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Commissioner of Income-tax and Super Profits Tax Vs. Burn and Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 371 of 1970
Judge
Reported in[1978]114ITR565(Cal)
ActsSuper Profits Tax Act, 1963 - Sections 2(5), 4 - Schedule - Rule 1; ;Payment of Bonus Act, 1965; ;Income Tax Act, 1922; ;Income Tax Act, 1961
AppellantCommissioner of Income-tax and Super Profits Tax
RespondentBurn and Co. Ltd.
Appellant AdvocateA. Sengupta and ;P. Majumdar, Advs.
Respondent AdvocateD. Pal and ;A. Ghose, Advs.
Cases ReferredStandard Mills Co. Ltd. v. Commissioner of Wealth
Excerpt:
- sabyasachi mukharji, j. 1. the assessee is a resident company. this reference relates to the question of computation of capital for the super profits tax assessment for the assessment year 1963-64, accounting year of which ended off 30th april, 1962. the assessee filed a return disclosing the chargeable profits at rs. 37,02,218. while computing the capital base for the purpose of super profits tax, the assessee claimed that the following items should be included in the capital of the company :rs.1.provision for p.i. bonus1,02,2002.provision for bonus39,40,0003.provision for gratuity11,21,7424.provision for interest4,20,4825.provision for taxation68,56,0956.works reconstruction reserve99,75,0007.taxation contingency reserve35,00,0008.salom project reserve80,00,0009.niwar project.....
Judgment:

Sabyasachi Mukharji, J.

1. The assessee is a resident company. This reference relates to the question of computation of capital for the super profits tax assessment for the assessment year 1963-64, accounting year of which ended off 30th April, 1962. The assessee filed a return disclosing the chargeable profits at Rs. 37,02,218. While computing the capital base for the purpose of super profits tax, the assessee claimed that the following items should be included in the capital of the company :

Rs.

1.Provision for P.I. Bonus1,02,2002.Provision for bonus39,40,0003.Provision for gratuity11,21,7424.Provision for interest4,20,4825.Provision for taxation68,56,0956.Works reconstruction reserve99,75,0007.Taxation contingency reserve35,00,0008.Salom project reserve80,00,0009.Niwar project reserve21,00,000

2. The Super Profits Tax Officer observed that it was clear that the first five items had been set apart for specific purposes already known. He, therefore, held that each of the above items were meant to be used for a specific contingency already foreseen, though not yet quantified, otherwise, those would have all been put in the general reserve account already maintained by the assessee. As these amounts had been specifically set apart and earmarked to meet particular liabilities and nothing else, none of these could be called a reserve within the meaning of the Second Schedule of the. Super Profits Tax Act, 1963. He also considered the other four items and was of the opinion that those were also of the same nature as the earlier five items, though these had been designated as 'reserve' instead of as 'provision'. He observed that when one looks to the substance and nature of these funds it became clear that each of them was designated to meet a liability, contingency, commitment or diminution in the value of the assets known to exist as at the time of the balance-sheet. The Super Profits Tax Officer, therefore, came to the conclusion, that these could not be called 'reserve' within the meaning of the Second Schedule of the Act in question. Thus, he did not include these items as part of the capital of the company. There was an appeal to the Appellate Assistant Commissioner who held that items 6, 8 and 9 mentioned above satisfied the conditions of 'reserve' and directed the Super Profits Tax Officer to include these in the computation of capital. The Appellate Assistant Commissioner, however, held that the three items should be 'reserves' and the other items would be 'provisions'. Being aggrieved by this decision of the Appellate Assistant Commissioner both the revenue and the assessee appealed to the Tribunal.

