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Commissioner of Income-tax Vs. Security Printers of India (P.) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 107 of 1967
Judge
Reported in[1972]86ITR210(All)
ActsSuper Profits Tax Act, 1963 - Schedule - Rule 1
AppellantCommissioner of Income-tax
RespondentSecurity Printers of India (P.) Ltd.
Appellant AdvocateB.L. Gupta and ;R.R. Misra, Advs.
Respondent AdvocateRajesh Tandon and ;Krishna Sahai, Advs.
Excerpt:
- .....to be taken into account in computing the capital under this rule ......' 5. for the purpose of rule 1 the reserves of the company must be added to its paid up capital. the reserves are those specified by the rule. 6. admittedly, the provision for bonus, for taxation and for proposed dividends are not reserves contemplated under proviso (b) to section 10(2)(vib) of the indian income-tax act, 1922, or section 34(3) of the income-tax act, 1961. the case of the assessee is that theyrepresent other reserves the amounts of which have not been allowed in computing the assessee's profits for the purposes of the indian income-tax act, 1922, or the income-tax act, 1961. for the revenue, while it is not disputed that the amounts represented by the three items have not been allowed in computing.....
Judgment:

R.S. Pathak, J.

1. The Income-tax Appellate Tribunal has referred the following question ;

'Whether, on the facts and in the circumstances of the case, it could be held that the provision for bonus, provision for taxation and provision for proposed dividends represented 'reserves' and were to be included in the computation of capital under the Super Profits Tax Act, 1963 ?'

2. The assessee is a private limited company. During assessment proceedings under the Super Profits Tax Act, 1963, for the assessment year 1963-64 (the relevant previous year being the financial year ending March 31, 1963), the assessee claimed that the following three items of reserves should be considered while computing its capital investment.

(a) provision for bonus Rs. 5,000

(b) provision for taxation Rs. 81,000

(c) provision for proposed dividends Rs. 52,500

3. The Income-tax Officer rejected the claim on the ground that these amounts were designed to meet a contingent liability and, therefore, could not be treated as reserves. The Appellate Assistant Commissioner of Income-tax affirmed the decision. The Tribunal examined the balance-sheet of the assessee, and upon a consideration of the nature of the provision for bonus, taxation and proposed dividends, held that they fell within the meaning of the expression 'reserves'. There was no disputebefore the Tribunal that the three items had been actually debited to the assessee's profit and loss account and had not been allowed as a deduction for the purposes of income-tax assessment. Accordingly, the Tribunal allowed the appeal and directed that the three items should be treated as 'reserves' and included in the computation of the capital of the assessee for the purposes of super profits tax. At the instance of the Commissioner of Income-tax, the Tribunal has now made the present reference.

4. The Super Profits Tax Act, 1963, enacted by Parliament, imposes a special tax on certain companies. Section 4 charges the tax on every company for every assessment year from April 1, 1963, in respect of so much of the chargeable profits of the previous year as exceed the standard deduction at the rates specified in the Third Schedule. The expression 'standard deduction' is defined in Section 2(9) as 'an amount equal to six per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of fifty thousand rupees, whichever is greater. The Second Schedule contains rules for computing the capital of a company for the purposes of super profits tax, and Rule 1 declares :

'Subject to the other provisions contained in this Schedule, the capital of a company shall be the sum of the amounts, as on the first day of the previous year relevant to the assessment year, of its paid up share capital and of its reserve, if any, created under the proviso (b) to Clause (vib) of Sub-section (2) of Section 10 of the Indian Income-tax Act, 1922 (11 of 1922), or under Sub-section (3) of Section 34 of the income-tax Act, 4961 (43 of 1961), and of its other reserves in so far as the amounts credited to such other reserves have not been allowed in computing its profits for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or the Income-tax Act, 1961 (43 of 1961), diminished by the amount by which the cost to it of the assets the income from which in accordance with Clause (iii) or Clause (vi) or Clause (vii) of Rule 1 of the First Schedule is not includible in its chargeable profits, exceeds the aggregate of--

(i) any money borrowed by it which remains outstanding ; (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 this rule ......'

5. For the purpose of Rule 1 the reserves of the company must be added to its paid up capital. The reserves are those specified by the rule.

6. Admittedly, the provision for bonus, for taxation and for proposed dividends are not reserves contemplated under proviso (b) to Section 10(2)(vib) of the Indian Income-tax Act, 1922, or Section 34(3) of the Income-tax Act, 1961. The case of the assessee is that theyrepresent other reserves the amounts of which have not been allowed in computing the assessee's profits for the purposes of the Indian Income-tax Act, 1922, or the Income-tax Act, 1961. For the revenue, while it is not disputed that the amounts represented by the three items have not been allowed in computing the assessee's profits for the purposes of either of the Income-tax Acts, it is contended that the three items cannot be described as reserves :

What then is a 'reserve' for the purpose of Rule 1

7. The Supreme Court in Commissioner of Income-tax v. Century Spg. & Mfg. Co, Ltd., [1953] 24 I.T.R. 499, 503 ; [1954] S.C.R. 203 (S.C.).considered a somewhat comparable provision of the Second Schedule to the Business Profits Tax Act, 1947.

8. Rule 2(1) of that Schedule read :

'Where the company is one to which Rule 3 of Schedule I applies, its capital shall be the sum of the amounts of its paid-up share capital and of its reserves in so far as they have not been allowed in computing the profits of the company for the purposes of the Indian Income-tax Act, 1922. ...'

