Skip to content


Indian Steel and Wire Products Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 603 of 1972
Judge
Reported in[1978]112ITR1(Cal)
ActsCompanies (Profits) Surtax Act, 1964; Companies Act, 1956
AppellantIndian Steel and Wire Products Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateS.R. Banerjee, ;D.C. Nandi and ;S.N. Mukherjee, Advs.
Respondent AdvocateAjit Sen Gupta and ;Prabir Majumdar, Advs.
Cases ReferredLtd. v. Commissioner of Income
Excerpt:
- .....as follows:' ..............the additions to reserves out of the profits of a particularprevious year ' proposed by the directors of a company would, on being approved in the annual general meeting, shed their character as proposed additions to reserves and will become part of the reserves of the company with effect from the first day of the immediately following 'previous year'. accordingly, these will have to be treated as 'reserves' as on such first day in computing the capital of the company for the purposes of the companies (profits) surtax act, 1964.'22. the words underlined* by me conclusively show that this circular will apply only where the directors of a company have proposed to make additions to reserves out of the profits of a particular previous year. since the assessee.....
Judgment:

Deb, J.

1. The following questions are involved in this reference under section 256(2) of the Income-tax Act, 1961 :

'(1) On the facts and circumstances of the case, whether the Tribunal is justified in law in holding that the reserve for taxation for Rs. 8,46,948 (rupees eight lakhs forty-six thousand nine hundred and forty-eight only) and dividend reserve for Rs. 17,47,647 (rupees seventeen lakhs forty-seven thousand six hundred and forty-seven only) do not qualify as reserve for computation of capital base under the Explanation to the Second Schedule of the Companies (Profits) Surtax Act, 1964 ?

(2) On the facts and circumstances of the case, whether the Tribunal is justified in law in holding that the reserve for taxation for Rs. 8,46,948 (rupees eight lakhs forty-six thousand nine hundred and forty eight only) and dividend reserve for Rs. 17,47,647 (rupees seventeen lakhs forty-seven thousand six Hundred and forty-seven only) do not rank in for consideration as reserve on proper interpretation of Part I of Schedule VI to the Companies Act, 1956 ?

(3) On the facts and circumstances of the case, whether the Tribunal is justified in law in holding that the reserve for taxation for Rs. 8,46,948 (rupees eight lakhs forty-six thousand nine hundred and forty-eight only) and dividend reserve for Rs. 17,47,647 (rupees seventeen lakhs forty-seven thousand six hundred and forty-seven only) was set apart for any specific liability and as such not eligible for consideration as reserve for the purposes of computation of capital base under the Companies (Profits) Surtax Act, 1964?'

2. The assesses is a company. The assessment year is 1965-66. The relevent previous year ended on March 31, 1965. For the purposes of the Companies (Profits) Surtax Act, 1964 (hereinafter stated as 'the Act'), the relevant date is April 1, 1964.

3. After providing for depreciation and development rebate, the assessee suffered losses in the earlier year and this year as well and transferred certain amounts from its reserves for the purposes of appropriations and proposed dividends.

4. On April 1, 1964, the two amounts mentioned in the aforesaid questions appeared on the liabilities side of the balance-sheet of the assessee. The Income-tax Officer excluded the aforesaid amounts from the computation of the capital of the assessee for the purposes of working out the 'statutory deduction' deductible from the chargeable profits of the assessee under Rule 1 of the Second Schedule to the Act. The appeal filed by the assessee was allowed by the Appellate Assistant Commissioner. Then the appeal filed by the department was allowed by the Appellate Tribunal.

5. In the accounting year 1961-62 the States of Madras and Kerala, respectively, claimed sales tax from the assessee on its inter-State sales. The assessee contested those claims and the proceedings arising thereunder are still pending. The assessee was also assessed to sales tax by the State of West Bengal in that accounting year and filed appeals from the assessment orders. Rs. 23 lakhs was shown by the assessee as 'provisions for taxation' in its balance-sheet for that year.

6. In the balance-sheet for the next year Rs. 8,46,948'03 was shown as 'reserve for taxation transferred from provisions for taxation' and this identical amount was shown as 'reserve for taxation' in its balance-sheet for the accounting year 1963-64.

