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Commissioner of Income-tax Vs. Ganganagar Sugar Mills Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtRajasthan High Court
Decided On
Case NumberD.B. Surtax Reference Application No. 19 of 1982
Judge
Reported in[1987]164ITR245(Raj)
ActsIncome Tax Act, 1961 - Sections 256(1) and 256(2); Companies (Profits) Surtax Act, 1964 - Sections 13
AppellantCommissioner of Income-tax
RespondentGanganagar Sugar Mills Ltd.
Appellant Advocate R.N. Surolia, Adv.
Respondent Advocate T.C. Jain and; Arun Bhandari, Advs.
Cases ReferredMetal Box Company of India Ltd. v. Their Workmen
Excerpt:
.....the distinction between a provision and a reserve is in commercial accountancy fairly well known. [1966]59itr685(sc) ,their lordships of the supreme court gave examples of different types of reserves maintained by companies in india, such as capital reserve, reserve for redemption of debentures, reserve for replacement of plant and machineries, reserve for buying new plant to be added to the existing ones, reserve for bad and doubtful debts, reserve for payment of dividends and general reserves. thus, it appears that it is usual for companies in this country to set apart funds by way of reserves for redemption of debentures and for bad and doubtful debts. the tribunal was justified in observing that it was a highly debatable matter and if the income-tax officer took one view at..........reserve for buying new plant to be added to the existing ones, reserve for bad and doubtful debts, reserve for payment of dividends and general reserves. thus, it appears that it is usual for companies in this country to set apart funds by way of reserves for redemption of debentures and for bad and doubtful debts. 7. in this view of the matter, it cannot be held that the income-tax officer was rectifying a mistake apparent on the record while he proceeded to hold that what he considered to be reserves at the time of passing of the surtax assessment order were not actually reserves but were provisions. the tribunal was justified in observing that it was a highly debatable matter and if the income-tax officer took one view at the time of passing of the order of assessment and held.....
Judgment:

Dwarka Prasad, J.

1. This application under Section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), raises the question as to whether there was a mistake apparent from the record on the basis of which the Income-tax Officer was justified in exercising jurisdiction under Section 13 of the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as 'the Act of 1964 ').

2. While computing the capital base of the assessee, M/s. Ganganagar Sugar Mills Ltd., in the proceedings for the assessment year 1969-70 for assessment of surtax, the Income-tax Officer took into consideration reserve for redemption of debentures and for meeting bad and doubtful debts.

3. After the completion of the surtax assessment, the Income-tax Officer initiated proceedings for rectification of his earlier order under Section 13 of the Act of 1964 and held that the amounts kept apart by the company as reserves for redemption of debentures and for meeting bad and doubtful debts could not be treated as reserves, as these were provisions made by the company for meeting its liabilities. The Income-tax Officer was of the view that a mistake of law apparent on the face of the record was committed by him while computing the surtax assessment and as such he proceeded to rectify the same under Section 13 of the Act of 1964. On appeal, the Commissioner of Income-tax (Appeals) Jaipur, affirmed the order passed by the Income-tax Officer on the ground that the company intended to create a fund out of the profits so as to enable it to redeem the debentures out of such fund when the debentures become due for repayment and that it was a provision made by the company for meeting a known liability in future. Similarly in respect of reserves for bad and doubtful debts, it was held that it was a provision made by the company for an anticipated liability in future. On further appeal by the company, the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, was of the viewthat the amounts set apart by the company out of its profits during the relevant assessment year as reserves were in substance reserves and not provisions made to meet a known liability. As such, the Income-tax Officer has no jurisdiction to pass an order under Section 13 of the Act of 1964, because it could not be held that there was any mistake apparent on the record. The Appellate Tribunal was of the view that since the matter was highly debatable and there was no mistake apparent on the record, the Income-tax Officer held that the aforesaid reserves were actually no reserves but were provisions. An application made by the Commissioner of Income-tax, Jaipur, under Section 256(1) of the Act was dismissed by the Tribunal on the ground that no question of law arose out of the order of the Tribunal, as in the view of the Tribunal, the question as to whether there was any mistake apparent on the record was one of fact.

4. The Income-tax Officer in the first instance had accepted that the company had made reserves for redemption of debentures and for bad and doubtful debts and thereafter initiated proceedings under Section 13 of the Act of 1964, which could have been taken only when the Income-tax Officer would have found that there was a mistake apparent from the record in the earlier assessment order. The provisions of Section 13 of the Act of 1964 could not have been resorted to merely because of a change of opinion on a debatable question as to whether the reserves for redemption of debentures and for bad and doubtful debts were really of the nature of reserves or were provisions made by the company for the purpose of meeting known liabilities. The Tribunal relied upon a decision of the Karnataka High Court in Addl. CIT v. Indian Telephone Industries : [1979]118ITR291(KAR) , wherein it was held that the amount appropriated to the reserves created for bad and doubtful debts was not one set apart to meet known liabilities and that it was a reserve and not a provision as was sought includible in the capital base of the company. It was held in the aforesaid case that since the sums were set apart as reserves for bad and doubtful debts and they were not with reference to any known liability on the date of the balance-sheet, it could not be held to be in the nature of a provision.

5. Their Lordships of the Supreme Court in Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC , while dealing with the question as to whether a particular amount set apart was a reserve or a provision, observed as under (at pages 67 and 68) :

'The next question is whether the amount so provided is a provision or a reserve. The distinction between a provision and a reserve is in commercial accountancy fairly well known. Provisions made against anticipated losses and contingencies are charges against profits and, therefore, to betaken into account against gross receipts in the P & L account and the balance-sheet. On the other hand, reserves are appropriations of profits, the assets by which they are represented being retained to form part of the capital employed in the business. Provisions are usually shown in the balance-sheet by way of deductions from the assets in respect of which they are made whereas general reserves and reserve funds are shown as part of the proprietor's interest (see Spicer and Pegler's Book-keeping and Accounts, 15th edition, page 42). 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 :'

6. In CIT v. Standard Vacuum Oil Co. : [1966]59ITR685(SC) , their Lordships of the Supreme Court gave examples of different types of reserves maintained by companies in India, such as capital reserve, reserve for redemption of debentures, reserve for replacement of plant and machineries, reserve for buying new plant to be added to the existing ones, reserve for bad and doubtful debts, reserve for payment of dividends and general reserves. Thus, it appears that it is usual for companies in this country to set apart funds by way of reserves for redemption of debentures and for bad and doubtful debts.

7. In this view of the matter, it cannot be held that the Income-tax Officer was rectifying a mistake apparent on the record while he proceeded to hold that what he considered to be reserves at the time of passing of the surtax assessment order were not actually reserves but were provisions. The Tribunal was justified in observing that it was a highly debatable matter and if the Income-tax Officer took one view at the time of passing of the order of assessment and held that the amounts set apart by the company were reserves for redemption of debentures and for bad and doubtful debts, it could not be said that an apparent mistake has been committed by him. If that was so, the Income-tax Officer has no jurisdiction to take proceedings under Section 13 of the Act of 1964, but he could have initiated proceedings only for the purpose of rectification of a mistake committed by him. Whether there was a mistake or not committed by the Income-tax Officer on the earlier occasion was a question which could not be said to be one of law, but it appears that it was merely a change of opinion by the Income-tax Officer while he proceeded to pass an order under Section 13 of the Act of 1964, which was not permissible under the law. In this view of the matter, this reference application is dismissed.


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