1978 Supreme(Cal) 51

High Court Of Calcutta
SABYASACHI MUKHERJI, SUDHINDRA MOHAN GUHA
COMMISSIONER OF INCOME-TAX AND SUPER PROFITS TAX - Appellant
Versus
BURN AND CO.LTD. - Respondent
Income-Tax Reference 371  Of  1970
Decided On : 01/25/1978

The expression "reserve" in Rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, should be understood in its ordinary sense and not in the sense in which it is understood in commercial accountancy.

Headnote:

SUPER PROFITS TAX - Computation of capital - Whether provision for P. I. bonus, provision for bonus and taxation contingency reserve should be treated as 'reserves' for computing the capital of the assessee-company for the purposes of super profits tax under the Super Profits Tax Act, 1963 - YES

Fact of the Case:

The assessee, a resident company, filed a return disclosing the chargeable profits at Rs. 37,02,218. While computing the capital base for the purpose of super profits tax, the assessee claimed that the following items should be included in the capital of the company: 1. Provision for P. I. Bonus - Rs. 1,02,200 2. Provision for bonus - Rs. 39,40,000 3. Provision for gratuity - Rs. 11,21,742 4. Provision for interest - Rs. 4,20,482 5. Provision for taxation - Rs. 68,56,095 6. Works reconstruction reserve - Rs. 99,75,000 7. Taxation contingency reserve - Rs. 35,00,000 8. Salom project reserve - Rs. 80,00,000 9. Niwar project reserve - Rs. 21,00,000 The Super Profits Tax Officer observed that the first five items had been set apart for specific purposes already known. He, therefore, held that each of the above items were meant to be used for a specific contingency already foreseen, though not yet quantified, otherwise, those would have all been put in the general reserve account already maintained by the assessee. As these amounts had been specifically set apart and earmarked to meet particular liabilities and nothing else, none of these could be called a reserve within the meaning of the Second Schedule of the. Super Profits Tax Act, 1963. He also considered the other four items and was of the opinion that those were also of the same nature as the earlier five items, though these had been designated as "reserve" instead of as "provision". He observed that when one looks to the substance and nature of these funds it became clear that each of them was designated to meet a liability, contingency, commitment or diminution in the value of the assets known to exist as at the time of the balance-sheet. The Super Profits Tax Officer, therefore, came to the conclusion, that these could not be called "reserve" within the meaning of the Second Schedule of the Act in question. Thus, he did not include these items as part of the capital of the company. There was an appeal to the Appellate Assistant Commissioner who held that items 6, 8 and 9 mentioned above satisfied the conditions of "reserve" and directed the Super Profits Tax Officer to include these in the computation of capital. The Appellate Assistant Commissioner, however, held that the three items should be "reserves" and the other items would be "provisions". Being aggrieved by this decision of the Appellate Assistant Commissioner both the revenue and the assessee appealed to the Tribunal. The Tribunal dismissed the appeal of the revenue but allowed the appeal of the assessee in part. Except the items named as provision for gratuity, provision for interest on sales tax and provision for taxation, being items Nos. 3, 4 and 5 mentioned above, the others were held by the Tribunal to be "reserves" and therefore, were directed to be taken into consideration in computing the capital base of the company. During the course of the arguments a statement that had been filed before the Appellate Assistant Commissioner explaining the aforesaid items was referred to on behalf of the assessee. The Tribunal referred to the observations of the Supreme Court in the case of Commissioner of Income-tax v. Century Spg. and Mfg. Co. Ltd. 1953 24 ITR 499 and observed that the expression "reserve" in the sense in which it has been used could only mean profit earned by a company and not distributed as dividend to the shareholders but kept back by the directors for any purposes to which it might be put in future. Any amount set apart for any purpose other than declaration of dividend to shareholders could be treated as a reserve. "provision", according to the Tribunal, in contradistinctive terms meant appropriation of an amount against an ascertained or anticipated liability. Except the items styled as provision for gratuity, provision for interest on sales tax and provision for taxation, the Tribunal did not find any evidence to impeach the other items. These last-mentioned items, according to the Tribunal, made provisions for ascertained or anticipated liabilities. Therefore, these were provisions and not reserves. The other items, according to the Tribunal, represented appropriation of the surplus and, though specific in purpose, these were against liabilities not quantified or ascertained and, hence, these constituted reserves within the meaning of the provisions of the Second Schedule of the Super Profits Tax Act, 1963. The Tribunal, therefore, allowed the assessee's appeal in part and dismissed the revenue's appeal. On an application being made to the Tribunal under Section 256 (1) of the Income-tax Act, 1961, read with Section 19 of the Super Profits Tax Act, 1963, the Tribunal has referred the following question to this court: "whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the items styled as provision for P. I. bonus, provision for bonus and taxation contingency reserve should be treated as 'reserves' for computing the capital of the assessee-company for the purposes of super profits tax under the Super Profits Tax Act, 1963?"

Finding of the Court:

The Tribunal was right in holding that the items styled as provision for P. I. bonus, provision for bonus and taxation contingency reserve should be treated as 'reserves' for computing the capital of the assessee-company for the purposes of super profits tax under the Super Profits Tax Act, 1963.

Issues: Whether the items styled as provision for P. I. bonus, provision for bonus and taxation contingency reserve should be treated as 'reserves' for computing the capital of the assessee-company for the purposes of super profits tax under the Super Profits Tax Act, 1963?

Ratio Decidendi: 1. The expression "reserve" in Rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, should be understood in its ordinary sense and not in the sense in which it is understood in commercial accountancy. 2. The expression "reserve" in the Super Profits Tax Act, 1963, means profit earned by a company and not distributed as dividends to the shareholders but kept apart by the directors for any purpose to which it might be put in the future. 3. In order to be a "provision" it must be a provision for a liability, which is a known liability, though the actual amount might not be quantified. 4. A contingent liability which cannot be ascertained with any substantial accuracy may be considered to be a "provision" in contradistinction to "reserve" but not mere possibility of an obligation which has not matured into a liability.

Final Decision: Question referred to the court is answered in the affirmative and in favour of the assessee with this addition that if in respect of any of the items any part of the amounts have been allowed in the computation of its profits for the purposes of the Indian Income-tax Act, 1922, or the Income-tax Act, 1961, the same should be disregarded.