7. In the balance-sheet for the accounting year 1963-64, under the head 'contingent liabilities and claims against the company not acknowledged as debts', it is, inter alia, stated that the High Court has decided against the State of West Bengal and the State of West Bengal might go on appeal to the Supreme Court.

8. The Tribunal found that the amount of liability arising out of the aforesaid inter-State sales of the assessee could not be determined with substantial accuracy in view of the pendency of those matters and the sum of Rs. 8,46,948 was provided for to meet these known liabilities for inter-State sales tax claimed by those two States. Therefore, the Tribunal held that this amount was a provision for taxation and not a reserve for taxation.

9. The assessee, as already stated, suffered a loss in the accounting year 1962-63 and transferred certain amounts from its earlier reserves for the purposes of appropriations and proposed dividends. In the annual report for that year the directors proposed to create a dividend reserve for Rs. 17,50,000 out of the transferred amounts and proposed to declare Rs. 17,42,353.20 as dividend for that year. This amount was also included in the 'profit and loss appropriation account' and was shown as 'dividend reserve' in the balance-sheet under the head 'Reserves and Surplus'.

10. The assessee also suffered loss in the accounting year 1963-64 and transferred from its earlier reserves certain sums for appropriation and proposed dividend. In the annual report for that year the directors proposed to transfer Rs. 17,40,000 to 'Dividend Reserve Account' and proposed to declare Rs. 17,42,353.20 as dividend. In the balance-sheet for that year Rs. 17,40,000 was shown as added to the 'dividend reserve'. It was also shown that Rs. 17,42,353.20 being the dividend for the earlier year was paid by the assessee in the accounting year ended on 31st March, 1964, and Rs. 17,47,647.80 remained as 'dividend reserve'.

11. The Tribunal found that Rs 17,47,647 and Rs. 8,46,948 were set aside by the assessee to meet specific liabilities and, therefore, it held that these two amounts were not eligible for consideration as reserves for the purposes of computation of the capital base of the assessee under the Act.

12. Hence, we are concerned with the aforesaid questions and the following contentions made on behalf of the assessee :

'(i) These two amounts were stamped by the directors of the assessee with the character of reserves before 1st April, 1964. Therefore, by misapplying the case of Commissioner of Income-tax v. Century Spinning & . : [1953]24ITR499(SC) , the Tribunal had erroneously held that these two amounts were not reserves under the Explanation of Rule 1 of the Second Schedule to the Act;

(ii) Each balance-sheet of the assessee relates to a particular year of accounting and accordingly the reserves or provisions made out of the aforesaid transferred amounts should be ignored for the purposes of determining its capital base as on April 1, 1964 ;

(iii) The 'form of balance-sheet' in Schedule VI to the Companies Act, 1956, differentiates between the reserves and surplus and also the current liabilities and provisions including the reserves and provisions. Therefore, since this company has made these reserves, the Tribunal had no power to hold these reserves as provisions; and

(iv) These two amounts should be held as reserves in view of the instructions of the Board contained in circular (One) dated February 2, 1972, printed at page 596 of Taxmann's 'Direct Taxes Circulars'.

13. The further submission on behalf of the assessee is that the assessee is entitled to argue before us that the decision of the Tribunal is perverse without raising a specific question on it in view of the decisions of the Supreme Court in the cases of Mehta Parikh and Co. v. Commissioner of Income-fax [1956] 30 ITR 181, G. Venkataswami Naidu & Co. v. Commissioner of Income-tax 0065/1958 : [1959]35ITR594(SC) , Oriental Investment Co. P. Ltd. v. Commissioner of Income-tax : [1969]72ITR408(SC) and Commissioner of Income-tax v. Rajasthan Mines Ltd. : [1970]78ITR45(SC) .

14. To show that the decision of the Tribunal on Rs. 17,47,647 is perverse it was stated that the claim of the assessee was that the dividend reserve for this amount should be included in its capital base whereas it was held by the Tribunal that Rs. 17,40,000 was not a dividend reserve which was not the case of this assessee.

