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Commissioner of Income-tax Vs. Western India Plywoods Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Reference Nos. 150 to 152 of 1979
Judge
Reported in[1984]150ITR218(Ker)
ActsCompanies (Profits) Surtax Act, 1964 - Schedule - Rule 1; Super Profits Tax Act, 1963
AppellantCommissioner of Income-tax
RespondentWestern India Plywoods Ltd.
Appellant Advocate P.K. Ravindranatha Menon, Adv.
Respondent Advocate P. Balachandran and; K.A. Nayar, Advs.
Excerpt:
.....- assessee public limited company - assessee took loan from corporation - assessee continued transferring certain amount every year out of their profits - income tax officer (ito) held that amounts appropriated out of profits will not be taken into account for computing capital of company for purpose of super profit tax - whether amount appropriated by assessee could be taken into account in calculating capital of company - company shall be charged tax in respect of so much of its chargeable profits of previous year as exceed statutory deduction - chargeable profits means total income of assessee computed under act and adjusted in accordance with provisions of act - question referred to court answered in favour of assessee-company. - - being unsuccessful, the commissioner of..........total income of an assessee computed under the income-tax act, 1961 (43 of 1961), for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the first schedule. section 2(8). ' statutory deduction ' means an amount equal to ten per cent. of the capital of the company as computed in accordance with the provisions of the second schedule, or an amount of two hundred thousand rupees, whichever is greater ; provided that where the previous year is longer or shorter than a period of twelve months, the aforesaid amount of ten per cent. or, as the case may be, of two hundred thousand rupees shall be increased or decreased proportionately : provided further that where a company has different previous years in respect of its income, profits and gains, the.....
Judgment:

Paripoornan, J.

1. These three references are at the instance of the Commissioner of Income-tax, Kerala-II, Ernakulam. The assessee, a public limited company, is the respondent in all the three references. The three assessment years concerned are 1963-64, 1966-67 and 1970-71. We are concerned in these cases with the interpretation of the provisions of the Super Profits Tax Act for the year 1963-64 and with the Companies (Profits) Surtax Act, 1964, for the years 1966-67 and 1970-71. The questions referred to this court for the three assessment years, wherein the broad principles, to be considered are similar, are as follows :

' 1. Assessment year 1963-64 :--Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the various amounts shown in the balance-sheet of the assessee-company as reserves for repayment of loans are to be treated as reserves created by the company and that they are to be taken into account for computing the capital of the company for the purpose of super profits tax for the assessment year 1963-64 ?

2. Assessment year 1966-67 :--Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the various amounts shown in the balance-sheet of the asses-see-company as reserves for repayment of loans are to be treated as reserves created by the company and that they are to be taken into account for computing the capital of the company for the purpose of surtax for the assessment year 1966-67?

3. Assessment year 1970-71 :--Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the various amounts shown in the balance-sheet of the assessee-company as reserves for repayment of loans are to be treated as reserves created by the company and that they are to be taken into account for computing the capital of the company for the purpose of surtax for the assessment year 1970-71 '

2. The assessee is a public limited company. In order to expand its business it approached the Industrial Finance Corporation of India (hereinafter called ' the Corporation '), for a loan. It was sanctioned as per agreement dated February 15, 1958. The total amount sanctioned was Rs. 30 lakhs, which was paid in four instalments. Rs. 8 lakhs was paid on August 1, 1958, Rs. 2 lakhs on September 1, 1958, Rs. 10 lakhs on October 1, 1958, and Rs. 10 lakhs on November 1, 1958. The loan was to be repaid by the assessee in 12 equal instalments , of Rs. 2 1/2 lakhs each. The 1st instalment was payable by January 1, 1961, and the other instalments were payable ' on the 1st day of the following calendar years'. As per the agreement, the last loan instalment would be paid by January 1, 1972.

3. While the loan was under negotiation, the company made provision in its balance-sheet for the repayment of the loan which they may get from the Corporation. For the year ending March 31, 1957, they had appropriated out of profits Rs. 2 lakhs and transferred it to a reserve called ' Reserve for IFC loan repayment '. To this reserve the assessee continued transferring certain amounts every year out of their profits. A sum of Rs. 2 lakhs was so transferred for the assessment (accounting) years ending March 31, 1958, and March 31, 1959. A sum of Rs. 1 1/2 lakhs was transferred for the year ending March 31, 1961. For the subsequent years up to the year ending March 31, 1969, Rs. 2 1/2 lakhs were transferred for each year. Thus by March 31, 1969, the reserve carried 27 1/2 lakhs to its credit. Out of this amount, the assessee utilised a sum of Rs. 20 lakhs for the issue of 20,974 bonus shares during 1966-67. The balance of Rs. 7 1/2 lakhs was transferred to the general reserve during 1969-70 and Rs. 26,218 bonus shares were issued out of the general reserve during the year 1970-71. For the issue of the bonus shares, the assessee obtained necessary consent of the Central Government and the Industrial Finance Corporation.

4. For all the three assessment years 1963-64, 1966-67 and 1970-71, the ITO held that the amounts appropriated out of the profits and transferred to the reserve called ' Reserve for IFC loan repayment': were created for a specific purpose and so were in the nature of a provision and so will not be taken into account for computing the capital of the company for the purpose of super profits tax for the assessment year 1963-64 and for computing the capital of the company for the purpose of the Companies (Profits) Surtax Act, 1964, for the years 1966-67 and 1970-71. Appeals were filed by the assessee before the AAC for all the three years. In the appeals for the years 1963-64 and 1966-67 (annexures B-1 and B-2), the AAC agreed with the assessee's contention and held that the reserve appropriated out of the profits and transferred to the reserve called ' Reserve for IFC loan repayment' will be treated as part of the reserve and such amounts qualified to be treated as part of the capital for the purpose of ' standard deduction '. But for the assessment year 1970-71, the AAC took a different view. He found that the reserve actually represented current liabilities as envisaged in the balance-sheet to be prepared according to rules of the Companies Act and to the extent the amount was earmarked for repayment, it cannot be treated as a reserve. It was only a mere provision and so cannot be taken into account for the purpose of standard deduction (annexure Ext. B-3). The Department filed second appeals before the Appellate Tribunal for the years 1963-64 and 1966-67 and the assessee filed a second appeal before the Appellate Tribunal for the assessment year 1970-71. The said three appeals were heard together and disposed of by a common order of the Appellate Tribunal dated February 13, 1976 (annexure C). The Appellate Tribunal held that the assessee is entitled to the relief claimed and that the reserve made for repayment of loan obtained from the Industrial Finance Corporation will be a reserve for the purpose of computation of capital. The Commissioner of Income-tax, Kerala-II, thereafter moved the Appellate Tribunal under Section 256(1) of the Act for referring the questions of law which arose out of the order of the Appellate Tribunal to this court. Being unsuccessful, the Commissioner of Income-tax moved this court and filed O.P. Nos. 124 of 1976, 125 of 1976 and 123 of 1976. In accordance with the directions of this court, the Appellate Tribunal has referred the questions of law stated in paragraph No. 1 supra for the decision of this court.

5. The short question that falls for consideration is whether the amount appropriated by the assessee out of its profits and transferred to a reserve called ' Reserve for I.F.C. loan repayment ' could be taken into account in calculating the capital as contemplated by Rule 1 (iii) of the Second Schedule of the Companies (Profits) Surtax Act, 1964. It is common ground that the provisions of the Super Profits Tax Act, which is relevant to be construed for the year 1963-64, are also of similar import. The following statutory provisions are relevant for considering the crucial issue involved in this case:

' Section 2(5). ' Chargeable profits' means the total income of an assessee computed under the Income-tax Act, 1961 (43 of 1961), for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule.

Section 2(8). ' Statutory deduction ' means an amount equal to ten per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of two hundred thousand rupees, whichever is greater ;

Provided that where the previous year is longer or shorter than a period of twelve months, the aforesaid amount of ten per cent. or, as the case may be, of two hundred thousand rupees shall be increased or decreased proportionately :

Provided further that where a company has different previous years in respect of its income, profits and gains, the aforesaid increase or decrease, as the case may be, shall be calculated with reference to the length of the previous year of the longest duration.

4. Charge of tax--Subject to the provisions contained in this Act, there shall be charged on every company for every assessment year commencing on and from the first day of April, 1964, a tax (in this Act referred to as the surtax) in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the Third Schedule.

The Second Schedule.--Subject to the other provisions contained in this Schedule, the capital of a company shall be the aggregate of the amounts, as on the first day of the previous year relevant to the assessment year, of......

(iii) its other reserves as reduced by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or the Income-tax Act, 1961 (43 of 1961).'

6. From the aforesaid provisions, it is clear that every company shall be charged a tax in respect of so much of its chargeable profits of the previous year, as exceed the statutory deduction. ' Chargeable profits ' is the total income of an assessee computed under the I.T. Act and adjusted in accordance with the provisions of the First Schedule to the Companies (Profits) Surtax Act, 1964. Statutory deduction means an amount equal to 10% of the capital of the company as computed in accordance with the provisions of the Second Schedule or an amount of two hundred thousand rupees, whichever is greater (as per the provisions of the Act as it stood then). So a company is liable to pay surtax under the Act in respect of its chargeable profits which exceed the statutory deduction. Such statutory deduction is 10% of the capital of the company computed in accordance with the provisions of the Second Schedule. According to the Second Schedule, Rule 1(iii), the other reserves of the company will also be taken into account for arriving at the capital of a company. So, if the amount appropriated by the assessee, in this case out of its profits and transferred to the reserve called ' Reserve for I.F.C. loan repayment', is considered as ' other reserves ' within the meaning of the Second Schedule, Rule 1(iii) of the Companies (Profits) Surtax Act, the standard deduction available will be 10% on the aggregate of the amounts including the amount so appropriated out of the profits and transferred to the said reserve account. The assessing authority took the view that the assessee is hot entitled to include the said sum as a reserve since the said reserve was created only for a specific purpose and so is in the nature of a provision and cannot be treated as part of the capital base. The core of the matter is whether the said view of the assessing authority sustained by the AAC for the year 1970-71 and negatived for the years 1963-64 and 1966-67 and held to be a ' reserve ' (part of the capital) by the Appellate Tribunal, is justified in law

7. The Appellate Tribunal, in its consolidated order (annexure C), held as follows:

' The company had created a reserve account in which certain moneys had been transferred by them out of the taxed profits. The reserve account is styled ' Reserve for repayment of loan from I.F.C.I. '. This appeared for the first time in the accounts for the year ended 31-3-1957, i.e., even before the loan was taken from the Corporation. In that year, i.e., for the year ended 31-3-57, Rs. 2 lakhs was set apart. It was increased and from 31-3-57 included the following amounts : Rs.Amount set apart in the year ended31-3-572 lakhsdo.31-3-582 lakhsdo.31-3-592 lakhsdo.31-3-60do.31-3-611 lakhsdo.31-3-62

2 lakhs

:Total 10 lakhs

8. We have already stated that the assessee had to repay these amounts by annual instalments. The first instalment for repayment fell in 1960 (January 1, 1961). Each year they had repaid Rs. 2 1/2 lakhs with the result Rs. 7 1/2 lakhs had been repaid by March 31, 1962. These repayments have not been made out of the funds set apart in the reserve account. The funds have not been touched at all for this purpose. On the other hand, the AAC had found, and it is also supported by records, that these funds were actually used for same other purpose in the year 1967, i.e., for the issue of bonus shares. From these facts we draw an inference that although the reserve is ostensibly for the repayment of loan to I.F.C.I., in fact it is not. As facts show, it came into existence even before the loan was negotiated, the repayment of the instalments of the loans was not from these funds and the ultimate user of the funds was also for an entirely different purpose.

9. We therefore, conclude that this reserve has nothing to do with the repayment of loan from I.F.C.I.

' Since this is a reserve created out of taxed profits by an appropriation approved, it is in no way different from a general reserve. We, therefore, think that the treatment given to this reserve should be exactly like to any other reserves created by the company.'

10. We are of the opinion that the above reasoning and conclusion of the Appellate Tribunal is justified on the facts and circumstances of the case. In CIT v. Periakaramalai Tea and Produce Co. Ltd., : [1973]92ITR65(Ker) , a Bench of this court had occasion to consider what is meant by the term ' reserves ' and what reserves can be taken into account in the computation of capital for the purpose of assessment under the Companies (Profits) Surtax Act, 1964, Schedule II, Rule 1. One of us, Subramonian Poti J. (now Chief Justice), after an exhaustive consideration of the relevant statutory provisions and decisions of courts, observed (p. 73):

' It appears to us in the light of what has been said by the Supreme Court in the decisions to which we have adverted that a reserve is any sum of money which has been kept back for future use whether the purpose for which it is so kept back be general or specific. Naturally, therefore, there is nothing strange if some specific purpose is indicated in the reservation, since a reserve for a specific purpose is as much a reserve as for a general purpose.'

11. The Appellate Tribunal adverted to the above test laid down by this court and, after adverting to the facts of the case, concluded that the amount of Rs. 10 lakhs set apart from the year ended by March 31, 1957, to March 31, 1962, is a.' reserve '. The Appellate Tribunal said:

' Applying this test we find that Rs. 10 lakhs is a reserve. It is not meant for any specific, purpose or any accrued liability which was already in existence. We, therefore, uphold the order of the Appellate Assistant Commissioner on this point.' (para 6 of annexure C)

12. We are of the opinion that the above reasoning and conclusion of the Appellate Tribunal is justified.

13. Counsel for the Revenue contended that the reserve in the instant case was earmarked for repayment of the loan and that it was only a provision and cannot be a general reserve and so, different from a general reserve. For one thing, the Appellate Tribunal has found that the reserve, in the instant case, styled as ' Reserve for repayment of loan from I.F.C.I.' appeared even before the loan was taken from the Corporation, and although it was ostensibly so named, in fact, it was hot for the repayment of the loan from I.F.C.I, and that the reserve had nothing to do with the repayment of the loan. The Appellate Tribunal also held that the reserve created in this case out of the 'taxed profits', by an appropriation approved, is in no way different from a general reserve. These findings of fact are not assailed by the Revenue and it is not open to the Revenue in these proceedings to contend that the reserve created in the instant case is not a general reserve or in any way different from a general reserve. Moreover, the Appellate Tribunal adverted to the test as to what constitutes ' a reserve ' for the purpose of computation of capital under the Companies (Profits) Surtax Act, 1964, Schedule II, Rule 1, as laid down by this court in the decision in CIT v. Periakaramalai Tea and Produce Co. Ltd., : [1973]92ITR65(Ker) , and applying the test came to the conclusion that Rs. 10 lakhs set apart in the different assessment years is a reserve. We are unable to accept the contention of the counsel for the Revenue that the sum of Rs. 10 lakhs, so set apart, is only a 'provision' and not a reserve. We may add that, broadly stated, ' a provision' is only a transitory one, and a ' reserve ' is a permanent or quasi-permanent one and in that view of the matter, it cannot be said that in this case when the assessee appropriated a substantial amount out of its taxed profits and transferred it to a reserve every year, it was only in the nature of a ' transitory provision ' or it was in the nature of a transitory arrangement and the , said provision cannot be called a 'reserve'. The counsel for the Revenue invited our attention to the decision of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT, : [1981]132ITR559(SC) , and referred to certain passages in the said decision, at pp. 579, 580, 582 and 596. We have perused through the said observations with care and we do not find anything in the said decision of the Supreme Court which militates against the test laid down by this court in the decision, Periakaramalai Tea and Produce Company's case, : [1973]92ITR65(Ker) , extracted earlier in the judgment. We hasten to add that this court laid down the test in, : [1973]92ITR65(Ker) , as to what constitutes ' other reserves ' for the purpose -of the Companies (Profits) Surtax Act, 1964, Schedule II, Rule 1, on the basis of the earlier decisions of the Supreme Court in CIT v. Century Spinning and ., : [1953]24ITR499(Bom) , First National City Bank v. CIT, : [1961]42ITR17(SC) , Standard Mills Co. Ltd. v. CWT, : [1967]63ITR470(SC) , Kesoram Industries and Cotton Mills Ltd. v. CWT, : [1966]59ITR767(SC) , and other decisions of the High Courts. The observations contained in the recent decision of the Supreme Court in Vazir Sultan's case, : [1981]132ITR559(SC) , referred to by the counsel for the Revenue do not militate against the observations contained in the earlier decisions of the Supreme Court referred to above. Incidentally, we may also mention the following passage occurring in the Law of Surtax in India, by M.M. Bhagawat (1983 edition) at p. 24 :

' The Supreme Court has recently/affirmed the decision of the Kerala High Court in CIT v. Periakaramalai Tea and Produce Co. Ltd., : [1973]92ITR65(Ker) , in which case the court held that a reserve is a sum of money which has been kept for the future use by the assessee whether the purpose for which it is so kept back is general or specific.' (The reference to the Supreme Court decision has not been given).

14. In the result, we hold that the decision of the Appellate Tribunal is correct. Accordingly, the questions referred to this court are answered in the affirmative and in favour off the assessee-company and against the Revenue. There shall be no order as to costs.

15. A copy of this judgment under the seal of the High Court and the signature of the Registrar will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench, as required by law.


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