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1980 Supreme(Cal) 173
High Court Of Calcutta
SABYASACHI MUKHERJI, SUDHINDRA MOHAN GUHA
COMMISSIONER OF INCOME-TAX, CENTRAL - Appellant
Versus
SHALIMAR TAR PRODUCTS (1935) LTD - Respondent
Income-Tax Reference 456 Of 1973
Decided On : 05/06/1980
B.K.Bagchi, B.K.NAHA, K.ROY, R.P.BANERJI
The distinction between reserves and provisions under the Companies (Profits) Surtax Act, 1964, and the factors to be considered in determining whether an amount is a reserve or a provision.
Headnote:
COMPANIES (PROFITS) SURTAX ACT, 1964 - RULE 1 OF THE SECOND SCHEDULE - RESERVE VS. PROVISION - DISTINCTION - INTERPRETATION.
Fact of the Case:
The assessee-company showed two amounts, namely, "Reserve for Pension" and "Reserve for Roofing Repairs" in its balance sheet. The Surtax Officer treated these amounts as reserves and computed the capital of the assessee under the Companies (Profits) Surtax Act, 1964. The Commissioner, however, revised the order of the Surtax Officer, holding that the amounts in dispute represented amounts set apart for meeting the liabilities of the assessee-company. On appeal, the Tribunal held that the amounts were reserves and set aside the order of the Commissioner.
Finding of the Court:
The court held that the amounts in question were not reserves but provisions, and that the Tribunal was not justified in holding otherwise. It observed that the amounts had been set apart for meeting known liabilities and that the assessee-company had not intended to treat them as reserves.
Issues: Whether the amounts in question were reserves or provisions within the meaning of Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.
Ratio Decidendi: The court held that in order to determine whether an amount is a reserve or a provision, the substance of the matter must be looked into. It observed that reserves are normally profits earned by a company and not distributed as dividends to the shareholders, but kept apart by the directors for any purpose or use in the future. On the other hand, provisions are amounts set aside out of profits and other surpluses to provide for any known liability or contingency. The court further held that the intention of the persons in authority, i.e., the directors of the company, is also relevant in determining whether an amount is a reserve or a provision.
Final Decision: The court answered the question referred to it in the negative, holding that the amounts in question were not reserves within the meaning of Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.
( 1 ) THIS reference under Section 256 (1) of the I. T. Act, 1961, at the instance of the Commissioner of Income-tax, Central, Calcutta, relates to the assessment year 1965-66 and the question referred to us is as follows :"whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 3,50,000 described as reserve for pension and the sum of Rs. 3,00,000 described as reserve for roofing repairs in the balance-sheet of the company were reserves within the meaning of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964?"
( 2 ) THE Surtax Officer treated the following two amounts as reserves and computed the capital of the assessee-company under the Companies (Profits) Surtax Act, 1964:
(i) Reserve for pensions Rs.
3,50,000
(ii) Reserve for roofing repairs 3,00,000
( 3 ) THE Commissioner was of the view that the Surtax Officer had wrongly included the above two items for computing the capital under the C. (P.) S. T. Act, 1964. As the Commissioner was of the view that the order of the Surtax Officer was erroneous in law and prejudicial to the interests of the revenue, he sought to revise the same under Section 16 of the C. (P.) S. T. Act, 1964. So, he issued a notice to the assessee to show cause why the order of the Surtax Officer should not be revised. The assessee submitted its explanation before the Commissioner. The Commissioner was of the view that the amounts in dispute represented amounts set apart for meeting the liabilities of the assessee-company. Thus, the Commissioner held that the Surtax Officer erred in treating the above two amounts as reserves. Hence, he set aside the order of the Surtax Officer and directed him to make a fresh assessment.
( 4 ) THE assessee preferred appeal before the Tribunal. It was urged before the Tribunal that the disputed amounts were reserves and the Commissioner was not justified in setting aside the order of the Surtax Officer. On behalf of the revenue, it was urged that the disputed amounts were" provisions" and not "reserves ". The Tribunal considered the provisions of the Companies Act and also the decisions in CIT v. Century Spinning and Manufacturing Co. Ltd. CIT v. Standard Vacuum Oil Co. and Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 ; 39 Comp Cas 410 (SC ). The Tribunal found that in the balance-sheet, the first item was shown as "reserve" under the heading "reserves and Surplus" and continued to remain so under that head. The pension reserves was first created in the balance-sheet for the year ended 30th June, 1957, with Rs. 50,000, and it increased year by year and on 30th June, 1961, it had risen to Rs. 3,50,000. The pension was payable by the assessee in respect of some employees. The expenditure incurred in respect of pensions had regularly been debited to the profit and loss account in the years during which they were incurred. The reserve for roofing repairs was created prior to 1957. In the balance-sheets for 30th June, 1956, 30th June, 1957, and 30th June, 1958, this item was shown as provision for roofing repairs under the head "current Liabilities and Provisions". In the balance-sheet for 30th June, 1959, and onwards it was shown as "reserve" for roofing repairs under the heading "reserves and Surplus" and continued to remain like that. In the balance-sheet for 30th June, 1956, the amount was Rs. 1,82,000 and it increased year by year to Rs. 3,00,000 by 30th June, 1961. The expenditure incurred in respect of repairs undertaken against the guarantee had regularly been debited to the profit and loss account in the years during which they were incurred. The Tribunal accepted the case of the assessee that the expenditure incurred in respect of pensions and repairs under guarantee had regularly been debited to the profit and loss account in the years during which they were incurred which was also supported by the auditors' report. It also observed