15. To show that in respect of Rs. 8,46,948 the conclusion reached by the Tribunal is perverse, it was said that the assessee had Rs. 48,75,000 for 'deferred taxation reserve' and Rs. 8,46,948.03 for 'reserve for taxation' on March 31, 1964. The Tribunal has ignored this sum of Rs. 48,75,000 in reaching the conclusion that Rs. 8,46,948 was set aside to meet the liability for sales tax to the States of Madras and Kerala.

16. The question on perversity was not raised expressly or impliedly before the Tribunal by the assessee in its application for reference under Section 256(1) of the Income-tax Act nor any such question was raised in the aforesaid four cases cited on its behalf. Accordingly, in those cases, the Supreme Court had no occasion to go into the question as to whether an aggrieved party is entitled to argue before the High Court that the decision of the Tribunal is perverse without raising that question in his application for reference before the Tribunal. Therefore, reliance on these cases was misplaced on behalf of the assessee.

17. Further, in view of the decisions of the Supreme Court in the case of Karnani Properties Ltd. v. Commissioner of Income-tax : [1971]82ITR547(SC) and in the case of Commissioner of Income-tax v. S. P. fain : [1973]87ITR370(SC) , it must be held that the assessee is not entitled to urge before us that the conclusion reached by the Tribunal is perverse.

18. Assuming but not admitting that this plea can be taken before us, it cannot be said that the decision of the Tribunal is perverse. As already stated, Rs. 17,50,000 was proposed by the directors in the annual report for the accounting year 1962-63 to be transferred to the 'dividend reserve account' and Rs. 17,42,353'20 was proposed to be distributed as dividend for that year. Rs. 17,50,000 was also included in the 'profit and loss appropriation account' for that year and at the foot note of page 18 of the annual report for that year it is stated that the 'directors have recommended dividend aggregating to Rs. 17,42,353.20................ whichdividend, if approved by the shareholders at the annual general meeting ............will be paid out of the dividend reserve and no separate provisionhas been made therefor'.

19. The directors proposed to increase this amount of Rs. 17,50,000 by Rs. 17,40,000 in the accounting year 1963-64 and proposed to distribute Rs. 17,42,353'20 as dividend for that year. Therefore, the decision of the Tribunal cannot be said to be perverse merely because it took these two figures, namely, Rs. 17,40,000 and Rs. 17,42,353, for the purpose of determining the question as to whether Rs. 17,47,647 claimed by the assessee was a 'dividend reserve'.

20. It is now to be noted here that the Income-tax Officer included Rs. 48,75,000 for 'deferred taxation reserve' in the capital base of the assessee and the Tribunal was not concerned with this sum of Rs. 48,75,000 in the appeal before it. The issue before the Tribunal was whether Rs. 8,46,948 was a 'reserve for taxation' as claimed by the assessee. This amount was originally shown as 'provisions for taxation' and was later on converted into 'reserve for taxation'. The assessee also failed to satisfy the Tribunal 'to indicate clearly that the entire amount of Rs. 8,46,948 formed part of its reserve and was not meant to meet any specific liability' as stated in its order and also in paragraph 8 of the statement of the case. It was also not the case of the assessee before the Tribunal that Rs. 48,75,000 was set aside to meet the liability for sales tax claimed by the States of Madras and Kerala. Therefore, it cannot be said that the decision of the Tribunal is perverse.

21. Now, as to the aforesaid circular of the Board. It deals with the Explanation to Rule 1 of the Second Schedule to the Act. It, inter alia, reads as follows:

' ..............the additions to reserves out of the profits of a particularprevious year ' proposed by the directors of a company would, on being approved in the annual general meeting, shed their character as proposed additions to reserves and will become part of the reserves of the company with effect from the first day of the immediately following 'previous year'. Accordingly, these will have to be treated as 'reserves' as on such first day in computing the capital of the company for the purposes of the Companies (Profits) Surtax Act, 1964.'

22. The words underlined* by me conclusively show that this circular will apply only where the directors of a company have proposed to make additions to reserves out of the profits of a particular previous year. Since the assessee had suffered losses in the consecutive years as aforesaid and the directors proposed to make additions to reserve out of the earlier years' reserves as already stated, this circular cannot apply to the facts and circumstances of this case.

