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Hyderabad Asbestos Cement Products Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred Nos. 34 and 35 of 1973
Judge
Reported in[1976]105ITR822(AP)
ActsSuper Profits Tax Act, 1963 - Sections 4; Income Tax Act, 1922 - Sections 10(2); Income Tax Act, 1961 - Sections 34(3)
AppellantHyderabad Asbestos Cement Products Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateK. Srinivasamurthy and ;K. Nagaraja Rao, Advs.
Respondent AdvocateP. Rama Rao, Adv.
Excerpt:
direct taxation - reserve - section 4 of super profits act, 1963, section 10 (2) of income tax act, 1922 and section 34 (3) of income tax act, 1961 - whether provisions for 'provisions for breakage and damage on sale' and 'provisions for contingencies and bonus' appearing in balance sheet to be taken into account in computing capital under act of 1963 - only reserves are qualified in calculation of capital under act - provisions in question cannot be treated as reserve as it was created to meet certain liabilities. - - , january 1, 1962 (the annual report gives the date as december 31, 1961, but obviously the same figures hold good for january 1, 1962, also) is shown as rs. century spinning and .[1953]24itr499(sc) referred to the dictionary meaning of the term 'reserves' from the.....jeevan reddy, j.1. these two reference cases have been placed before a full bench by a division bench of this court in view of the contention raised by the learned counsel for the assessee that certain observations by a division bench of this court in vazir sultan tobacco co. ltd. v. commissioner of income-tax : [1974]96itr248(ap) run counter to the decision of the supreme court in kesoram industries and cotton mills ltd. v. commissioner of wealth-tax : [1966]59itr767(sc) and also that the view expressed by this court in the said bench decision is in conflict with the views of other high courts in nagammal mills ltd. v. commissioner of income-tax : [1974]94itr387(mad) , commissioner of income-tax v. indian steel rolling mills ltd. : [1973]92itr78(mad) , commissioner of income-tax v......
Judgment:

Jeevan Reddy, J.

1. These two reference cases have been placed before a Full Bench by a Division Bench of this court in view of the contention raised by the learned counsel for the assessee that certain observations by a Division Bench of this court in Vazir Sultan Tobacco Co. Ltd. v. Commissioner of Income-tax : [1974]96ITR248(AP) run counter to the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax : [1966]59ITR767(SC) and also that the view expressed by this court in the said Bench decision is in conflict with the views of other High Courts in Nagammal Mills Ltd. v. Commissioner of Income-tax : [1974]94ITR387(Mad) , Commissioner of Income-tax v. Indian Steel Rolling Mills Ltd. : [1973]92ITR78(Mad) , Commissioner of Income-tax v. Periakaramalai Tea & Produce Co. Ltd. : [1973]92ITR65(Ker) and Commissioner of Income-tax v. Security Printers of India (P.) Ltd. : [1972]86ITR210(All) .

2. R.C. No. 34 of 1973 has been referred to this court under Section 19 of the Super Profits Tax Act, 1963, read with Section 256(1) of the Income-tax Act, 1961, for opinion on the question :

'Whether, on the facts and in the circumstances of the case, the two sums of Rs. 2,02,696 representing 'provision for breakages and damages on sales' and/or Rs. 1,00,000 representing 'provision for contingencies and bonus' have to be included in the capital computation for the purposes of super profits tax under the Super Profits Tax Act, 1963 ?'

3. The assessment year relevant in R.C. No. 34 of 1973 is the assessment year 1963-64, corresponding to the previous year ending with December 31, 1962 (the assessee has been adopting the calendar year for its accounting purposes), while R.C. No. 35 of 1973 pertains to the assessment year 1965-66, corresponding to the previous year ending with December 31, 1964. R.C. No. 35 of 1973 has been referred for the opinion of this court under Section 18 of the Companies (Profits) Sur-tax Act, 1964, read with Section 256(1) of the Income-tax Act, 1961, and the question referred is :

'Whether, on the facts and in the circumstances of the case, the said sums of Rs. 4,00,000 as 'reserve for breakages and damages' and of Rs. 5,00,000 as reserve for contingencies had to be included in the capital computation for the purposes of sur-tax under the Companies (Profits) Sur-tax Act, 1964?'

4. It has been stated by the learned counsel appearing for both the assessee and the department that the contentions raised in both the R.Cs. are identical and, therefore, they are heard together and can be disposed of by a common judgment. The assessee in both the cases is Hyderabad Asbestos Cement Products Ltd., engaged in manufacture and sale of asbestos cement products having its factories at Sanatnagar, Hyderabad and Ballabgarh in Punjab.

5. The Super Profits Tax Act, 1963 (Act 14of 1963), was enacted by Parliament with a view to levy a tax referred to in the Act as 'super profits tax' in respect of the chargeable profits of every company in respect of the previous year or previous years, as the case may be, exceeding the standard deduction, at the rate or rates specified in the Third Schedule to the Act. This Act remained in force only for one year when it was repealed by the Companies (Profits) Sur-tax Act, 1964 In this context it may be noted that with a view to tax the excess profits earned by the companies during the Second World War, the Excess Profits Tax Act, 15 of 1940, was enacted which was repealed by the Business Profits Tax Act, 1947. Again in 1963, the Super Profits Tax Act was enacted which remained in force only for the assessment year 1963-64 arid the Act now in force is the Companies (Profits) Sur-tax Act, 1964.