3. The Tribunal dismissed the appeal of the revenue but allowed the appeal of the assessee in part. Except the items named as provision for gratuity, provision for interest on sales tax and provision for taxation, being items Nos. 3, 4 and 5 mentioned above, the others were held by the Tribunal to be 'reserves' and therefore, were directed to be taken into consideration in computing the capital base of the company. During the course of the arguments a statement that had been filed before the Appellate Assistant Commissioner explaining the aforesaid items was referred to on behalf of the assessee. The Tribunal referred to the observations of the Supreme Court in the case of Commissioner of Income-tax v. Century Spg. & Mfg. Co. Ltd. : [1953]24ITR499(Bom) and observed that the expression'reserve' in the sense in which it has been used could only mean profit earned by a company and not distributed as dividend to the shareholders but kept back by the directors for any purposes to which it might be put in future. Any amount set apart for any purpose other than declaration of dividend to shareholders could be treated as a reserve. 'Provision', according to the Tribunal, in contradistinctive terms meant appropriation of an amount against an ascertained or anticipated liability. Except the items styled as provision for gratuity, provision for interest on sales tax and provision for taxation, the Tribunal did not find any evidence to impeach the other items. These last-mentioned items, according to the Tribunal, made provisions for ascertained or anticipated liabilities. Therefore, these were provisions and not reserves. The other items, according to the Tribunal, represented appropriation of the surplus and, though specific in purpose, these were against liabilities not quantified or ascertained and, hence, these constituted reserves within the meaning of the provisions of the Second Schedule of the Super Profits Tax Act, 1963. The Tribunal, therefore, allowed the assessee's appeal in part and dismissed the revenue's appeal. On an application being made to the Tribunal under Section 256(1) of the Income-tax Act, 1961, read with Section 19 of the Super Profits Tax Act, 1963, the Tribunal has referred the following question to this court :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the items styled as provision for P.I. bonus, provision for bonus and taxation contingency reserve should be treated as 'reserves' for computing the capital of the assessee-company for the purposes of super profits tax under the Super Profits Tax Act, 1963 ?' It may be mentioned that a statement had been filed before the Appellate Assistant Commissioner explaining the several items and, in respect of the three items with which we are concerned in this reference, it was stated as follows:

'(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.

(7) 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 this reserve.

N.B.--The reserve has been disallowed in the income-tax assessment.' Before we deal with the question involved in this reference it may be relevant to refer to the Super Profits Tax Act, 1963. Under the Act, tax was imposed in respect of certain profits made by the companies which were called super profits. For the said purpose, the 'chargeable profits' under Sub-section (5) of Section 2 of the Act meant the total income of an assessee computed under the Income-tax Act, 1961, for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule to the Super Profits Tax Act, 1963. Standard deduction under Sub-section (9) of Section 2 meant an amount equal to 6% of the capital of the company as computed in accordance with the provisions of the Second Schedule of the said Act, or an amount of Rs. 50,000, whichever was greater. Section 4, which is the charging section, provided that subject to the provisions contained in that Act, a tax would be charged on every company for every assessment year commencing on and from the 1st April, 1963, referred to in the Act as super profits tax, in respect of so much of its chargeable profits of the previous year or previous years, as the case might be, as exceeded the standard deduction, at the rate or rates specified in the Third Schedule to the said Act. The First Schedule to the Act laid down rules for computation of chargeable profits. The Second Schedule laid down the rules for computing the capital of a company for the purposes of super profits tax. We have noticed that under Sub-section (9) of Section 2, standard deduction for computation of the profit for super-tax was 6% of the capital of the company. The rules in the Second Schedule were meant to compute the capital of the company for the purpose of making the standard deduction. Rule 1, with which we are concerned in this reference, so far as is material for our present purpose, was as follows :