23. Now, briefly speaking, chargeable profit for the purposes of surtax isto be computed by applying the rules contained in the First and the SecondSchedules to the Act. The Second Schedule deals with rules for computing the capital of a company for the purposes of surtax. Rule 1 of that Schedule reads, inter alia, as follows !

'............the capital of a company shall be the aggregate of theamounts,...............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 (XI of 1922), or the Income-tax Act, 1961 (XLIII of 1961);............

Explanation.--For the removal of doubts it is hereby declared that any amount standing to the credit of any account in the books of a company as on the 1st 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.' (Underlining * is for emphasis).

Schedule VI to the Companies Act, 1956, contains the 'Form of balance-sheet'. Under the head 'Reserves and Surplus', item No. 6 is 'Proposed additions to reserves'. Under the head 'Current Liabilities and Provisions', item No. 8 is 'Provisions for taxation'. Part III of Schedule VI contains rules of interpretation of the balance-sheet. It, inter alia, provides as follows :

(a) the expression 'provision' shall.......mean any amount......retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy ;

(b) the expression 'reserve' shall not,......include any amount......retained by way of providing for any known liability ;......'

24. We are concerned, therefore, with the nature and' character of the amounts and not with their nomenclature. The substance of the matter must also necessarily determine their nature and character.

25. The word 'provision' means any amount set aside out of the profits of any year to meet any known liability of which the amount cannot be quantified with substantial accuracy.

26. Whereas, reserves, as stated by William Pickles in the second edition of his book titled 'Accountancy', at page 192, are 'amounts set aside out of the profits and other surpluses which are not designed to meet any liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance-sheet'.

27. The case law on reserves and provisions has been exhaustively discussed by a Division Bench of this court presided over by me in the case of Braithwaite & Co. (India] Ltd. v. Commissioner of Income-tax, reported in : [1978]111ITR825(Cal) . Since the learned counsel for the assessee has accepted the correctness of that decision, it is unnecessary for us to discuss it here.

28. Now, the Explanation contained in the Second Schedule to the Act expressly provides that the amounts standing to the credit of any account in the books of the company which is of the nature of, inter alia, item No. 6 under the head 'Reserves and Surplus' or in the nature of the item under the head 'Current Liabilities and Provisions' in the 'form of balance-sheet' given in Schedule VI to the Companies Act, 1956, shall not be regarded as reserve for the purposes of computation of the capital of the company under the provisions of the said Schedule. Therefore, whether any amount standing to the credit of any account in the books of the assessee on April 1, 1964, was brought forward from the earlier years cannot be a relevant factor for consideration under the Explanation.

29. The amounts of liability for inter-State sales tax, as found by the Tribunal, could not be determined with substantial accuracy as those proceedings were still pending. The Tribunal has also found as a fact that Rs. 8,46,948 was retained by the assessee to meet the claims for sales tax of those two States, namely, the State of Madras and the State of Kerala. The assessee further failed to show before the Tribunal that this amount formed part of its reserve as contended by it. Therefore, in view of the findings of the Tribunal, it must be held that this amount is a 'provision for taxation'' and directly falls under item No. 8 under the head 'Current Liabilities and Provisions' in the 'Form of balance-sheet' given in Schedule VI to the Companies Act, 1956, and is, therefore, hit by the Explanation.

30. Similarly, in view of the facts and circumstances pertaining to the account relating to Rs. 17,47,647 already adverted to and the directors' proposed additions to reserve as already stated, it must also be held that this account is of the nature of item No. 6 under the head 'Reserves and Surplus' in the 'Form of balance-sheet' given in Schedule VI to the Companies Agt, 1956, and accordingly, this amount also falls within the mischief of the Explanation to Rule 1 of the Second Schedule to the Act.

31. In the premises, the contentions made on behalf of the assessee must fail and we answer all the questions in the affirmative and in favour of the revenue.

32. There will be no order as to costs.

Sankar Prasad Mitra, C.J.

33. I agree.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //