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Commissioner of Income Tax Vs. Tata Engineering and Locomotive Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberI.T. Ref. No. 210 of 1975
Judge
Reported in(1986)51CTR(Bom)365
ActsIncome Tax Act, 1961 - Sections 256(1); Super Profits Tax Act, 1964; Companies Act, 1956
AppellantCommissioner of Income Tax
RespondentTata Engineering and Locomotive Co. Ltd.
Excerpt:
.....of capital - nothing in statement of case to indicates as to what was contingency to meet liability on account of which said amount was set apart by assessee. (ii) computation of capital - whether certain sum which was part of surplus in profit and loss account but had been appropriated as dividend reserve includible in computation of capital - nothing in statement of case as to indicate whether any dividend was declared and particularly whether any part of this amount was ultimately utilised towards payment of that dividend. - - the supreme court had laid down certain guideline for determining whether an appropriation is a reserve or whether an appropriation should be considered as a reserve or a provision and has, inter alia, pointed out that a mass of undistributed..........and gratuity reserve, etc. as set out earlier, should be treated as a reserve for the purpose of capital computation. he also accepted that the sum of rs. 3,46,790 appropriated to the dividend reserve, as aforesaid, should be treated as a reserve for determining the capital base of the company under the super profits tax act. the revenue appealed to the itat. the tribunal, after referring to certain judgment, confirmed the decision of the aac. it is from this decision of the tribunal that the aforesaid questions have been referred to us.3. this is one of the few unfortunate cases where the statement of case submitted by the tribunal is grossly unsatisfactory. apart from referring to certain decision and setting out the contentions raised by the assessee and the revenue before the lower.....
Judgment:

Kania, J.

1. This is a reference under s. 256(1) of the IT Act, 1961 as applicable under the provisions of s. 19 of the Super Profits Tax Act, 1963. The assessment year with which we are concerned is the asst. yr. 1963-64, the relevant previous year being the one ended on 31-3-1963. The question referred to us for our determination are as follows :

'(1) Whether, on the facts and in the circumstances of the case, the sum of Rs. 63,78,693 representing provision for leave salary, accident, gratuity reserve etc. was includible in computation of the capital of the assessee ?

(2) Whether on the facts and in the circumstances of the case, the sum of Rs. 12,00,000 representing provision for contingencies was includible in the computation of capital ?

(3) Whether, on the facts and in the circumstances of the case, the sum of Rs. 3,46,790 which was a part of the surplus in the Profit and Loss Account as on 31-3-1962 but had been appropriated as 'Dividend Reserve' after 31-3-1963 was includible in the computation of capital ?'

2. The facts found, as can be seen from the statement of case, are grossly inadequate to determine the question referred to us. What is set out in the statement of the case is that before the ITO concerned the assessee claimed that a sum of Rs. 63,78,693 representing provision for leave salary, accident and gratuity reserve, dividend reserve and contingency reserve was liable to be treated as a reserve under r. 1 of the Second Schedule to the Super Profits Tax Act. This contention of the assessee was rejected. The assessee further claimed that an amount of Rs. 12,00,000 being provision for contingencies should be included as a reserve in the computation of capital. That claim was also rejected by the ITO. The assessee further contended before the ITO that a sum of Rs. 3,46,790 which formed part of the surplus in the Profit & Loss account of the assessee as on 31-3-1962 and had been appropriated as Dividend Reserve, after 31-3-1963, and that the said amount was liable to be included in the computation of the capital of the assessee as reserve. This contention also was rejected by the ITO. On an appeal to the AAC, he accepted the assessee's claim that the provision of Rs. 63,78,693 for leave salary, accident and gratuity reserve, etc. as set out earlier, should be treated as a reserve for the purpose of capital computation. He also accepted that the sum of Rs. 3,46,790 appropriated to the dividend reserve, as aforesaid, should be treated as a reserve for determining the capital base of the company under the Super Profits Tax Act. The revenue appealed to the ITAT. The Tribunal, after referring to certain judgment, confirmed the decision of the AAC. It is from this decision of the Tribunal that the aforesaid questions have been referred to us.

3. This is one of the few unfortunate cases where the statement of case submitted by the Tribunal is grossly unsatisfactory. Apart from referring to certain decision and setting out the contentions raised by the assessee and the revenue before the lower authorities, the Tribunal had not set out any facts found by the Tribunal, which would be necessary to enable us to determine the questions referred to us.