'1. Subject to the other provisions contained in this Schedule, the capital of a company shall be the sum of the amounts, as on the first day of the previous year relevant to the assessment year, of its paid up share capital and of its reserve, if any, created under the proviso (b) to Clause (vib) of Sub-section (2) of Section 10 of the Indian Income-tax Act, 1922(11 of 1922), or under Sub-section (3) of Section 34 of the Income-tax Act, 1961 (43 of 1961), and of its other reserves in so far as the amounts credited to such other reserves have not been allowed in computing its profits for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or the Income-tax Act, 1961 (43 of 1961), diminished by the amount by which the cost to it of the assets the income from which in accordance with Clause (iii) or Clause (vi) or Clause (vii) of Rule 1 of the First Schedule is not Includible in its chargeable profits, exceeds the aggregate of-

(i) any money borrowed by it which remains outstanding ;

( ii) the amount of any fund, any surplus and any such reserve as is not to be taken into account in computing the capital under this rule.'

4. It appears, therefore, that under Rule I of the Second Schedule, for computation of standard deduction on capital it is necessary to take up the share capital and its reserves, if any, created under proviso (b) to Clause (vib) of Sub-section (2) of Section 10 of the Indian Income-tax Act, 1922, or Sub-section (3) of Section 34 of the Income-tax Act, 1961, and all other reserves and the other reserves only, in so far as the amounts credited to such reserves have not been allowed in computation of its profits for the purpose of the Indian Income-tax Act, 1922, or the Income-tax Act, 1961. These items of reserves should be taken up together with the paid up share capital in order to compute the capital in respect of which 6% return is allowed under Sub-section (9) of Section 2 as standard deduction. Therefore, it is necessary to consider whether the three items with which we are concerned in this reference, namely, provision for provident institution long service bonus--Rs. 1,02,200, provision for bonus--Rs. 39,40,000 and taxation contingency reserve--Rs. 35,00,000, can be considered to be other reserves which should be added for computation of the capital in terms of Rule 1 of the Second Schedule to the Super Profits Tax Act, 1963. Precursors of the Super Profits Tax Act, 1,963, were the Excess Profits Tax Act, 1940, and thereafter the Business Profits Tax Act, 1947. Rule 2 of Schedule II of the last-mentioned Act used identical expressions. The said expressions came up for consideration by the Supreme Court in the case of Commissioner of Income-tax v. Century Spg. & Mfg. Co. Ltd. : [1953]24ITR499(SC) . There for the year ending on 31st December, 1945, the profit of the assessee-Company, whose accounting year was the calendar year, was a certain sum according to the profit and loss account. After making provision for depreciation and taxation, the balance of Rs. 5,08,637 was carried to the balance-sheet. This sum was not allowed in computing the profits of the assessed for the purposes of income-tax. In February, 1946, the directors of the company recommended that out of the amount a sum of Rs. 4,92,426 should be distributed as dividend and the balance of Rs. 16,211 was to be carried forward to the next year's account. This recommendation was accepted by the shareholders in their meeting of 3rd April, 1946, and the amount was shortly afterwards distributed as dividends. In computing the capital of the assessee-company on 1st April/1946, under the Business Profits Tax Act, 1947, the assessee claimed that the sum of Rs. 5,08,637 and the profit earned by it during the period 1st January, 1946, to 1st April, 1946, should be treated as 'reserves' for the purpose of Rule 2(1)of Schedule II. The High Court of Bombay held that the sum of Rs. 5,08,637 must be treated as a reserve for the purpose of Rule 2, but the profits made by the assessee during the period 1st January, 1946, to 1st April, 1946, could not be included in the reserves. There was an appeal to the Supreme Court : [1953]24ITR499(Bom) and the Supreme Court held that the sum of Rs. 5,08,637 and the profits earned by the assessee during the period 1st January, 1946, to 1st April, 1946, did not constitute reserves within the meaning of Rule 2(1) of Schedule II. In dealing with the relevant provisions, which were more or less as mentioned hereinbefore similar to the present case with which we are concerned, the Supreme Court observed that the term 'reserve' has not been defined in the Act. Therefore, one must resort to the ordinary natural meaning as understood in common parlance. Then the Supreme Court referred to the meaning of the expression 'reserve' in the dictionary which indicated that it meant either to keep for future use or enjoyment; to store up for some time or occasion ; to refrain from using or enjoying at once ; or to keep back or hold over to a later time or place or for further treatment; or to set apart for some purpose or with some end in view; to keep for some use; or to retain or preserve for certain purposes. The Supreme Court also referred to Webster's New International Dictionary for the meaning given there and the Supreme Court further observed that what is the true nature and character of the disputed sum, must be determined with reference to the substance of the matter. The Supreme Court came to the conclusion that, in order to be 'reserve', it might be a general reserve or a specific reserve, but there must be a clear indication to show whether it was a reserve either of the one or the other kind. The fact that it constituted a mass of undistributed profit could not automatically make a particular sum a reserve. At page 504 of the report, the Supreme Court quoted the observations of Chief Justice Chagla of the High Court to the following effect:--See : [1953]24ITR499(SC) .

