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Commissioner of Income-tax Vs. Karam Chand Thapar and Brothers - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 431 of 1976
Judge
Reported in(1980)19CTR(Cal)49,[1981]131ITR175(Cal)
ActsCompanies (Profits) Surtax Act, 1964 - Schedule - Rule 1; ;S.P.T. Act, 1963
AppellantCommissioner of Income-tax
RespondentKaram Chand Thapar and Brothers
Appellant AdvocateA. Sengupta, Adv. for ;S. Sen, Adv. and ;Samar Banerjee, Advs.
Respondent AdvocateD. Pal, ;R.K. Murarka and ;A.K. De, Advs.
Cases ReferredMetal Box Co. of India Ltd. v. Their Workmen
Excerpt:
- sabyasachi mukharji, j. 1. the assessee is a limited company and the instant reference under section 256(1) of the i.t. act, 1961, read with section 18 of the c. (p.) s.t. act, 1964, relates to the assessment years 1964-65, 1965-66 and 1966-67. for these assessment years, the assessee-company claimed before the ito that in the computation of capital under schedule ii to the c. (p.) s.t. act, 1964, the reserves for depreciation on investments amounting to rs. 3 lakhs should be included in the capital computation for all the three years. similarly, for the assessment years 1965-66 and 1966-67, the assessee-company claimed that reserves for doubtful debts should be included in the capital computation. the ito, however, did not accept this claim. being aggrieved, the assessee preferred an.....
Judgment:

Sabyasachi Mukharji, J.

1. The assessee is a limited company and the instant reference under Section 256(1) of the I.T. Act, 1961, read with Section 18 of the C. (P.) S.T. Act, 1964, relates to the assessment years 1964-65, 1965-66 and 1966-67. For these assessment years, the assessee-company claimed before the ITO that in the computation of capital under Schedule II to the C. (P.) S.T. Act, 1964, the reserves for depreciation on investments amounting to Rs. 3 lakhs should be included in the capital computation for all the three years. Similarly, for the assessment years 1965-66 and 1966-67, the assessee-company claimed that reserves for doubtful debts should be included in the capital computation. The ITO, however, did not accept this claim. Being aggrieved, the assessee preferred an appeal before the AAC. The AAC dealing with the said contention observed, inter alia, as follows:

' The issue raised is the Income-tax Officer's not including the undermentioned reserves in the computation of the capital basis for working out the standard deduction for these three assessments :--

Reserve1964-651965-661966-67

Rs.Rs.Rs.For depreciation on investments3,00,0003,00,0003,00,000For doubtful debts--2,67,8131,95,127Special Reserve under proviso (ii) to rule 1, clause II of the First Schedule to the Super Profits Tax Act, 1963--3,50,000--

2. The reserve for depreciation on investments was not included in the computation of the capital base on the ground that it represented a kind of a provision and did not constitute a reserve. The word 'reserve' has been interpreted to mean 'something specifically kept apart for future use or for specific action'. The word 'reserve' thus invariably bears the sense of a reservation of finance for long term use when employed in the context of accounting. If the reserve for depreciation is judged by this important criterion, it has to be accepted to be a reserve even if it is created with the object of preserving a company's position against future losses occurring as a result of depreciation in the value of the investment it owns.

3. However, there is another factor which strengthens the appellant's case in support of the inclusion of this reserve in the computation of its capital base. On 30-6-1963 and 30-6-64, the dates on which the appellant's previous years relevant to the assessment years 1964-65 and 1965-66 ended, the market value of the investments was substantially more than their book value not taking into account the unquoted shares. The position which can be easily ascertained from the appellant's printed account in respect of these two years was as follows :--

Book valueMarket value

Rs.Rs.30-6-6390,56,734 1,06,07,22930-6-6493,38,5191,05,43,261

The figures with regard to the position as on 30-6-65 (relevant assessment year 1966-67) could not be ascertained because the printed accountswere not immediately available in the course of the hearing. But this, asI have indicated, is an additional factor which strengthens the appellant'scase. In any case, the figures of the book value and the market value onthe investments as on 30-6-63 and 30-6-64 indicate that the market valueof the investments was greater than the book value of the investments.As such, there was no need for the appellant to provide for the depreciation in the value of investments during these years. '

