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Commissioner of Income-tax Vs. Indian Standard Wagon Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 245 of 1971
Judge
Reported in[1979]116ITR539(Cal)
ActsCompanies (Profits) Surtax Act, 1964 - Schedule - Rule 1
AppellantCommissioner of Income-tax
RespondentIndian Standard Wagon Co. Ltd.
Appellant AdvocateBalai Pal and ;B.K. Nag, Advs.
Respondent AdvocatePal and ;P.K. Pal, Advs.
Cases ReferredMetal Box Co. of India Ltd. v. Their Workmen
Excerpt:
- .....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.' in this case, the tribunal has referred to its order for the previous year where the tribunal was dealing with the sum of rs. 19,57,268 shown as provision for 'labour retiring gratuity'. the tribunal in its order for the previous year has observed in respect of that amount as follows : 'the assessee has shown rs......
Judgment:

Sabyasachi Mukharji, J.

1. This reference arises from the assessment proceedings under the Companies (Profits) Surtax Act, 1964. We are concerned with the assessment year 1964-65, the relevant previous year ending on 31st March, 1964.

2. Under the Companies (Profits) Surtax Act, 1964, there is a charge of tax on the chargeable profits of the previous year in accordance with the rule set out in the Third Schedule to that Act, 'Chargeable profits' mean the total income of the assessee computed under the I.T. Act, 1961, for any previous year and adjusted in accordance with the provisions of the First Schedule to that Act. It is not necessary for us to go into the adjustments provided in the First Schedule for the present purpose. Under Section 2(8) of the said Act there was statutory deduction for an amount equal to 10 per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule to that Act or Rs. 2,00,000, whichever. was greater. In the Second Schedule the computation of capital was shown as follows :

(a) Paid up share capital,

(b) Development rebate reserve, and

(c) Other reserves in so far as the amounts credited to such other reserves had not been allowed in computing the profits for the purpose of income-tax.

3. There are other items to be added and some deductions to be made from the aggregate of the above. For our present purpose it is not necessary to go into these aspects. Only on the net amount remaining after the adjustment of the statutory deduction against the chargeable profits surtax was imposed.

4. The assessee-company in the instant case was carrying on business of building railway wagons. In the accounts for the assessment year 1964-65, Rs. 20,60,869 appeared as provision for 'labour retiring gratuity' as on the 1st day of April, 1963, that is, the relevant date. The assessee claimed the said amount as reserve for inclusion in the capital computation before the assessing authority. The ITO did not treat this as reserve. The assessee appealed to the AAC, who upheld the order of the ITO. The assessee thereupon appealed to the Tribunal contending that the amount was intended only as reserve and not to cover any imminent or known liability. The contentions of the parties were considered and for the reasons as in the earlier year, the Tribunal treated the amount as reserve and, therefore, upheld the claim for inclusion in the capital computation.

5. Upon this under Section 256(1) of the I.T. Act, 1961, the Tribunal has referred the following question to us :

'Whether, on the facts and in the circumstances of the case, 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 Companies (Profits) Surtax Act, 1964?'

6. (There is a typographical error in the question at page 4 of the paper-book. The figure should be as we have mentioned above and not Rs. 30,60,869).

7. The question as to in what sense 'reserve' in Rule 1 of the Second Schedule of the Super Profits Tax Act, 1963, should be construed, has recently been discussed by us in the case of CIT & SPT v. Burn & Co. Ltd. I.T. Reference No. 371 of 1970 [since reported in : [1978]114ITR565(Cal) ]. We further held in any event that the items with which we were concerned in that case were not ascertained with any substantial accuracy and these had not matured with any definiteness which could be allowed as contingent liabilities even on the basis that contingent liability could be treated as different from 'reserve' on the basis of the accounting principle. The question that falls for our consideration in the instant case, however, is guided by the Companies (Profits) Surtax Act, 1964, and there has been an Explanation added after Rule 1 of the Second Schedule of that Act. That Explanation reads as follows :

'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 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.' In this case, the Tribunal has referred to its order for the previous year where the Tribunal was dealing with the sum of Rs. 19,57,268 shown as provision for 'labour retiring gratuity'. The Tribunal in its order for the previous year has observed in respect of that amount as follows : 'The assessee has shown Rs. 19,57,268 as provision for 'labour retiring gratuity'. This amount appears as on 1st April, 1962. The amount continues in the balance-sheet as on 31st December, 1962, and 31st December, 1964, with some slight modification covering some actual payments made thereout. It was explained before us that this amount was only a reserve for covering the future liability regarding the gratuity. It waspointed out that at the end of a person's service gratuity was payable under certain conditions and that on the basis of the assumption that the conditions would be satisfied, the assessee in order not to be faced with a large liability on a future date went on making provisions. The submission is that the amount was intended only as a reserve and was not to cover any imminent or known liability. As the payment to the employee was circumscribed by certain conditions of the employees and as the amount was not absolutely payable merely because a person retired, it was pointed out that it could not have been taken as a mere provision. In this connection, our attention was drawn to the decision of the Supreme Court in Standard Mills Co. Ltd. v. CWT [1961] 63 ITR 470. The departmental representative submitted that the description given by the assessee and the purpose for which it was provided clearly showed that the amount could not have been treated as a 'reserve'. The Tribunal, after discussing the said decisions, held that the amount should be treated as a reserve and included as such.'

