statutory deduction at the rates specified in the Third Schedule thereto. "Statutory deduction" is defined by section 2(8) to mean an amount equal to ten per cent. of the capital to the company as computed in accordance with the provisions of the Second Schedule to the Act. The Second Schedule. sets out the rules for computing the capital of a company and its relevant portions, for the purposes of this reference, are these:

"(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---

(i) its paid-up share capital;

(2) Where a company owns any assets the income from which in accordance with clause (iii) or clause (vi) or clause (viii) of rule 1 of the First Schedule is required to be excluded from its total income in computing its chargeable profits, the amount of its capital as computed under rule 1 of this Schedule shall be diminished by the cost to it of the said assets as on the first day of the previous year relevant to the assessment year in so far as such cost exceeds the aggregate of--.

(i) any moneys borrowed (other than the debentures referred to in clause (iv) of moneys referred to in clause (v) of rule 1) and remaining outstanding as on the first day of the said previous year; and

(ii) the amount of any fund, any surplus and any such reserve as is not to be taken into account in computing the capital under rule 1.

Explanation 1. A paid-up share capital or reserve brought into existence by creating or increasing (by revaluation or otherwise) any book asset is not capital for computing the capital of a company for the purposes of this Act..."

Mr. Jetley, learned counsel for the Revenue, submitted that the dollar revaluation reserves in the said sum were book assets under Explanation 1 to rule 2. The said sum was held by the assessee for the purpose of acquiring spec machinery. The said sum was, therefore, not includible in the capital base of the company.

It will be seen that the paid-up share capital of a company is includible in the computation of its capital base. The assessee's share capital included the. amount in dollars paid as subscription for its shares by the Pfizer Corporation, Panama, which, with the Reserve Bank's permission, was retained in an American bank account. On June 6, 1966, there was devaluation of the Indian rupee consequent upon which the rupee equivalent of that amount in dollars increased, the amount in dollars remaining the same. That increase in the rupee value of the same amount of American dollars had to be reflected in the assessee's books maintained in India in Indian rupees. This was done by crediting the increased sum of Rs.18,22,214 to an account called "dollar revaluation reserve". This was, therefore, clearly not a case where the assessee had revalued a book asset within the meaning of Explanation 1 to rule 2. This increase in the rupee value was an increase in its paid-up share capital in rupees and remained includible in the computation of its capital base.

We are fortified in this view by the decision of the Andhra Pradesh High Court in CIT v. Warner Hindustan Ltd. (1986) 158 ITR 51. In that case too, the assessee's foreign collaborators had paid in dollars towards its equity shares and the dollar balances remained in an American bank to the assessee's credit. Upon devaluation of the rupee on June 6, 1966, the increased value of the dollars in deposit with the American bank was reflected in the assessee's books by crediting an account called "Gain on devaluation" therewith and correspondingly debiting the American bank's account. The assessee's claimed that it was entitled to include this gain on devaluation in the computation of its capital base. The Revenue relied there, as here, upon Explanation 1 to rule 2. The learned Judges of the Andhra Pradesh High Court rejected the Revenue's contention. They said that this was not a case where a book asset was revalued within the meaning of that Explanation. The gain on devaluation, in their opinion represented an increase in the value of an asset which had been realised.

In the result, the second question is answered in the affirmative and in favour of the assessee.

No order as to costs.

M.B.A./2283/TQuestion answered.