4. It is common ground between the counsel that the same principles which have been held to govern the distinction between a reserve and a provision for the purposes of the computation of the capital base of a Company under the Companies Surtax Act, 1964, would also govern the distinction between reserves and provisions for the purposes of the computation of the capital base of the company for the purposes of Super Profits Tax Act. The leading decision regarding the computation of the capital base of a company for the aforesaid purpose is the decision of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT, A.P. : [1981]132ITR559(SC) . We have set out in some detail the principles laid down in that decision on our judgment in IT Ref. No. 51 of 1975 [CIT, Bombay City-III, Bombay v. Hindustan Lever Limited, Bombay] decided on 2-9-1985, and hence we do not propose to set out in detail again the principles laid down by the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. (supra), in this judgment. Very briefly stated the Supreme Court held in that case, that the meaning attached to the words 'reserves' and 'provisions' in the provisions of the Companies Act, 1956, dealing with the preparation of the balance-sheet and the profit and loss account would govern the connotation of the said terms for the purposes of the said two enactments. The broad distinction between the two terms is that whereas a provision is a charge against the profit to be taken into account against gross receipts in the profit and loss account, a 'reserve' is an appropriation of profits, the asset or assets by which it is represented being retained to form part of the capital employed in the business. Merely because a retention or appropriation is not a provision, it does not necessarily follow that it is a reserve; that question will have to be decided having regard to the true nature and character of the sums so retained or appropriated depending on the surrounding circumstances, particularly the intention with which and the purpose for which such retention or appropriation has been made. The Supreme Court had laid down certain guideline for determining whether an appropriation is a reserve or whether an appropriation should be considered as a reserve or a provision and has, inter alia, pointed out that a mass of undistributed profits cannot automatically become a reserve and somebody possessing the requisite authority must clearly indicate that a portion thereof has been earmarked or separated from the general mass of profits with a view to constituting it either a general reserve or a specific reserve. So far as the gratuity reserve is concerned, the Supreme Court has pointed out that, ordinarily, an appropriation to gratuity reserve will have to be regarded as a provision made for a contingent liability. If by adopting a scientific method, namely actuarial valuation an appropriation is made to meet the estimated liability on account of gratuity reserve, which it will constitute a provision representing fairly accurately a known and existing liability for the year in question. If, however, an ad hoc sum is appropriated without resorting to any scientific basis such appropriation would also be a provision intended to meet a known liability, though a contingent one; but if the sum so appropriated is shown to be in excess of the sum required to meet the estimated liability (discounted present value on a scientific basis) it is only the excess that will have to be regarded as a reserve under cl. 7(2) of Part III of Sch. VI to the Companies Act, 1956.

5. Bearing in mind these principles as laid down in the foresaid decision we find the statement of the case submitted by the Tribunal is totally inadequate for determining the questions referred to us. As far as Question No. 1 is concerned, the statement of the case is totally silent as to how the amount of Rs. 6,78,693 is made up, namely which part of it constitutes the reserve on account of leave salary, which part of it constitutes a reserve for accident liability, which part of it constitutes a reserve for meeting the gratuity liability and so on. Again, there is no indication as to what was the liability on account of leave salary and as to how it was calculated. The same is the case regarding the liability on account of accident and gratuity.

6. As far as Question No. 2 is concerned, there is nothing in the statement of case to indicate what was the contingency to meet the liability on account of which the amount of Rs. 12,00,000 was set apart by the assessee. As far as Question No. 3 is concerned, in the first place, there is nothing to indicate as to how the amount of Rs. 3,46,790 was appropriated as 'Dividend Reserve', although the question indicates that this appropriation was made after 31-3-1963. There is nothing in the statement of case to show that this indication is correct. Moreover, there is no information at all contained in the statement of case as to whether any dividend was declared and particularly whether any part of this amount was ultimately utilised towards payment of that dividend.

7. In the circumstances set out by us earlier, the statement of case is grossly inadequate and it is not possible for us to determine the questions referred to us on the basis of the facts contained therein.

8. We direct the Tribunal to submit a supplemental statement of case after giving both the parties an opportunity to be heard and in accordance with law.

9. No order as to costs.


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