4. Another argument was put forward by the assessee and that was this: If the dividend equalisation reserve qualified to be a reserve includible in the capital base of the assessee-company, there was no reason why a reserve to meet the contingency of future loss should not qualify to be such a reserve. The AAC found considerable force in this argument. So far as the reserve for doubtful debts was concerned, it was urged, the assessee had created reserves for doubtful debts on an ad hoc basis year after year. The quantum of the debts which, after proper scrutiny appeared to be doubtful, was invariably different from the amount of the* reserve for doubtful debts. This was quite evident from the assessee's printed accounts. Thus, as on June 30, 1964, the reserve for doubtful debts was not Rs. 2,67,813, what the assessee had claimed should be included in the capital base, but it amounted to Rs. 11,68,356. The provision for doubtful debts on that date was as follows :

Under current assets, loans and advancesRs. (a)Debts outstanding for a period exceeding six months7,49,873 (b)Other debts considered doubtful 9,304Under loans and advances (unsecured) Advances to sundry parties considered doubtful2,14,052

9,73,229

5. The difference between the two amounts of the reserve and the provision as on June 30, 1964, was Rs. 1,95,127 and this was the amount which, the assessee contended, should be included in the computation of the capital base as on June 30, 1964. The difference between the reserve (Rs. 11,27,516) as on June 30, 1963, and provision on that date (Rs. 8,59,703) was Rs. 2,67,813. These two amounts thus represented, according to the assessee, the excess of the reserves over the provision and since the reserves were created on an ad hoc basis, that excess partook of the nature of the reserves. The AAC accepted the contention of the assessee and held that the'Surtax Officer was not justified in not including in the assessment years 1965-66 and 1966-67 the reserves for doubtful debts amounting to Rs. 2,67,813 and Rs. 1,95,127, respectively. He, therefore, directed inclusion of these reserves in the capital base and to modify the assessments accordingly. With the other contentions raised before the Appellate Tribunal, we are not concerned with in the instant reference. When the matter went before the Tribunal, the Tribunal after considering the submissions of both sides agreed with the AAC and dismissed the appeal. On these facts in this reference under Section 256(1) of the I.T. Act, 1961, for all these three years the following question was referred to this court:

Common question for all the three assessment years

'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the reserve for depreciation on investments was a reserve within the meaning of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, and was, therefore, includible in the computation of capital for the purpose of the said Act ?' And for the assessment years 1965-66 and 1966-67, the following question was referred to this court: 'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the reserve for doubtful debts was a reserve within the meaning of Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, and was, therefore, includible in the computation of capital for purposes of the said Act ?'

6. As we have noticed before, the question involved is about two items that is to say, the excess of the provision made for actual doubtful debts and the investment depreciation reserve. So far as investment depreciation reserve is concerned, the investments were shares and there was no depreciation in the value in the year in question and there was no evidence or apprehension as to the depreciation in the years in question. The question whether a particular amount should be considered as provision or reserve in the context of the present Act, viz., C.(P.)S.T. Act, 1964, has been considered from various angles by the different decisions by the courts. We will refer to some of these.

7. In the decision in the case of CIT v. Jupiter General Insurance Co. : [1975]101ITR370(Bom) , it was held by the Division Bench of the Bombay High Court that as for calculating the capital base for the purpose of the S.P.T. Act, 1963, the ITO had excluded the balance of Rs. 35,029 standing as reserve for doubtful debts on the ground that since this amount was earmarked for a specific liability, it could not be regarded as a reserve. On appeal, the AAC reversed the ITO's order and the Appellate Tribunal agreed with the AAC. On a reference, it was held by the Bombay High Court that the Tribunal found as a fact that the said amount stood in the company's books for several years and was meant to be utilised for writing off bad or doubtful debts and that such debts were invariably debited to the profit and loss account and not to the reserve account and the Tribunal, therefore, concluded that the account was not maintained to meet any specific liability for bad or doubtful debts. As the question was decided by the Tribunal on a consideration of the factual position and as it had followed the principles laid down by the Supreme Court, no question of law arose out of the Tribunal's order according to the Bombay High Court.

8. So far as provisions for bad and doubtful debts are concerned, the facts in the instant case are more or less identical with the facts before the Division Bench of the Bombay High Court. In the instant case, it was found that the provision for doubtful debts is provided for in the balance-sheet as we have indicated hereinbefore.