8. In the context of the Explanation introduced into the Companies (Profits) Surtax Act, 1964, it was urged in the instant reference before us that the item should have been excluded from computation of capital. The Tribunal in dealing with this contention had observed as follows :

'18. The other items under dispute are- Rs.(a) Provision for taxation 1,07,08.679(b) Provision for labour retiring gratuity 20,60,869(c) Provision for proposed dividend 17,38,351

9. Out of the above, items (a) and (c) are covered by the Explanation asthey are items (8) and (9), respectively, shown under the head 'Current liabilities and provisions' in the form of the balance-sheet prescribed under theCompanies Act. As regards provision for labour retiring gratuity, thisdoes not come within the scope of any of the enumerated items. It is notalso excluded from the category of reserves. In these circumstances, we aresatisfied that the change in the law does not affect the character of thisamount which we have treated earlier in this order as a reserve. For thesame reasons, we direct its inclusion as a reserve for this year also.'Therefore, we have to consider this question whether in view of the Explanation added to the Companies (Profits) Surtax Act, 1964, the provision forlabour retiring gratuity for Rs. 20,60,869 could be considered to be a partof its reserve in terms of Rule 1 of the Second Schedule to the said Act. It isapparent that the Explanation specifically excluded certain items from thecomputation of reserve. It excludes any amount standing to the credit ofany account in the books of the company on the first day of the previousyear which are in the nature of item (5) or (6) or (7) under the head' Reserve and surplus' or any of the items under the head 'Currentliabilities 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. The form of balance-sheet given in Part I of Schedule VI of the Companies Act contains as follows:

' Current liabilities and provisions :

(A) Current liabilities :

(1) Acceptances

(2) Sundry creditors

(3) Subsidiary companies

(4) Advance payments and unexpired discounts for the portion for which value has still to be given, e.g., in the case of the following classes of companies:--newspaper, fire insurance, theatres, clubs, banking, steamship companies, etc)

(5) Unclaimed dividends

(6) Other liabilities (if any)(7) Interest accrued but not due on loans.

B. Provisions:

(8) Provision for taxation.

(9) Proposed dividends.

(10) For contingencies.

(11) For provident fund scheme.

(12) For insurance, pension and similar staff benefit schemes.

(13) Other provisions. A foot note to the balance-sheet may be added to show separately:

(1) Claims against the company not acknowledged as debts.

(2) Uncalled liability on shares partly paid.

(3) Arrears of fixed cumulative dividends.

(4) Estimated amount of contracts remaining to be executed on capital account and not provided for.

(5) Other money for which the company is contingently liable.'

10. In this case it is not urged that the item in question can be considered to be in the nature of either item (5) or (6) or (7) under the heading 'Reserves and Surplus'. There is no dispute that the item is none of these. The only question, therefore, is whether the item with which we are concerned comes under the heading 'Current liabilities and provisions'. Undoubtedly there is scope for argument that this item might be covered by item (10) under the heading 'Provision for contingencies' or item (13) being 'other provisions'. The form of the balance-sheet under the heading 'Current liabilities and provisions' makes a clear-cut distinction. Under the heading 'A' it deals with current liabilities and there are about 7 items. It is not urged and it cannot be that the item in question with which we are concerned fall under any of the heads mentioned inthe heading 'A' under 'Current liabilities'. 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 which 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. We have indicated in our decision in the case of CIT & SPT v. Burn & Co. Ltd. [I.T. Reference No. 371 of 1970--since reported as : [1978]114ITR565(Cal) ] for the reasons mentioned therein that we are inclined to take the view that the expression ' reserve ' in Rule 1 of the S.P.T. Act, 1963, which has 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, that the item of this nature should be considered to be reserve (sic).

11. In any event, an item which cannot be ascertained with any substantial accuracy, either by following any normal method of accountancy--actuarial or otherwise--cannot be considered to be a contingent liability which merits exclusion from being considered as 'reserve' in the context of Rule 1 of the Second Schedule to the Act. This aspect is important even if one considers the question of 'reserve' in contradistinction to 'provision' in the accountancy principle. On the point that such a kind of estimate of an obligation cannot be considered to be a contingent liability meriting exclusion from reserve, reliance may be placed on the observations of the Supreme Court in the case of Standard Mills Co. Ltd. v. CWT : [1967]63ITR470(SC) and also on the decision in the case of Metal Box Co. of India Ltd. v. Their Workmen : (1969)ILLJ785SC . The view we are taking is in consonance with the view of the Bombay High Court in the-case of CIT v. Porbes Forbes Campbell & Co. Ltd. : [1977]107ITR38(Bom) , though being a decision under the C.P.S.T. Act, 1964, their Lordships of the Bombay High Court did not refer to the change introduced by the Explanation by the 1964 Act.

12. In the premises, the question referred to this court is answered in the affirmative and in favour of the assessee. Parties will pay and bear their own costs.

Guha, J.

13. I agree.


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