6. The object of the Super Profits Tax Act is to impose a special tax on companies on their excess profits which are computed in accordance with the provisions of the Act, after providing for certain deductions. 'Chargeable profits' has been defined by Clause (5) of Section 2 to mean the total income of an assessee computed under the Income-tax Act, 1961, for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule. 'Standard deduction' has been defined by Clause (9) of Section 2 to mean an amount equal to 6% of the capital of the company as computed in accordance with the provisions of the Second Schedule or an amount of Rs. 50,000, whichever is greater. Section 4 is the charging section which says that subject to the provisions contained in the said Act, a tax (referred to in the Act as super profits tax) shall be charged on every company for every assessment year commencing on and from the first day of April, 1963, in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the standard deduction at the rate or rates specified in the Third Schedule, Against the assessment made by the Super Profits Tax Officer, an appeal is provided to the Appellate Assistant Commissioner of Income-tax and a further appeal to the Income-tax Appellate Tribunal. Section 19 applies certain provisions of the Income-tax Act to the proceedings under the said Act including Section 256 of the Income-tax Act, which provides for a reference to this court for its opinion on questions referred. We are not concerned in these cases with other provisions of the Act. The First Schedule contains the rules for computing the chargeable profits, but it is not necessary to examine the said provisions in detail since it is not necessary for the purpose of these cases. The Second Schedule contains the rules for computing the capital of a company for the purpose of Super Profits Tax Act. According to Rule (1) subject to the other provisions contained in the said Schedule, the capital of a company shall be the sum of the amount, as on the first day of the previous year relevant to the assessment year of its : (i) paid up share capital, (ii) its reserves, if any, created under the proviso (b) to Clause (vib) of Sub-section (2) of Section 10 of the Indian Income-tax Act, 1922, or under Sub-section (3) of Section 34 of the Income-tax Act, 1961, and (iii) its other reserves in so far as the amounts credited to such other reserves have not been allowed in computing the profits of the company for the purpose of the Income-tax Act. Certain deductions are also provided by Rule (1) of the said schedule with which we are not concerned in these cases. The only question arising for decision in R.C. No. 34/73 is whether certain amounts designated as provision for 'breakages and damages on sales' of the company's products and for 'contingencies and bonus' are 'other reserves' within the meaning of Rule (1) of the Second Schedule to the Act or not. As stated above, R.C. No. 35 of 1973 arises under the provisions of the Companies (Profits) Sur-tax Act, 1964, which is substantially on the same lines as the Super Profits Tax Act, 1963, and therefore, it is not necessary to refer to the various provisions of the said 1964 Act. However, it is relevant to refer to the Explanation 1 to Rule (1) contained in the Second Schedule to the said Act. The said Explanation declares for removal of doubts, that any amount standing to the credit of an account in the books of a company as on the first day of the previous year relevant to the assessment year, which is in the nature of item 5 or item 6 or item 7 under the heading 'Current liabilities and provisions' in the column relating to 'Liabilities in the form of balance-sheet' given in Part I of Schedule VI to the Companies Act, 1956, shall not be regarded as a reserve for the purpose of computation of the capital of a company under the provisions of this Schedule. This Explanation virtually obviates the controversy arising under the Super Profits Tax Act regarding the meaning of the words 'other reserves' and which expression has been the subject-matter of adjudication by several High Courts in India.

7. For the purposes of appreciating the question referred in these two cases, it is sufficient to refer to the facts in R.C. No. 34 of 1973. As indicated above, the assessment year concerned in this case is the assessment year 1963-64, corresponding to the previous year ending with December 31, 1962. The profit and loss account for the year ended December 31, 1962, is printed at pages 12 and 13 of the company's annual report pertaining to the year 1962, while the several schedules to the said profit and loss account are printed at pages 14 to 23 of the annual report. Under the profit and loss account, the two items relevant for our purposes are 'provision for breakages and damages on sales' and 'provision for contingencies and bonus'. The said amounts are dealt with in detail under Schedule 'D', at page 16 under the general heading 'Current liabilities and provisions'. Under the sub-heading 'provisions', these two items are mentioned. In respect of 'provision for breakages and damages on sales', the amount as on the first day of the previous year, i.e., January 1, 1962 (the annual report gives the date as December 31, 1961, but obviously the same figures hold good for January 1, 1962, also) is shown as Rs. 2,02,686. It is further stated that another sum of Rs. 2,00,000 was added under the said item during the said previous year though the actual amount of breakages for the said year amounted to Rs. 36,360 only. Under the item 'provision for contingencies and bonus', an amount of Rs. 1,00,000 is shown as on the first day of the previous year. Another sum of Rs. 2,50,000 was added under this item during the said previous year. It is the said two items/amounts as on the first day of the previous year that are claimed as 'reserves' by the company while according to the department, they are only 'provisions', as indeed so designated by the company itself in its profit and loss account. The Super Profits Tax Officer excluded both the sums while computing the capital for the purpose of the Act on the ground that the 'breakages' was an annual feature in the case' of the products of this company and that such loss is claimed as a deduction by the company in computation of its total income under the Income-tax Act every year. Regarding the provision for 'contingencies and bonus', the officer held that the said amount represented the provision made to meet a liability occurring each year. He held that actual payment of bonus in a given year was set off against the provision and claimed as a deduction in the income-tax assessment of the company and, therefore, the said amount cannot also be treated as a 'reserve'. As against the said order of the officer, the assessee went up in appeal before the Appellate Assistant Commissioner who allowed the appeal mainly relying upon Commissioner of Income-tax v. Vasantha Mills Ltd. : [1957]32ITR237(Mad) . The reasoning adopted by the Appellate Assistant Commissioner was that the total investments in a company consist of amounts returnable to shareholders without the liquidation of the company or reduction of the capital, and amounts which cannot be returned to them until the liquidation or reduction of capital. According to him, share capital falls in the latter category while all other amounts on the liabilities side of the balance-sheet, other than the loans and advances taken, fall within the former category. He, therefore, concluded that all such amounts constitute 'reserves'. He then referred to the decision of the Supreme Court in Commissioner of Income-tax v. Century Spinning and . : [1953]24ITR499(SC) as an authority for the proposition that the undesignated mass of profits in the profit and loss account cannot constitute 'reserves' and then held that, by implication, all other designated amounts would constitute 'reserves' if they do not come under the head 'capital or existing liabilities'. On the said reasoning, he held that both the amounts constitute 'other reserves' and have got to be added to the capital in computation of the same under the Second Schedule to the Act. Aggrieved by the decision of the Appellate Assistant Commissioner, the department went up in appeal to the Income-tax Appellate Tribunal which allowed the appeal by its order dated August 18, 1971. The Tribunal referred to the distinction between the expressions 'reserves' and 'provisions' pointed out by the Supreme Court in its decision in Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC and applying the said reasoning and also relying upon the interpretation of the words 'reserves' and 'provisions' contained in Clause (vii) of para. 3 of Schedule VI of the Companies Act, 1956, held that inasmuch as the said amounts were not meant for meeting a known and certain liability, they are only 'provisions' and not 'reserves' notwithstanding the fact that the actual quantification of the liability may not be known on the relevant date. The Tribunal also held that admittedly the board of directors have not set apart the two amounts in question as 'reserves', but have shown in the profit and loss account of the company under the heading 'current liability and provisions'. It pointed out that the 'breakages' are abnormal feature in the line of the assessee's business and that bonus is also a certain liability. Aggrieved by the decision of the Tribunal, the assessee applied for referring the question of law arising out of the Tribunal's judgment to this court under Section 19 of the Act read with Section 256(1) of the Income-tax Act, 1961, and the Tribunal agreeing that a question of law does arise, has referred the said question to this court. The statement of the case is found at pages 2 to 10 of the printed record in R. C. No. 34 of 1973.

8. The expressions 'provisions' and 'reserves' are not defined either by the Super Profits Tax Act or by the Income-tax Act or by the Companies (Profits) Sur-tax Act, 1964. However, the said expressions are defined by Rule 7 in Part III of Schedule VI of the Companies Act, 1956. The relevant clauses in the said Rule 7(1) may be extracted.

'Rule 7(1)(a).--The expression 'provision' shall, subject to Sub-clause (2) of this clause, mean any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy ;

(b) the expression 'reserve' shall not, subject as aforesaid, include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability.'

9. The Supreme Court in Commissioner of Income-fax v. Century Spinning and . : [1953]24ITR499(SC) referred to the dictionary meaning of the term 'reserves' from the Oxford Dictionary as well as Webster's New International Dictionary, second edition. According to the Oxford Dictionary, the word 'reserve' means:

'I(a) To keep for future use or enjoyment; to store up for some time or occasion, to refrain from using or enjoying at once.

(b) To keep back or hold over to a later time or place or for further treatment.

(c) To set apart for some purpose or with some end in view; to keep for some use.

II. To retain or preserve for certain purposes.' According to Webster's New International Dictionary, the word 'reserve' means:

'1. To keep in store for future or special use; to keep in reserve: to retain, to keep as for oneself.

2. To keep back; to retain or hold over to a future time or place.

3. To preserve'.

10. However, the said expressions have, as indicated by us above, been the subject-matter of interpretation by the Supreme Court as well as the several High Courts of India, With a view to understand the precise meaning of these expressions, it may therefore be necessary to examine the decisions of the Supreme Court in the first instance. The earliest case in which the expression 'reserves' fell for consideration before the Supreme Court is the decision reported as Commissioner of Income-tax v. Century Spinning and . : [1953]24ITR499(SC) , arising under the provisions of the Business Profits Tax Act. The first question referred by the Tribunal to the High Court, which is relevant for our purposes, was 'whether the amount of Rs, 5,08,637 is a part of the 'reserves' of the assessee-company as on April 1, 1946, within the meaning of Rule 2(1) of the rules in Schedule II to the Business Profits Tax Act ?' The Supreme Court observed that the true nature and character of the disputed sum must be determined with reference to the substance of the matter and that, therefore, the said sum of Rs. 5,08,637 cannot be called 'reserve' as on the first day of April, 1946, since 'nobody possessed of the requisite authority had indicated on that date the manner of its disposal or destination'. On the other hand, it was pointed out that the directors clearly earmarked the said sum for distribution as dividend. It was further observed that 'reserve' may be a general reserve or a specific reserve but there must be a clear indication to show whether it was a reserve either of one or the other kind. The nature of the said amount was held to be nothing more than the undistributed profits of the company. Reference was also made to the provisions of Sections 131(a) and 132 of the Indian Companies Act read with regulation 99 of the 1st Schedule, Table A and Form 'F' in Schedule III thereof, and it was held that in that case the directors while recommending dividend took no action to set aside any portion of the said sum as a reserve or reserves. The decision of the Bombay High Court was reversed and it was held that the said amount does not constitute a 'reserve' and cannot, therefore, be added to the capital.

11. The next and the highly relevant case to be noted is the decision in Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC . There the question was whether a sum of Rs. 18.38 lakhs being the estimated liability under two gratuity schemes framed by the company and which was deducted from the gross receipts in the profit and loss account can be deducted while working out the company's net profits for the purpose of the Bonus Act. Reference was made to the decision in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax : [1966]59ITR767(SC) and after referring to the ratio of the said decision, it was held that in the instant case before them, the question was not really whether such estimated liability arising under the gratuity schemes amounts to a 'debt' or not but that the question to be answered was whether the amount allocated towards the said gratuity schemes can be deducted from the net profits for the purpose of the said Act. At page 67 of the report, the court pointed out the distinction between a 'provision' and 'reserve' as being fairly well known in commercial accountancy. It was stated that the provisions made against anticipated losses and contingencies are charges against profits, while the reserves are appropriations of profits being retained to form part of the capital employed in the business. Referring to William Pickles Accountancy, second edition, page 192, and Part III, Clause 7, Schedule VI, to the Companies Act, 1956, the court held : (1969)ILLJ785SC :

'An amount set aside out of profits and other surpluses, not designed to meet a liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance-sheet is a reserve but an amount set aside out of profits and other surpluses to provide for any known liability of which the amount cannot be determined with substantial accuracy is a provision.'

12. It was then observed that if under the Income-tax Act, an estimated liability ascertainable with substantial accuracy can be taken into account for arriving at the true profits and gains, there is no reason why the same cannot be done under the Bonus Act unless there is any provision therein forbidding the same.

13. Since reference is made to the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax : [1966]59ITR767(SC) , arising under the Wealth-tax Act, it may also be noted. The directors of the appellant-company in that case had shown a sum of Rs. 15,29,855 as the amount of dividend proposed to be distributed for that year in its profit and loss account for the year ending March 31, 1957. The dividend was actually declared by the company at its general meeting held on November 27, 1957. The question which arose for consideration was whether the amount so set apart by the company as dividend was a 'debt' owed by the company on the relevant date, i.e., March 31, 1957, and as such was deductible in computing the net wealth of the company. After referring to various cases, it was held by the court that:

'A debt is a present obligation to pay an ascertainable sum of money,whether the amount is payable in praesenti or in futuro: debitum inpraesenti, solvendum in futuro. But a sum payable upon a contingency does not become a debt until the said contingency has happened. A liability to pay income-tax is a present liability though it becomes payable after it is quantified in accordance with ascertainable data.'

14. However, in this case, we are not concerned with the question whether the amounts in question constitute a 'debt' or not and, therefore, this case is not really relevant. We may also refer to another case referred to by the learned counsel for the assessee, namely, Commissioner of Income-tax v. Standard Vacuum Oil Co. : [1966]59ITR685(SC) . The question there was whether the 'earned surplus', i.e., the profits earned year after year by the assessee-company and which were retained and reinvested in business, constitute 'reserve' though they have not been called as such. It was pointed out by the Supreme Court that in considering the said question certain special features of the system of accounting obtaining in U. S. A. had to be taken note of. It was held that according to the said system, in the balance-sheets of companies, the assets are balanced against liabilities, capital stock and surplus, while in the company accounts it was usual to provide for specific or special reserves, but there was no allocation to a head called 'general reserve' in the accounts. It was held that according to the said system of accounting, accounts of companies maintained under the American system are self-contained for each year and that whatever remains on hand at the end of the year is entered on the liabilities, capital stock and surplus side as 'earned surplus'. Reference was also made to the case reported as First National City Bank v. Commissioner of Income-tax : [1961]42ITR17(SC) , where also the court had pointed out the difference between the system of accounting followed in India and the United States. It was, therefore, held on the facts of that case that the balance of the net profits after allocation to specific reserves and payment of dividend and entered in an account under the caption 'earned surplus' constitute 'reserve' generally referred to in India as 'general reserves' We do not think that this case is of any help in deciding the question arising before us.

15. Before proceeding to consider the various decisions of the High Courts in India cited by both the parties, it would be appropriate to deal with the decision of this court in Vazir Sultan Tobacco Company Ltd. v. Commissioner of Income-tax : [1974]96ITR248(AP) and see whether it runs counter to the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax, [1965] 59 ITR 767. The said case arose under the provisions of the Super Profits Tax Act and the question was whether the provision made by the company for (a) taxation, (b) for retirement gratuity, and (c) for dividend, could be treated as reserves in computation of capital for the purpose of the said Act. The court referred to the definition of the expressions 'provision' and 'reserves' in the Companies Act and then made a specific reference to the relevant observations of the Supreme Court reported in Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC . Thereafter, the court referred to the various decisions of the Supreme Court including Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax : [1966]59ITR767(SC) and Commissioner of Income-tax v. Century Spinning and . : [1953]24ITR499(SC) , and held at page 259 : [1974]96ITR248(AP) as follows :

'Apart from that, the liability to pay income-tax is a present liability though it becomes payable at a future point of time when it is quantified in accordance with the ascertainable data. That liability, on the first day of the accounting year, is known, but the amount of that liability cannot be determined on that date with substantial accuracy. (See Kesoram Industries & Cotton Mills Ltd. v. Commissioner of Wealth-tax). Therefore, the amount set apart for tax liability is a 'provision' and not a 'reserve', because it is set apart to meet a known liability, the quantum of which, on that date, cannot be determined with substantial accuracy.'

16. What Mr. Srinivasamurthy contends is that the principle set out above, within quotes, is not supported by the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax. However, on closer examination, we noticed that the reference to Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax was really a mistake and that the court was really referring to the case of Metal Box Company of India Ltd. v. Their Workmen, : (1969)ILLJ785SC . This is evident from the fact that the language and the expressions used in the said paragraph are the same which are employed in the case of Metal Box Company of India Ltd. v. Their Workmen, : (1969)ILLJ785SC . In fact, the words 'substantial accuracy' are taken from the decision of the Supreme Court in Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC and that the said expression does not occur in the case of Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax. We presume that it was either a typographical or an accidental mistake that the reference was made to Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax while really intending and referring to the case of Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC . In this view, the very basis of the argument that the observations made in the decision of this court in Vazir Sultan Tobacco Co. Ltd. v. Commissioner of Income-tax run counter to the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax disappears and we see no conflict whatsoever between both the decisions. In fact, the decision of this court is wholly consistent with the principle of the decision in Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC as well as Commissioner of Income-tax v. Century Spinning and . : [1953]24ITR499(SC) and applying the said principles, the Bench had come to the conclusion that the provisions for taxation, retirement gratuity and dividends are provisions and not 'reserves' for the purpose of the Super Profits Tax Act.

17. We may now refer to the several decisions of the High Courts in India cited by Mr. Srinivasamurthy in support of his submissions. The first decision in this behalf is the decision of the Allahabad High Court in Commissioner of Income-tax v. British India. Corporation (P.) Ltd., [1973] 92 ITR 58 arising under the Super Profits Tax Act. We do not find any reference to the decision of the case in Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC nor a full discussion of the subject. In one paragraph, it was held that the capital reserve, stocks and stores reserves, bad and doubtful debts reserves, obsolescence reserve, loans and insurance reserves and investment reserve 'not earmarked for any existing liability' are reserves. However, in so far as the forfeited monies reserve was concerned, it was held that since it is open to the company to waive the bar of limitation and to make payment of the belated claims and since such a payment could be a payment against an existing liability, the said amount cannot constitute a 'reserve' but it is only a provision. We are of the opinion that this case is of no assistance to the assessee.

18. The next case is the decision of the Kerala High Court in Commissioner of Income-tax v. Periakaramalai Tea & Produce Co. Ltd. : [1973]92ITR65(Ker) , which case arose under the Companies (Profits)--Surtax Act, 1964. The question was whether the fund created for payment of retirement gratuity to the employees of a company is a reserve or a provision for the purpose of the said Act. In this case, again reference is not made to the case reported in Metal Box Company of India Ltd. v. Their Workmen. However, after referring to the various cases, it was held that the amount in question in that case was 'not for any commitment which had already arisen or payment of which has fallen due but is only a provision in regard to gratuity which may have to be paid to the employees as and when the liability may arise in future '. As we have noted above, a Division Bench of this court in Vazir Sultan Tobacco Co. Ltd. v. Commissioner of Income-tax : [1974]96ITR248(AP) has rightly held the retirement gratuity as an existing, ascertainable and certain liability and the opinion of the Kerala High Court to the contrary in the above case is not acceptable. We are of the opinion that by not referring to the relevant criteria laid down in Metal Box Company of India Ltd. v. Their Workmen and by seeking to apply the principle laid down in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax : [1966]59ITR767(SC) , the Kerala High Court has come to a conclusion which according to us does not represent the correct position in law.

19. The next decision referred to on behalf of the assessee is of the Madras High Court reported in Commissioner of Income-tax v. Indian Steel Rolling Mills Ltd. : [1973]92ITR78(Mad) arising under the Super Profits Tax Act. There also, the question was whether the amounts set apart for payment of gratuity, which was described by the said High Court as a 'contingent and future liability' and which was stated to have been used for the purpose of the business of the company, should be treated as a reserve for the purpose of the said Act. This case also does not refer to the principle contained in Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC . After referring to the various decisions, it was held at page 85 that the amount set apart for payment of gratuity is a 'contingent and future liability'. No reasons are given for describing the said liability as 'contingent and future liability'. We feel that the liability though for payment of gratuity is a certain and ascertainable liability, it may have to be paid in future as and when a particular workman retires, and after due quantification. It was further pointed out in that case that the said amount was used for the purpose of the business of the company. The decision, however, does not disclose the facts as to, in what circumstances, the said amount was used by the company. The decision of the case has, therefore, to be confined to the particular facts of that case and does not purport to lay down any principle of general application. The other decision cited for the assessee is also of the Madras High Court in Nagammal Mills Ltd. v. Commissioner of Income-tax : [1974]94ITR387(Mad) . However, this case also does not refer to the decision of the Supreme Court in Metal Box Company of India Ltd. v. Their Workmen. The items in dispute in that case pertain to excess provision for bonus, provision for dividend, provision for taxation and the excess development rebate reserve. It was held that in so far as the provision for bonus and taxation is concerned, they are merely provisions but in so far as the excess provision for bonus and development rebate reserve was concerned, the. court was of the opinion that they must be treated as 'reserves'. It was similarly held that excess provision for taxation satisfied the test of a 'reserve' and must be treated as such. But, in the present case, we are not concerned with the problem of any excess provision though Mr. Srinivasamurthy sought to develop an argument on the basis of this and other decisions referring to excess provision. In the case before us, we are concerned with the nature of the amounts as on the first day of the previous year, i.e., January 1, 1962, when a provision was made in respect of 'breakages and bonus'. The statement of the case does not contain any reference to such excess provision nor does the question referred to us refer to the said aspect. However, even if it is assumed that the case and the question referred to us can be said to include and comprise the said aspect also, we are of the opinion that inasmuch as no person possessed of the requisite authority had designated the said amounts as 'reserves' on the relevant date nor had indicated the manner of its disposal or the destination of the said balance (if it can be so called) we are of the opinion that the said amount shown by the assessee itself as 'provision' cannot become a 'reserve' The submission that the true nature of the amount should be seen and not the mere description by the assessee, no doubt true, is not really relevant on the facts of this case. It may be that in spite of an amount being designated as reserve, the department may come to a conclusion that it has been so designated only for the purpose of evading tax and that such designation is not genuine or bona fide. But it does not follow that even though an amount is not so designated by the requisite authority, and even though the requisite authority had specifically designated it as a provision, still it can be treated as a 'reserve' We are, therefore, of the opinion that this decision or the other decisions dealing with excess/surplus provision are not of any help to the assessee in this case.

20. Another case of the Madras High Court in United Nilgiri Tea Estates Co. Ltd. v. Commissioner of Income-tax : [1974]96ITR734(Mad) is also referred to. In the said decision, the court held that while the amounts actually paid out for meeting a tax liability cannot be called a 'reserve', the excess provision which was available to the company for its use has to be treated as a 'reserve' From the question referred to the court in that case, it appears that the excess depreciation was adjusted to general reserve and it was, therefore, held to be a reserve and, further, observations were made following the decision in Nagammal Mills Ltd. v. Commissioner of Income-tax : [1974]94ITR387(Mad) that excess provision even in respect of tax also constitutes a 'reserve'. But the said report does not show in what circumstances the said excess provision in respect of tax has come into being and in what manner it was allocated by the company. Since this decision merely follows the earlier decision of that court in Nagammal Mills Ltd. v. Commissioner of Income-tax no principle as such is deducible from the said decision.

21. Mr. Srinivasamurthy then referred to the decision in Commissioner of Income-tax v. Security Printers of India (P.) Ltd. : [1972]86ITR210(All) , a case arising under the Super Profits Tax Act before the Allahabad High Court. The question for consideration in that case was whether, on the facts and in the circumstances of that case, it could be held that the provision for bonus, provision for taxation and provision for proposed dividends represented reserves and, therefore, were entitled to be included in the computation of the capital for the purpose of the said Act. The learned judges referred to certain cases decided by the Supreme Court, but of course not to the decision in Metal Box Company of India. Ltd. v. Their Workmen, [1969] 73 ITR 33; 89 Comp Cas 410 (SC) and thereafter on the facts before them held that the amounts under the said three items 'represent amounts specifically set apart for meeting future liabilities' It was further observed by the court 'it does not appear that the revenue ever contended before the Tribunal that the amounts represent liabilities which had already arisen during the relevant previous year and were not intended for a future contingency. Nor was it questioned that the provision was made by the requisite authority.' On the said findings, it was held that the provisions for the said three items were entitled to be treated as reserves for the purpose of computation of the capital under the said Act. It is significant to note that the said decision was rendered on August 9, 1971, and similar problem presented itself before the same Bench on December 23, 1971, when they arrived at a contrary decision. The latter case is reported in Commissioner of Income-tax v. Hind Lamps Ltd. : [1973]90ITR487(All) . Again, the question arose whether, on the facts and in the circumstances of that case, the provisions made for proposed dividend, for taxation and the credit balance of profit and loss account and depreciation reserve are entitled to be treated as 'reserves' for the purpose of the Super Profits Tax Act. After discussing the case law on the subject, but again not the case in Metal Box Company of India Ltd. v. Their Workmen, it was held on the facts before the court that the item of Rs. 4,17,500 being the proposed dividends cannot be treated as reserve inasmuch as the board of directors had made a proposal to the shareholders for distribution of the same by way of dividend for the relevant year. Even in respect of the provision for taxation, it was held that it was only a provision in respect of a current liability which merely awaited quantification and, therefore, was held not to be a reserve. Dealing with the item pertaining to credit balance of the profit and loss account, again it was held that there was nothing to show that it was set apart by the assessee for future use and it was also held to be a provision. The fourth item, namely, the depreciation reserve, was also held to be a provision in the absence of any evidence to show that it was set apart for a future use. No reference was made to the earlier decision of the same Bench reported in Commissioner of Income-tax v. Security Printers of India (P.) Ltd. : [1972]86ITR210(All) . We must presume that the earlier decision was rendered on the particular facts and findings in that case and that, therefore, it is of no help to the assessee in the present case. As pointed out above, the latter decision negatives the contentions put forward on behalf of the assessee.

22. Mr. Srinivasamurthy then referred us to pages 146 and 147 of the Hand Book of Practical Auditing by Tandon to show the definition of the expression 'reserve' by the said author. It is stated therein that in accountancy terminology 'reserve' means that part of the profits which is set aside for any known or unknown contingency, liability diminution in the values of asset, etc. It was then stated that 'reserve' may be for a general or a specific purpose. 'General reserve' was said to be an amount set aside out of the profits or surplus of a business to provide additional working capital or to strengthen the liquid resources of the business or for meeting an unknown contingency or to equalise dividend. It was held that just like an individual, a company may not distribute all its profits by way of dividend but may retain a portion of the same which constitute the surplus and goes to improve the liquid resources of the business. Such retention may even be for the reason that it may be more profitable to invest the said amount for the purpose of the company's business itself than investing the same outside the business. But we do not think that even the said passage of the author, assuming that it represents the true concept of a general reserve, is of any help to the assessee in this case since admittedly no amount was 'set aside' as such by the competent authority for any of the purposes mentioned by the said author. The learned counsel then referred to the book Accountancy by William Pickles at pages 192 and 193. As we have already noted, the Supreme Court in its decision in Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC has considered the opinion of the said author on the meaning of the expressions 'reserves' and 'provisions' and also referred in particular to page 192 of the said book. Mr. Srinivasamurthy, however, draws particular reference to the passage at page 193 to the effect that 'any amount set aside for the purpose of providing for depreciation and any other known liability of which the amount cannot be determined with substantial accuracy in excess of estimated requirements must be regarded as a reserve'. But, as we have indicated above, not only the assessee itself treated the said sums as provisions but that no person possessing the requisite authority had earmarked or indicated the same as 'reserves', We have indicated our reasoning on this aspect while dealing with the case of the Madras High Court reported in Nagammal Mills Ltd. v. Commissioner of Income-tax : [1974]94ITR387(Mad) .

23. Mr. Srinivasamurthy referred us to a passage to the similar effect at page 11 of the Study Papers published by the Institute of Chartered Accountants of India--Study IV (I.S.P. Ac-14). For the reasons given by us above, it is not necessary to deal with the said passage in detail.

24. Mr. P. Rama Rao, the learned standing counsel for the income-tax department, referred us to the decisions in Commissioner of Income-tax v. Hindustan Milk Food Mfg. Ltd. and Indian Steel and Wire Products Ltd. v. Commissioner of Income-tax : [1955]27ITR436(Cal) . The first among them is a decision of the Punjab and Haryana High Court arising under the Super Profits Tax Act. The question that was referred for the court's opinion in that case was whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the sum of Rs. 8,64,961, being the amount proposed to be distributed as dividend, constitutes a reserve for the purpose of the said Act. The Tribunal had held it to be a reserve purporting to follow the decision of the Supreme Court in Commissioner of Income-tax v. Century Spinning and . : [1953]24ITR499(SC) . But the High Court rightly came to the conclusion after referring to the relevant decisions of the Supreme Court referred to by us above and the other decisions, that the Tribunal misunderstood the ratio of the decision of the Supreme Court in Commissioner of Income-tax v. Century Spinning and . and that the said amount was merely a provision to be distributed by way of dividend to the shareholders. It was also pointed out that the company itself had in its balance-sheet shown the said amount under the heading 'provisions'. The said aspect was relied upon as disclosing the intention of the Company itself not to treat the amount as a reserve, having earmarked it for distribution as dividend. In Greaves Cotton & Crompton Parkinson Ltd. v. Commissioner of Income-tax : [1963]48ITR20(Bom) the Bombay High Court had to deal with the question whether the sums, being provisions for retiring gratuity and bonus to the employees, have to be excluded while determining the assessee's actual accounting profits for the purpose of Section 23 A of the Indian Income-tax Act, 1922. Under Section 23A of the 1922 Act, the department was given a power in the case of private limited companies to direct the distribution of profits as dividend if it was found that the company had distributed less than 60% of its profits by way of dividend. The assessee contended that the said amounts are entitled to be treated as deductions from the accounting profits of the company from which the dividend should be distributed. The court held that the liability to pay gratuity had already been incurred by the assessee as a result of the award of the industrial court so far as its workers who had completed ten years of service were concerned and, therefore, the company had to and did set apart the sum of Rs. 1,00,200 to meet the said liability and, hence, it cannot be said that the company while providing for the said amount was building up its reserve fund for meeting any future liability but was merely making a provision in respect of an existing liability. In so far as the amount towards bonus was concerned, it was held that inasmuch as the industrial court had awarded the bonus for the previous assessment year, the company's liability to pay bonus at a similar rate for the relevant assessment year also 'was very imminent and even certain as the assessee had made large profits during 1947 also' and, therefore, it was held that a sum set apart to meet such imminent and certain liability was an allowable deduction in determining the distributable profits. Though the case arose under the provisions of the Income-tax Act, we are of the opinion that the principle of the said decision, with which we are in agreement, is relevant for answering the question referred to us in these cases.

25. The case in Indian Steel and Wire Products Ltd. v. Commissioner of Income-tax : [1955]27ITR436(Cal) however, arose under the Business Profits Tax Act, which as we have already noted, is a fore-runner of the Super Profits Tax Act. This case has been cited by the counsel for the department to meet the argument of the assessee with respect to the 'surplus/excess provision'. Two chargeable accounting periods relevant in that case were periods commencing from April 1, 1946, and ending with March 31, 1947, and commencing from April 1, 1948, to March 31, 1949. Similar questions arose with respect to both the said years. In so far as the accounting period commencing on April 1, 1946, is concerned, the facts were that the balance-sheet of the assessee-company for the year ending March 31, 1946, showed a sum as an unappropriated balance which sum was made up of two smaller sums, namely ; (i) an amount which had been carried forward out of the balance as on March 31, 1945, and (ii) an amount which was the balance of the profits for the year ending March 31, 1946. The assessee claimed that it was entitled to have the said amounts treated as reserve for the purpose of computation of its capital under the said Act. But it was held by the Calcutta High Court, following the decision of the Supreme Court in Commissioner of Income-tax v. Century Spinning and . : [1953]24ITR499(SC) that on the relevant date, namely, April 1, 1946, nobody possessed of the requisite authority had indicated the manner of disposal or the destination of the balance concerned. 'The amount of the balance was simply pushed forward to the next year without being allocated to any particular purpose, whether general or special' and it was held that that was not sufficient to constitute it a reserve.

26. Now, coming to the facts in R.C. No, 34 of 1973 before us, it is evident from the statement of facts and the balance-sheet of the company for the calendar year 1962, that the company itself has treated the said two amounts as merely provisions. At page 14 of the said balance-sheet/annual report, 'reserves and surplus' are mentioned under Schedule 'B'. Under the said head, various types of reserves are mentioned, namely, general reserve, development rebate reserve and reserve for doubtful and bad debts. The current liabilities and provisions are set out in Schedule 'D' at page 16. Again, in Schedule 'D' there is a sub-heading '(b) Provisions' whereunder these two items are shown along with the provision for taxation and for proposed dividends. It is thus clear that the company never intended to treat the said amount as reserves and that nobody with the requisite authority had designated the said amounts as reserves or indicated the manner of its disposal or even the destination of the balance concerned. As has been found by the Tribunal and by the Super Profits Tax Officer also, 'breakages and damages on sales' is an annual and normal feature in the line of the business of the assessee and it was also further found that the liability to pay the bonus had arisen for the previous year and, therefore, it is evident that a similar liability was certain and definite in view of the profits made by the company for the relevant year. The Tribunal was, therefore, right in holding that both the amounts are merely provisions to meet a known liability of which the amount could not be determined with substantial accuracy on the relevant date, i.e., on January 1, 1962. Applying the principle of the decision of the Supreme Court in Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC we also come to the same conclusion that the said amounts are 'provisions made against anticipated losses and contingencies' and that they were amounts set aside out of profits and other surplus to provide for a known liability of which the amount cannot be determined with substantial accuracy on the relevant date. With respect to the contention of the assessee that the surplus/excess provision has to be treated as a reserve, we have already indicated that, on the facts and in the circumstances before us, the said question does not arise and even if it is held to arise, we are of the opinion that merely because the amount of balance from the previous year has been 'simply pushed forward to the next year', borrowing the language of the Calcutta High Court in Indian Steel and Wire Products Ltd. v. Commissioner of Income-tax : [1955]27ITR436(Cal) it cannot be said that it constitutes a reserve unless some person possessed of the requisite authority had designated it as such or indicated the manner of the disposal or the destination of the balance concerned.

27. We are also of the opinion that there is no conflict between the decision of this court in Vazir Sultan Tobacco Co. Ltd. v. Commissioner of Income-tax, [1974] 96 ITR 249 and the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax : [1966]59ITR767(SC) as explained by us above.

28. For the aforesaid reasons, we answer the question referred to us inR.C. No. 34 of 1973 against the assessee and in favour of the department.For the same reasons and particularly in view of the Explanation to Rule 1 in the Second Schedule to the Companies (Profits) Sur-tax Act, 1964,we also answer the question referred to us in R.C. No. 35 of 1973 againstthe assessee and in favour of the department. The respondent is entitledto its costs. Advocate's fee Rs. 250 in each.


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