9. In the case of Parke Davis (India) Ltd. v. CIT : [1981]130ITR813(Bom) , the Division Bench of the Bombay High Court had again dealt with this question. There, for the assessment year 1963-64, the previous year being December 1, 1961, to November 30, 1962, the board of directors of the assessee-company had passed a resolution at its meeting held on April 15, 1963, approving transfer of certain amounts to various reserves. The assessee-company had claimed that the amounts set apart for general reserve, reserve for terminal pay, reserve for bad and doubtful debts, tax exempt dividend reserve, reserve for staff gratuity and proposed dividend should be taken into account for the purposes of computation of capital. The S.P.T. Officer had declined to treat the general reserve as part of capital on the ground that it was not a reserve on December 1, 1961. He had taken the view that the amounts set apart for reserve for terminal pay, reserve for bad and doubtful debts, tax exempt dividend reserve and reserve for staff gratuity were appropriated for meeting specific liabilities and did not, therefore, constitute reserves. He had also treated the amount set apart for the proposed dividend as a provision. The Tribunal had held that when the directors or shareholders decided to transfer the amount of reserve from a particular date, the reserve was constituted from that date and, therefore, the amount of general reserve must be treated as having been transferred to the reserve fund from December 1, 1961, and was to be taken into account for the purposes of computation of capital. The Tribunal further held that the amounts set apart for terminal pay, for bad and doubtful debts and for staff gratuity to meet gratuity payments falling due from time to time were retained for providing a known liability of which the amounts could not be determined with substantial accuracy and were, therefore, ' provisions' and not ' reserves '. It was held by the Bombay High Court that the amount set apart for general reserve had constituted a 'reserve' and it should be taken into account for the purposes of computation of capital and that the amount set apart for reserve for terminal pay was in substance an amount to meet a possible claim for retrenchment compensation in future. There was no known liability for retrenchment compensation nor was there any evidence to show that there was any demand for retrenchment compensation likely to arise in respect of which that amount was set apart. If an amount was -merely set apart for a possible claim for retrenchment compensation which might or might not arise in future and not in respect of any known liability, it was to be treated as a ' reserve ' and was includible in the computation of capital. It was further held that the amounts appropriated to the reserve for bad and doubtful debts were appropriated entirely on an ad hoc basis. That amount did not have any relation whatsoever to any amount of debt which could actually be said to be bad or doubtful. There was no existing liability, nor was there any known liability, because it was never ascertained as to which debt was likely to become a bad debt and the practice of the assessee-company was to debit bad and doubtful debt to the profit and loss account and not to the reserve in question. The amount of reserve for bad and doubtful debt was, therefore, a ' reserve ' and includible in the computation of capital.

10. The other questions with which the Division Bench of the Bombay High Court dealt with are not relevant for our present purpose.

11. This question has been examined by this court in several decisions and it would be relevant in view of some of the arguments canvassed before us to refer to some of those decisions. But before we do so, we may first refer to the decision of the Division Bench of this court in the case of Braithwaite & Co. (India) Ltd. v. CIT : [1978]111ITR729(Cal) . There, in the assessment for the assessment year 1963-64, the assessee-company had claimed that in the computation of its capital under Rule 1 of Schedule II to the S.P.T. Act, 1963, the following four items should be included as ' reserves': (i) provision for taxation, (ii) proposed dividend, (iii) provision for gratuities, and (iv) provision for bonus. The assessee's claim was disallowed by the S.P.T. Officer and the AAC. The Appellate Tribunal held that, as regards provision for taxation, provision for dividend and provision for bonus, the sums mentioned could not be considered to be reserves. As regards the provision for gratuity, the Tribunal held that the balance in this account of Rs. 5 lakh?, as on January 1, 1961, should be treated as part of the reserves. On a reference regarding the provision for taxation, proposed dividend and bonus, it was held by the Division Bench of this court that the proposed dividend could not be treated as a reserve as the amount remained a mass of undistributed profits of the company. This was held following the principles enunciated by the Supreme Court in the case of CIT v. Century Spinning and . : [1953]24ITR499(SC) . So far as the other two items of provision for taxation and provision for bonus were concerned, it was held that those could not also be considered to constitute reserves as the said items were really provisions for payment of existing liabilities. In this regard, reliance was placed on the decision of the Allahabad High Court in the case of CIT v. Hind Lamps Ltd. : [1973]90ITR487(All) . It was further noted that while this provision was made, no action was taken to set apart these sums or any portion thereof as a 'reserve' or 'reserves'. The balance-sheet of the company did not indicate that these items were allocated to any reserve. These items were items providing for payment of existing liabilities and any provision made for meeting an existing liability could not constitute 'reserve'. An amount provided for meeting an accrued and existing liability cannot be said to have been set apart for meeting a contingency which may arise in future and cannot, therefore, constitute reserve. It is a provision for meeting an existing liability and not a reserve for any future contingency.