'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 but kept back by the directors for any purpose to which- it may be put in future.'

5. The Supreme Court had occasion to consider the effect of the said decision of the Supreme Court in the case of Commissioner of Income-tax v. Century Spg. & Mfg. Co. Ltd. [1953] 24 ITR 449 in the subsequent decision in the case of First National City Bank v. Commissioner of Income-tax : [1961]42ITR17(SC) . There, the Supreme Court at page 23 of the aforesaid report observed that the true nature and character of a sum disputed as 'reserve' had to be determined with reference to the substance of thematter. Then, at page 24 of the present report, their Lordships quotedfrom the judgment of the report of the Supreme Court in : [1953]24ITR499(SC) , as mentioned before but the same was really a quotation from the judgment of the Bombay High Court. But it is clear that the said observations of the Bombay High Court were adopted as the ratio of the Supreme Court judgment in the case of Commissioner of Income-tax v. Century Spg. & Mfg. Co. Ltd. : [1953]24ITR499(SC) as was understood by the subsequent decision of the Supreme Court in the case of First National City Bank v. Commissioner of Income-tax : [1961]42ITR17(SC) .

6. In the case of Commissioner of Income-tax v. Standard Vacuum Oil Co. : [1966]59ITR685(SC) , the Supreme Court had to consider, inter alia, whether 'capital paid in surplus' and 'earned surplus' were reserves within the meaning of Rule 2(1), Schedule II, of the Business Profits Tax Act, 1947. The Supreme Court held that 'capital paid' and 'earned surplus' were reserves within the meaning of the rule. The Supreme Court noted that the ordinary meaning of the expression 'reserve' meant something specifically kept apart for future use or for specific action.

