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Commissioner of Income-tax Vs. Laxmi Sugar and Oil Mills Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberMisc. Case No. 202 of 1971
Judge
Reported in[1977]106ITR913(All)
ActsSuper Profits Tax Act, 1963 - Sections 2(9); Sugarcane Control Order, 1955
AppellantCommissioner of Income-tax
RespondentLaxmi Sugar and Oil Mills Ltd.
Appellant AdvocateDeokinandan and ;R.R. Misra, Advs.
Respondent AdvocateB.L. Gupta and ;Ashok Gupta, Advs.
Excerpt:
- - so, the first condition is satisfied. this clearly shows that in the subsequent year the assessee-company realised that it had no liability whatsoever to meet in respect of the increased sugar price. the amount in question did appear on the first day of the relevant previous year as a liability in its balance-sheet under the head 'current liabilities and provisions'.ordinarily, a provision for a current liability cannot be treated as a reserve, but in the present case the description of the account was clearly wrong, inasmuch as there did not exist any current liability against the company. we are satisfied that the view taken by the tribunal is correct......and was put back into the profits. this clearly shows that in the subsequent year the assessee-company realised that it had no liability whatsoever to meet in respect of the increased sugar price. the amount in question did appear on the first day of the relevant previous year as a liability in its balance-sheet under the head 'current liabilities and provisions'. ordinarily, a provision for a current liability cannot be treated as a reserve, but in the present case the description of the account was clearly wrong, inasmuch as there did not exist any current liability against the company. as has been pointed out by the supreme court in commissioner of income-tax v. standard vacuum oil co. : [1966]59itr685(sc) the name given to an account is not material. what is to be seen.....
Judgment:

R.L. Gulati, J.

1. This is a reference under Section 256(1) of the Income-tax Act, 1961.

2. The assessee is a limited company. Daring the assessment year 1963-64, under the Super Profits Tax Act, 1963, a question arose with regard to the computation of its capital. The assessee claimed a sum of Rs. 8,16,000 as its capital for purposes of determining the standard deduction. The Government of India passed the Sugarcane Control Order, 1955, which was amended from time to time. Under that Order the Government fixed the minimum price of sugarcane payable by the sugar mills to the sugarcane growers on the understanding that the cane growers would be duly compensated by the proportionate share in the excess price of sugar realised by the mills. For this purpose the Government issued a notification on September 23, 1958, Clause 3(i) whereof made the sugar mills liable for the additional price payable to cane growers in certain circumstances set out therein and also prescribed the formula for working out the shares of cane growers in the excess sale price realised by the mills. In order to meet this liability, the company in its accounts relevant to the assessment years 1961-62 and 1962-63 set apart sums of Rs. 5,40,000 and Rs. 2,76,000, respectively. These amounts were debited to the profit and loss account and credited to the 'current liabilities and provisions'. No payment was, however, made to the cane growers and the demand of the growers was contested by the assessee. The aggregate amount of Rs. 8,16,000 was claimed by the assessee as a deduction in its computation of income under the Income-tax Act, but the same was disallowed.

3. The Income-tax Officer did not accept the assessee's claim that the sum of Rs. 8,16,000 should be treated as its capital for the purposes of determination of tax under the Super Profits Tax Act nor was the claim accepted by the Appellate Assistant Commissioner of Income-tax. On second appeal, the Income-tax Appellate Tribunal allowed the assessee's claim holding that the sum in question was a part of the capital base of the company which should have been taken into account while determining the standard deduction. The Commissioner is aggrieved and at his instance the following question of law has been referred to us:

'Whether, on the facts and in the circumstances of the case, the provision for additional cane price amounting to Rs. 8,16,000 was rightly treated as a 'reserve' forming part of the assessee's capital for the purposes of assessment to super profits tax for the year under consideration ?'

4. Under Section 4 of the Super Profits Tax Act, every company is liable to pay tax in respect of so much of its chargeable profits of the previous year as exceeds the standard deduction. The term 'standard deduction' has been defined in Clause (9) of Section 2 as under :

'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.........'

5. The Second Schedule contains rules for computing the capital of a company for purposes of super profits tax. Rule 1 of the Schedule provides that the capital of the company shall be the sum of amounts as on the first day of the previous year relevant to the assessment year of its paid up share capital and of its reserves except those which are allowed as deductions in computing the profits of the company for purposes of the Indian Income-tax Act, 1922, or the Income-tax Act, 1961. Thus, in order that an amount may be treated as capital of a company, it must satisfy the following two requirements:

(i) that it should not have been allowed as a deduction in computing the profits of a company for purpose of income-tax ; and

(ii) that it should represent a reserve.

6. Admittedly, the amount in question has not been allowed as a deduction in the computation of its income under the Income-tax Act, even though a claim in that regard was made by the assessee. So, the first condition is satisfied. All that remains to be seen is as to whether the amount in question represents a 'reserve'. This court has already pointed out in Commissioner of Income-tax v. British India Corporation (P.) Ltd. : [1973]92ITR38(All) that there being no definition of the word 'reserve' in the Act, it has to be understood in its ordinary sense. It has further been pointed out that, according to the accountancy practice, any amount set apart out of the profit or surplus of a company to meet an existing liability is called a 'provision', while an amount set apart to meet a future liability is called a 'reserve'. The Supreme Court in Commissioner of Income-tax v. Standard Vacuum Oil Co. : [1966]59ITR685(SC) has pointed out that the word 'reserve' in its ordinary meaning means 'something specifically kept apart for future use or for specific purpose'. In the instant case, the Tribunal has found, and rightly, that there was no existing liability on the assessee for the payment of extra sugar price to the cane growers under the notification. There is also no finding that the notification applied to the case of the assessee nor did the assessee in fact pay anything to the cane growers. In the subsequent year the amount in question was taken out of the balance-sheet and was put back into the profits. This clearly shows that in the subsequent year the assessee-company realised that it had no liability whatsoever to meet in respect of the increased sugar price. The amount in question did appear on the first day of the relevant previous year as a liability in its balance-sheet under the head 'current liabilities and provisions'. Ordinarily, a provision for a current liability cannot be treated as a reserve, but in the present case the description of the account was clearly wrong, inasmuch as there did not exist any current liability against the company. As has been pointed out by the Supreme Court in Commissioner of Income-tax v. Standard Vacuum Oil Co. : [1966]59ITR685(SC) the name given to an account is not material. What is to be seen is its true nature. The Tribunal has found that having regard to the terms of the notification and the circumstances prevailing in the assessee's case, the liability of the company was unreal and imaginary and not a real liability at all. The directors of the company did, however, set apart an amount to meet this liability in future. In the circumstances, the amount set apart could properly be treated as reserve. We are satisfied that the view taken by the Tribunal is correct.

7. We, accordingly, answer the question in the affirmative, in favour of the assessee and against the department. The assessee is entitled to the costs, which we assess at Rs. 200.


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