12. It is very important, in our opinion, to remember the facts with which the Division Bench of this court was concerned because we find that in some subsequent decisions some doubts have been expressed as to what this case had actually decided. This case, as we have understood, followed the ratio of the principles of the Supreme Court in the case of CIT v. Century Spinning and , : [1953]24ITR499(SC) , in so far as it held that a sum set apart could not be treated as reserve if it remained as a mass of undistributed profits of the company without anything else. This case further decided that if there was a provision for an existing liability as such, the said provisions could not be treated as reserves. There are the two points which this case actually decided. This case, however, noted the contentions of learned advocates for different parties. At p. 736 (of 111 ITR) of the report, Mr. Justice A. N. Sen, as the learned Chief Justice then was, observed, inter alia, as follows:

'Mr. Bajoria has fairly stated that in view of the decision of the Supreme Court in the said decision of Century Spinning and . : [1953]24ITR499(SC) , he cannot seriously contend that the said item (viz., item under the proposed dividend) should be treated as a reserve as the facts of the instant case on this aspect also happen to be similar to the facts in the case before the Supreme Court.'

13. Thereafter, dealing with several decisions on this aspect, at p. 746 of the report (111 ITR), the learned judge observed, inter alia, as follows :

'In the instant case, the proposed dividend cannot be treated as a reserve as the amount remains a mass of undistributed profits of the company and, therefore, cannot be considered to constitute any reserve. This aspect, in our opinion, is clearly covered by the decision of the Supreme Court in the case of Commissioner of Income-tax v. Century Spinning and . : [1953]24ITR499(SC) .'

14. So far as other two items are concerned, the Division Bench noted the meaning to be given to 'reserve' and 'provision' and referred to the decision in the case of Metal Box Co. of India Ltd. v. Their Workmen : (1969)ILLJ785SC . The Division Bench at p. 746 (of 111 ITR), after referring to the Allahabad 'High Court decision, referred to hereinbefore, discussed as follows:

' So far as the other two items are concerned, namely, provision for taxation and provision for bonus, in our view, the said items cannot also be considered to constitute reserves as the said items are really provisions for payment of an existing liability' (underlined by us).

15. At p. 747, the learned judge observed :

'An amount provided for meeting an accrued and existing liability cannot be said to have been set apart for meeting a contingency which may arise in future and cannot, therefore, constitute a reserve.'

16. We have set out in extenso the ratio of the said decision as well as the facts with which the said decision was concerned because we note that in a subsequent decision, viz., in the case of A. P. V. Engineering Co. Ltd. v. CIT : [1979]119ITR937(Cal) , another Division Bench of this court had observed at pp. 950-951, that to the extent the observations made by us in the decision in the case of CIT v. Burn and Co. Ltd. : [1978]114ITR565(Cal) , to which we shall presently refer, were in conflict with the decision in the case of Braithwaite and Co. (India) Ltd. v. CIT : [1978]111ITR729(Cal) , those should be treated as obiter. We have failed to appreciate in what respect, as we shall presently explain, the decision in the case of Braithwaite and Co. (India) Ltd. v. CIT : [1978]111ITR729(Cal) and the decision in the case of CIT v. Burn and Co. Ltd. : [1978]114ITR565(Cal) , were in conflict. But, for our own purpose, we have set out the ratio, the facts and the actual decision in the case of Braithwaite and Co. (India) Ltd. v. CIT : [1978]111ITR729(Cal) , in order to find out for ourselves whether there was any conflict between this decision and in the subsequent decision. The Division Bench in the case of A. P. V. Engineering Co. Ltd. v. CIT [1973] 119 ITR 937 had also referred to a decision in the case of Duncan Brothers and Co. Ltd. v. CIT [1978] 3 ITR 885 , and indicated that there might be some difference of opinion between that case and in the decision of ours in the case of CIT v. Burn and Co. Ltd, : [1978]114ITR565(Cal) . It is, therefore, necessary to examine the decision in the case of Duncan Brothers and Co. Ltd. : [1978]111ITR885(Cal) . In the decision in the case of Duncan Brothers and Co. Ltd. v. CIT : [1978]111ITR885(Cal) , the Division Bench observed that the term 'reserve' had not been denned in the Super Profits Tax Act. Having regard to the accepted meaning of 'reserve ', according to the Division Bench, an amount provided for meeting an accrued existing liability could not be said to have been set apart for meeting a contingency which might arise in future and could not constitute a reserve. Provision for taxation was a provision for payment of an existing liability. It was not a reserve within the meaning of Rule 1 of Schedule II to the S.P.T. Act, 1963, and it could not, therefore, be taken into account in computing the capital of a company. The expression ' fund ' used in the context of Rule 2 of Schedule II to the C. (P.) S.T. Act, 1964, had to be construed in the context of the provisions. The rule did not indicate or lay down that there had to be an enquiry as to the purpose of the ' fund ' in order to determine the meaning of the expression and should be read without introducing the words which were not there. The term ' fund ' could be an expression of accountancy, viz., a particular category of entry which a person used in making up accounts. Fund could also mean actual cash resources. Provision for taxation constituted a fund within the meaning of Rule 1(2) of Schedule II to the S.P.T. Act, 1963, and Rule 2(2) of Schedule II to the C.(P.) S.T. Act, 1964, and had to be taken into account in computing the capital of a company. In this case also though the learned judge, who delivered the judgment, also delivered the judgment in the subsequent decision in the case of A. P. V. Engineering Co. Ltd. v. CIT : [1979]119ITR937(Cal) had nothing to do with the points that were decided by the Division Bench in the case of Burn and Co. Ltd. : [1978]114ITR565(Cal) as we shall presently note. It is, therefore, necessary now to examine the decision in the case of CIT v. Burn and Co. : [1978]114ITR565(Cal) . There, the assessee-company filed a return for the assessment year 1963-64 disclosing chargeable profits at Rs. 37,02,212. While computing the capital base for the purpose of super profits tax, the assessee claimed that 9 items of reserves should be included in the capital of the company. Except the items named as provision for gratuity, provision for interest on sales tax and provision for taxation, the other items were held by the Appellate Tribunal to be reserves and, therefore, were directed to be taken into consideration in computing the capital base of the company. On a reference at the instance of the assessee, in respect of the three disallowed items, viz., provision for gratuity, provision for interest on sales tax and provision for taxation, it was held by us that in the statement filed before the AAC, the explanation given by the assessee in respect of the three disallowed items were as follows (see p. 571 of 114 ITR):

' (1) Provision for provident institution long service bonus: Rs. 1,02,200.

This is a reserve to cover payments to those employees who joined the provident fund before 1925, as and when they retire, based on the last basic salary drawn. Each year, therefore, the company makes provision for the difference in salaries after adjusting any payment made.

N.B.--For I.T. assessment purpose, the provision is added back and the actual payments are claimed.

(2) Provision for bonus : Rs. 39,40,000.

Bonus is payable after the annual general meeting of the company and also after a settlement has been arrived at between the company and the unions. The amount charged in the accounts is only an estimated figure.

N.B.--I.T. assessment is made on actual payment basis.

(3) Taxation contingency reserve: Rs. 35,00,000.

Following prudent financial policy of the company, estimated tax saving for claiming the initial and double depreciation have been set aside in the reserve.

N.B.--The reserve has been disallowed in the income-tax assessment.'

17. We also held that reserve, according to the Supreme Court decisions in the cases of CIT v. Century Spinning and . : [1953]24ITR499(SC) and First. National City Bank v. CIT : [1961]42ITR17(SC) , normally meant profit earned by a company and not distributed as dividend to the shareholders but kept apart by the directors for any purpose to which it might be put in future. In this connection, it may be appropriate to avoid any controversy to refer to the Supreme Court's own interpretation of what was actually held in the case of CIT v. Century Spinning and . : [1953]24ITR499(SC) and refer to the observations of the Supreme Court in the case of First National City Bank v. CIT : [1961]42ITR17(SC) of the report the Supreme Court observed as to what the word 'reserve' as used in the Business Profits Tax Act would connote as considered by the Supreme Court in the case of CIT v. Century Spinning and . : [1953]24ITR499(SC) . The Supreme Court held that the true nature and character of a sum disputed as reserve had to be determined with reference to the substance of the matter. The amount in dispute in that case was the profits after deduction of depreciation and tax which amount was carried over to the balance-sheet and was later recommended by the directors to be appropriated mainly to dividends and balance to be carried forward to the next years. Thus, on the crucial date, that is, 1st April, 1946, from which the chargeable accounting period began the sum in dispute had not been declared as reserve, on the other hand, the directors earmarked it for distribution as dividend and it remained as a mass of undistributed profits for distribution. Then the Supreme Court referred to the observations of Mr. Justice Ghulam Hossain at p. 504 of the report of the decision in the case of CIT v. Century Spinning and . : [1953]24ITR499(SC) as follows:

' A 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 (underlined by us) but kept back by the direceors for any purpose to which it may be put in future. Therefore, giving to the 'reserves' its plain natural meaning it is clear that the sum of Rs; 5,08,637 was kept in reserve by the company and not distributed as profits and subjected to taxation. Therefore, it satisfied all the requirements of rule 2. The directors had no power to distribute the sum as dividend. They could only recommend, as indeed they did, and it was up to the shareholders of the company to accept that recommendation in which case alone the distribution could take place.'

18. It may be mentioned that the Supreme Court was dealing in the case of CIT v. Century Spinning and . : [1953]24ITR499(SC) with the Business Profits Tax Act. That was a tax dealing with companies. The expression ' reserve ' was, therefore, understood in the context of companies. We are making this observation in order to meet the argument that in respect of these Acts the expression should be construed in the context of company law and not in the context of the general law. But in the context of company law the Supreme Court expressed that 'reserve' should mean the profit earned by a company and not distributed as dividends to the shareholders but kept apart by the directors for any purpose to which it might be put in future. The same view was expressed by the Supreme Court in the case of CIT v. Standard Vacuum Oil Co. : [1966]59ITR685(SC) . It is desirable to understand the expression in the way the Supreme Court understood and explained the expressions in the case of Century Spinning and . : [1953]24ITR499(SC) in the latter mentioned case of the Supreme Court. We have, therefore, been unable to appreciate the observations of the Division Bench of this court in the case of A. P. V. Engineering Co. Ltd. v. CIT : [1979]119ITR937(Cal) when it observed as follows :

' It does not appear to us that the decision of the Supreme Court in Century Spinning and . : [1953]24ITR499(SC) was based solely (underlined by us) on the ordinary dictionary meaning of the expression ' reserve' '.

19. The Supreme Court observed in the case of Century Spinning and . : [1953]24ITR499(SC) that the expression should be understood in the ordinary sense in the context of the Business Profits Tax Act, 1947. In the case of CIT v. Burn and Co. Ltd. : [1978]114ITR565(Cal) we had followed the aforesaid interpretation and the meaning of the word 'reserve' given by the Supreme Court in answering the basic question which we noted that in the case where there was any conflict between reserve and provision, the expressions 'reserve' and 'provision' should be understood in the ordinary sense in contradistinction to the sense in which these words were understood in company jurisprudence. The Supreme Court observed in the case of Century Spinning and '. : [1953]24ITR499(SC) while dealing with the Business Profits Tax Act that it should be understood in the ordinary sense. The Supreme Court explained further in its subsequent decision that it could only mean, as it is understood in company law, a mass of undistributed profit kept apart for future use. In such a situation, it is difficult for us to hold that again it has to be understood otherwise. Reserve is understood as provision in commercial practice very often. However, in the case of 'reserve' and 'provision', this contradistinction might be irrelevant. The Supreme Court in the case of CIT v. Century Spinning and . : [1953]24ITR499(SC) , in the case of First National City Bank v. CIT : [1961]42ITR17(SC) and also in the case of CIT v. Standard Vacuum Oil Co, : [1966]59ITR685(SC) , understood these expressions in respect of either the Business Profits Tax Act or S.P.T. Act in the background of taxation of profits of the companies. Therefore, the notion of an ordinary meaning given was applied by the Supreme Court in understanding these expressions even in respect of taxation of companies. We also understood in the case of CIT v. Burn and Co. Ltd. : [1978]114ITR565(Cal) that the decision in the case of Metal Box Co. of India Ltd. v. Their Workmen : (1969)ILLJ785SC though it made a clear distinction between 'provision' and 'reserve' in the context of provision yet was in the context of the Companies Act. But, we have been unable to discover any conflict between either in the case of Braithwaite and Co. (India) Ltd. v. CIT : [1978]111ITR729(Cal) or in the case of Duccan Brothers and Co. v. CIT : [1978]111ITR885(Cal) and the decision in the case of CIT v. Burn and Co. Ltd. : [1978]114ITR565(Cal) . We had, however, referred to the decision of the Bombay High Court in the case of Shree Ram Mills Ltd. v. CIT : [1977]108ITR27(Bom) and then we formulated the following tests: (i) A mass of undistributed profits could not automatically become a reserve for the purpose of Rule 1 of Schedule II of the S.P.T. Act, 1963, and somebody possessing the requisite authority must normally indicate that the amount had been separated from the general mass of profit with a view to constituting it as a reserve; (ii) it should be apparent from the surrounding circumstances that the amount so set apart was in fact a reserve to be utilised in future for a specific purpose on a specific occasion ; (iii) clear conduct on the part of the directors in setting apart the sum from the mass of undistributed profits avowedly for the purpose of distribution as dividend would be destructive of making the amount a reserve ; and (iv) having regard to the purpose of the rule framed for computing the capital of the company under the S.P.T. Act, the amount so set apart should be available to the assessee for purposes of its business. Such reserves need not be exclusively set apart from profits but might be from other available surplus. In that context, we held, the expression 'reserve' in Rule 1 of Schedule II must be held to mean reserve in the ordinary sense and need not be considered in contradistinction to 'provision'. Then we examined and held that, even if the question was considered on the principle that the expression ' reserve ' had to be understood in contradistinction to 'provision', whether the items in that case actually satisfied the tests of 'reserve' and, we found, that these did. The decision of the Tribunal therefore was upheld, but we observed that if in respect of any of the items any part of the amounts had been allowed in the computation of its profits for the purpose of the Indian I.T. Act, 1922, or the I.T. Act, 1961, the same should be disregarded.

20. Another aspect of the matter which we had referred to in the aforesaid decision of Burn and Co. Ltd. : [1978]114ITR565(Cal) was that Parliament had the advantage of the construction of the meaning of the expression 'reserve' in the Business Profits Tax Act, 1947, when it introduced the S.P.T. Act of 1964 and it used the same expression. In that context, it was presumed by us that-the expression 'reserve' was used in the light in which it was understood by the Supreme court in Century Spinning and . : [1953]24ITR499(SC) and not in the sense it was understood in the case of Metal Box Co. of India Ltd. : (1969)ILLJ785SC .

21. The Division Bench of this court in the case of A.P.V. Engineering Co. Ltd. v. CIT : [1979]119ITR937(Cal) observed that Parliament had the advantage of considering the interpretation of the Supreme Court when it introduced the Companies Act, 1956. It was observed by the Division Bench at p. 943 of the report that in this context the Companies Act of 1956 was of great significance and reference was made to Section 217 of the Companies Act, 1956, and regln. 99. At page 951 of the report, the Division Bench had referred to the Indian Companies Act, 1913, and observed that no differentiation had been made between provision and reserve in the subsequent Act of 1956. This reference was made to the provisions of the balance-sheet. The reference to the balance-sheet as contained in the Companies Act of 1913 which is annexed to Table A of the Regulation indicated the form of the balance-sheet. Reserve fund under Part VI shows the amount set apart from profits to meet the contingencies. The amendment made in 1938 introduced Section 131 A in the Companies Act of 1913 provided for the similar obligation though not in identical language as that of Section 217 of the Companies Act of 1956. Section 131A of the Companies Act of 1913, which I have set out hereinbefore, was introduced in 1938, which stated that the directors shall make out and attach to every balance-sheet a report with respect to the state of the company's affairs, the amount, if any, which they recommended should be paid by way of dividend or the amount, if any, which they proposed to carry to the reserve ;fund, general reserve or reserve account shown specifically on the balance-sheet or to a reserve fund, general reserve or reserve account to be shown specifically in a subsequent balance-sheet.

22. Regulation 99 of Table A of the Indian Companies Act, 1913, is more or less similar to regulation 87 of the Companies Act, 1956. Therefore, we have not been able to appreciate for ourselves the significant difference that the Companies Act, 1956, is supposed to have made which could have altered the view of the judicial pronouncement to the meaning of ' reserve ' in the case of Century Spinning and . : [1979]116ITR539(Cal) . There, we had to consider the Explanation to Rule 1 of Schedule II to the C. (P.) S.T. Act, 1964. There, the assessee-company was carrying on the business of building railway vagons. In the accounts for the assessment year 1964-55, a sum of Rs. 20,60,869 appeared as provision for ' labour retiring gratuity ' as on the 1st day of April, 1963, i. e., the relevant date. The assessee claimed the said amount as reserve for inclusion in the capital computation under the C. (P.) S. T. Act, 1964, but the ITO did not treat this as reserve and the AAC agreed with him. On further appeal, the Tribunal treated the amount as reserve and, therefore, upheld the claim for inclusion in the capital computation. On a reference, at the instance of the Commissioner, we held that it had been decided in CIT v. Burn and Co. Ltd. : [1978]114ITR565(Cal) , which we had referred to, that the expression 'reserve' in Rule 1 of the S. P. T. Act, 1963, was more or less the same expression as in the C. (P.)S. T. Act, 1964, except to the extent modified by the Explanation introduced in the Act of 1964, and items of this nature should be considered to be reserve. An item which could not be ascertained with any substantial accuracy, either by following any normal method of accountancy--actuarial or otherwise--could not be considered to be a contingent liability which merited exclusion from being considered as 'reserve' in the context of Rule 1 of Schedule II to the Act. This aspect, we emphasised, was important even if one considered the expression 'reserve' in contradistinction to provision on accountancy principle. Therefore, the Tribunal was right in holding that the sum of Rs. 20,60,869 shown by the assessee in its accounts as provision for ' labour retiring gratuity' was a reserve so as to be eligible for inclusion in the capital computation under the Second Schedule to the C. (P.) S. T. Act, 1964. We noted that the Explanation had been introduced for the removal of certain doubts.

23. The Division Bench of this court in the case pf A. P. V. Engineering Co. Ltd. v. CIT : [1979]119ITR937(Cal) has observed that it is not proper to consider a prior statute by the expression used in the later statute. We respectfully agree with that view so far as it goes. But if the Legislature says that for removal of doubts it has to be given some meaning, that intention of the Legislature has to be respected. This Act of 1964 was being passed one year after the first Act was passed, viz., the 1963 Act. Therefore, the expression 'removal of doubts', in our opinion, does convey that there were some doubts in the previous Act, while it is true that an Act should be construed not with reference to a subsequent Act, but the stipulation in the subsequent Act may indicate what doubts there existed. It may be and it is a well known canon of construction to construe in the light that doubts existed and if that recognition is taken in construing a prior statute, it does not infringe any canon of construction.

24. One aspect has to be considered. We had observed in the last-mentioned judgment in CIT v. Indian Standard Wagon Co. Ltd. : [1979]116ITR539(Cal) , as follows :

'But then the current liabilities and provisions in the form of the balance-sheet are separately treated and are not treated together. Current liabilities are treated under the heading ' A' and provisions are treated under the heading ' B'. In the Explanation what has been considered to be excluded from being computed as reserve is not anything which is included in the heading under ' Provision ', but what is included under the heading ' Liabilities '. Therefore, item (13) or item (10) under the heading ' Provisions' do not really fall for exclusion in the computation of reserve under the Explanation as provided under the Act. If that is the position, then the expression ' reserve ' should be construed in the ordinary meaning as it is, because the Explanation only removes doubt in respect of certain items.'

25. In view of the language used in the Explanation which, inter alia, provides that ' ...any amount standing to the credit of any account in the books of a company as on the first day of the previous year relevant to the assessment year which is of the nature of item (5) or item (6) or item (7) under the heading ' Reserves and Surplus ' or of any item 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 (1 of 1956), shall not be regarded as a ' reserve ' for the purposes of computation of the capital of a company under the provisions of this Schedule'. We are of the opinion that in so far as we expressed the view about the current liabilities, the expression of our views in the case of CIT v. Indian Standard Wagon Co. Ltd. : [1979]116ITR539(Cal) was perhaps too widely stated. Explanation is dealing with the nature of item (5) or item (6) or item (7) under the heading 'Reserves and Surplus' or of any item, that is to say, all the items under the heading 'Current Liabilities and Provisions'. But even apart from that Explanation, we have held in that case that the items considered in the decision could not be considered to be anything but reserves. There is a provision in the appendix to the Companies Act providing as to how the balance-sheet should be construed and it was contended that with the aid of interpretation, in any event, a provision for depreciation for investment allowances could not be considered to be reserve. It is true that the interpretation clause is an aid to the construction, but the provision for depreciation, that had been made, was in the context of the facts and circumstances of the case.

26. Here, in this case, there was not any evidence of any depreciation in the value or of any liability on account of depreciation in the value of the investment. It was merely based on a hypothetical evaluation. Therefore, in either light, that is to say, in the light of commercial accountancy, as understood in the Metal Box's case : (1969)ILLJ785SC or in the light of the Explanation or in the light of ordinary sense, this provision for depreciation of investment should be considered, in the facts and circumstances averred to the Tribunal and the AAC, as reserves which should be included in the capital computation for the present Act.

27. So far as bad and doubtful debts are concerned, as we have noted, that the provision made was far in excess of the bad and doubtful debts which had been provided for in the balance-sheet from year to year, which has been noticed by the AAC which we have set out hereinbefore. From this aspect of the matter, the facts, in the instant case, are different from the facts with which the Division Bench of this court in the case of A. P. V. Engineering Co. Ltd. v. CIT [1919] 119 ITR 937 was concerned.

28. In these lights, therefore, we are of the opinion that both the questions should be answered in the affirmative and in favour of the assessee, in the facts and circumstances of the case.

29. There will be no order as to costs.

Sudhindra Mohan Cuba, J.

30. I agree.


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