Therefore, it seems to us that, according to the Supreme Court decisions, 'reserve' in the sense in which the expression was used under Rule 2 of the Business Profits Tax Act, 1947, and the same expression is used under Rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, normally means 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 the future. In the case of Commissioner of Income-tax v. Standard Vacuum Oil Co. : [1966]59ITR685(SC) the Supreme Court noted that reserves built up from other sources than profits may be admissible for inclusion in capital under the relevant rule. Therefore, to determine whether a particular amount was reserve or not, we must find out, firstly, the substance of the matter. Secondly, it is necessary, for the purpose of Rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, to find out whether the amount in question represented any profit earned by the assessee-company and other amount available to the assessee-company and not distributed as dividends and, thirdly, whether there has been any decision by authorities competent to take the decision to keep the amount in question back for any purpose to which it might be put in future. The meaning put to the expression 'reserve', according to the dictionary and the meaning of ordinary common parlance had been noted by the Supreme Court and we have referred to that view. But the expression 'reserve' has also a distinctive meaning under the Companies Act as well as under the accounting principles. This expression is often considered in contradistinction to 'provision'. Our attention was drawn to the observations appearing in William Pickles' Accountancy, third edition, page 184, where 'reserve' has been state to be the amount set aside out of 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 while 'provision' means the amount set aside out of profits and other surpluses to provide for, (a) depreciation, renewals or diminution in value of assets ; or (b) any known liability of which the amount cannot be determined with substantial accuracy. Pickles has further observed that the amount set aside for the last mentioned purpose in excess of estimated requirements must be regarded as reserve and sums set aside to meet known liabilities of which the amount can be determined with substantial accuracy did not fall within the definition of 'provision' and should, therefore, be described as accruals or accrued liabilities. In the book, Guide to Company Balance-Sheets & Profit and Loss Accounts by Frank H. Jones, sixth edition, in Chapter IX, at page 232, ' provision ' and 'reserve' have been contrasted. Reference has been made to the report of the Cohen Committee in England in 1945, where 'reserve ' has been stated to be as any amount which, having been set aside out of revenue or other surpluses, are free in that they are not retained to meet any diminution in value of assets, specific liability, contingency or commitment known to exist at the date of the balance-sheet. In the Companies Act, 1956, the form of the balance-sheet also provides that 'reserve' has to be separately indicated from 'provision'. Part III, Rule 7(1)(a) and Rule 7(1)(b) of Schedule VI of the Companies Act, 1956, defines both 'provision' and 'reserve'. But the said definitions are only for the purpose of Part I & II of the said Schedule VI of the said Act, unless the context otherwise requires. The Super Profits Tax Act, 1963, does not, however, define 'reserve'. The distinction between 'reserve' and 'provision' in company jurisprudence as well as according to the principles of accountancy had been adverted to by the Supreme Court in the decision in the case of Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC . It is necessary to bear in mind the true scope and effect of the said Supreme Court decision. The said decision was in an appeal from an order of the Industrial Tribunal where the Tribunal was concerned with the question whether the computation of bonus in respect of the accounting year ending on 31st March, 1963, payable to the employees was in accordance with the Payment of Bonus Ordinance. The Supreme Court observed that-contingent liabilities discounted and valued as necessary could be taken into account as trading expenses if these were sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into consideration. An estimated liability under a scheme of gratuity, if properly ascertainable and the present value was discounted, was deductible from gross receipts while preparing the profit and loss account. Such a provision provides for a known liability of which the amount can be determined with substantial accuracy. It cannot, therefore, be termed 'reserve'. Therefore, according to the Supreme Court, the estimated liability for the year on account of a scheme of gratuity should be allowed to be deducted from the gross profits. The Supreme Court observed that the allowance was not restricted to the actual payment of gratuity during the year. At page 63 of the report, the Supreme Court observed that the distinction between provision and reserve in commercial accountancy was fairly well known. Provisions made against anticipated losses and contingencies were charges against profits and, therefore, would be taken into account against gross receipts in profit and loss account and the balance-sheet. On the other hand, reserves were appropriation of profits, the assets by which they were represented being retained to form part of the capital employed in the business. Provisions were usually shown in the balance-sheet by way of deductions from the assets in respect of which they were made whereas general reserves often would be shown as a part of the proprietor's interest. 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 was a reserve but an amount set aside out of Profits and other surpluses to provide for any known liability of which the amount could not be determined with substantial accuracy was a 'provision' (underlined by us). Reference in this connection was made by the Supreme Court to William Pickles' Accountancy, second edition, page 192, as well as to Part 3, Clause 7, Sixth Schedule, to the Companies Act, 1956, which defined provision and reserve. In that case, as the Supreme Court was dealing with the question of bonus, the Supreme Court had observed that the Second Schedule of the Payment of Bonus Act, 1965, required the adding back to the net profit shown in the profit and loss account the amount of depreciation deducted in that account while computing the gross profit.