9. The Supreme Court observed :

'The term 'reserve' is not defined in the Act and we must resort to the ordinary natural meaning as understood in common parlance. The dictionary meaning of the word 'reserve' is :

'1(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.

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

11. To retain or preserve for certain purposes.' (Oxford Dictionary, Vol. VIII, p. 513).

10. In Webster's New International Dictionary, second edition, page 2118, 'reserve' is defined as follows:

'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.''

11. And then it said ;

'Reserve in the sense in which it is used in Rule 2 can only mean profit earned by a company and not distributed as dividend to the shareholders but kept back by the directors for any purpose to which it may be put in future.'

12. This test was applied by the Supreme Court in First National City Bank v. Commissioner of income-tax, [1961] 42 I.T.R. 17 ; [1961] 3 S.C.R. 371(S.C.) and again in Commissioner of Income-tax v. Standard Vacuum Oil Co., [1966] 59 I.T.R. 685, 698 (S.C.)where it re-affirmed that;

'In its ordinary meaning, the expression 'reserve' means something specifically kept apart for future use or for a specific occasion.'

13. We shall now turn to some decisions of the High Courts in this country. The Patna High Court, in Commissioner of Income-tax v. Bank of Bihar Ltd., [1953] 24 I.T.R. 9 (Pat.)said:

' According to commercial practice a company which has a balance to the credit of its profit and loss account may either declare a dividend to be paid to the shareholders or may appropriate the balance to a suspense account or to reserves. Before recommending any dividend it is open to the directors to set aside out of the profits of the company such sum as they might think proper as a reserve fund for acquiring property for the company or providing for payment of rent for meeting contingencies or for equalising dividends or for any other purpose of the company which they may think fit.'

14. In Commissioner of Income-tax v. Vasantha Mills Ltd., [1957] 32 I.T.R. 237, 251 (Mad.) the Madras High Court upheld the assessee's claim that a sum of Rs. 9,00,000 shown as provision made in the relevant year of account for the payment of income-tax and excess profits tax should be treated as a reserve for the purposes of Rule 2(1) of the Second Schedule to the Business Profits Tax Act. The learned judges observed :

'......that the sum of Rs. 9,00,000 was set apart for a specifiedpurpose with a specified end in view, payment of taxes when they fell due. Reservation of a specified sum for a specified use, when the reservation has been validly made by a person having authority to do so, would appear to bring the sum so reserved within the meaning of the expression 'reserve' in Rule 2(1).'

15. They held that the allocation of a specified sum out of the profits of the company kept back for utilisation towards the payment of tax was sufficient to make the sum so set apart a reserve within the meaning of Rule 2(1). It was set apart for some purpose and was kept for some use, the purpose and use having been specified when the sum was allocated and 'reserved' for the payment of tax. What constitutes a reserve under Rule 2(1) of the same Schedule was considered by the Calcutta High Court also. In Indian Steel and Wire Products Ltd. v. Commissioner of Income-tax, [1958] 33 I.T.R. 579, 584, 588 (Cal.) Chakravarti C.J, with whom Guha J. agreed, observed :

'. . . . it can hardly be disputed that nothing can be reserved unless it has been reserved or laid by or stored for use or application in a futurecontingency which is anticipated as certain or likely. In the actual administration of companies also a part of the surplus profits is removed from the immediate business of the company by way of a provision against future contingencies and a reserve is thus created, although after being carried to the reserve, the amount in question may be invested or re-employed in the business, if the articles so permit.'

16. Elaborating further, he said:

'A reserve as I have endeavoured to explain is by its very nature a fund which is created and maintained for the purpose of being drawn upon in future. .... A reserve is created only out of the whole or a part of the surplus profits as they are found to be in the hands of the company at the end of the year and it is a reserve against a contingency which still lies in the future.'

17. Our attention was drawn on behalf of the revenue to Aluminium Industries Ltd v. Commissioner of Income-tax, [1968] 68 I.T.R. 125 (Ker.) where the Kerala High Court considered the meaning of the expression 'reserve' in Rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, the question with which we are concerned. The High Court applied the test propounded by the Supreme Court in Century Spg, & Mfg. Co. case, holding that the considerations governing the question under the Super Profits Tax Act were substantially the same as those under the Business Profits Tax Act.

18. From the cases referred to, one thing is clear. And that is that the term 'reserve' means a sum specifically kept apart for future use or for a specific occasion. The reservation must be effected by some one having authority to do so, and it must be of a specified sum for a specified use, Where it arises out of the surplus profits of the company, it should be set apart before the distribution of dividends to the shareholders. It is a sum laid by or stored for use or application in a future contingency which is anticipated, a fund which is created and maintained for the purpose of being drawn upon in future.

19. Upon the facts before us it is clear that the three items, provision for bonus, for taxation and for proposed dividends represent amounts specifically set apart for meeting future liabilities. 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. An attempt has been made before us on behalf of the revenue to raise those questions, but we are unable to permit those points to be raised as they were not raised before the Tribunal. There is no dispute that the three items have actually been debited to the assessee's profit and loss account and that theyhave not been allowed as a deduction for the purposes of income-tax assessment.

20. In our opinion, the provision for bonus, the provision for taxation and the provision for proposed dividends are entitled to be treated as 'reserves' for the purposes of Rule 1 of the Second Schedule to the Super Profits Tax Act, and they should be included in the computation of capital under that provision.

21. The question referred is answered in the affirmative.

22. The assessee is entitled to its costs, which we assess at Rs. 200. Counsel's fee is assessed in the same figure.


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