7. In the instant case, a fundamental question has been urged in the sense, whether in considering the expression 'reserve' under Rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, it has to be understood in its ordinary commercial sense or in the sense in which it is understood in commercial accountancy, because if it is understood in the sense it is understood in commercial accountancy then for the purpose of adjudicating the controversy, before us, the expression 'reserve' has to be construed in contradistinction to 'provision' while, if it is to be understood in its ordinary meaning as was understood by the Supreme Court in the case of Commissioner of Income-tax v. Century Spg. and M/g. Co. Ltd. : [1953]24ITR499(Bom) , referred to hereinbefore, then all that is necessary to find out is whether the amounts were kept apart out of the profits or available surplus to be used for future occasions and not merely to be available as undistributed surplus.It is further necessary that such a decision that the amounts should be keptapart for future use must have been taken by one or those who is or arecompetent to take the decision on behalf of the company. If, in substancethe matter fulfils the above tests, then, according to the ordinary meaning,the sum would be a reserve irrespective of the fact whether it might alsorepresent a provision or not. In the expression used in Rule 1 of the SecondSchedule, the 'reserves' that have been thought of exclude the amountscredited which have been allowed in computation of the profits for thepurpose of the Indian Income-tax Act, 1922, or the Income-tax Act, 1961.It is difficult to conceive of any amount which is 'provision for a knownliability' which would not be allowed in computing the profits for thepurpose of the Indian Income-tax Act, 1922, or the Income-tax Act, 1961.The use of the expression 'all other reserves' in so far as the amountscredited to such other reserves have not been allowed in computing itsprofits for the purpose of the Indian Income-tax Act, 1922, or the Income-taxAct, 1961, in Rule 1 of the Second Schedule seem to suggest that the expression 'reserve' has been used in ordinary sense and not in contradistinctionto 'provision'. This view, we are inclined to think, is fortified bythe decision of the Supreme Court in the case of Commissioner of Income-taxv. Century Spg. and Mfg. Co. Ltd. : [1953]24ITR499(Bom) , referred to hereinbefore, as was understood by the Supreme Court in the subsequent decisionin First National City Bank v. Commissioner of Income-tax : [1961]42ITR17(SC) referred to hereinbefore. In the case of Metal Box Company of India Ltd.v. Their Workmen : (1969)ILLJ785SC , the Supreme Court was not consideringthe use of the expression 'reserve' in the context of either of the Business'Profits Tax Act, 1947, or the Super Profits Tax Act, 1963. Furthermore, whenthe Super Profits Tax Act, 1963, was enacted, Parliament had the pronouncement of the Supreme Court on the basis of the Business Profits Tax Act,1947, using the same expression 'reserve' in the same context asenunciated by the Supreme Court in the case of Commissioner of Income-taxv. Century Spg. and Mfg. Co. Ltd. : [1953]24ITR499(Bom) . Therefore, it islegitimate to think that, having had the advantage of judicial exposition ofthat view, Parliament used the same expression ' reserve' and alsoeliminated the amounts credited for such reserve which had not been allowedin the computation of profits for the purpose of the Indian Income-tax Act,1922, or the Income-tax Act, 1961, and, therefore, wanted that the expression 'reserve' would continue, to have the same meaning as in the ordinarysense and not the meaning according to the principles of commercial accountancy. The Division Bench of the Madras High Court in the case of Commissioner of Income-tax v. Indian Steel Rolling Mills Ltd. : [1973]92ITR78(Mad) hadoccasion to consider this aspect and had observed at page 86 of the reportas follows:

'The learned counsel for the revenue points out that there is a dear-cut distinction between a reserve and a provision and that a mere provision to meet a future contingency cannot be treated as a reserve at all and that the words 'other reserves' should be read ejusdem generis with the development rebate reserve. Though there is a distinction between a reserve and a provision in the Companies Act, that distinction cannot be imported into the meaning of the word ' reserve' in Rule 1 of Schedule 2. In this rule the word 'reserve' has to be understood as a specified amount set apart for a specific purpose by a company, before distribution of dividends, which is available for future use of the company. '

8. There is another aspect of the matter. From what have been mentioned before it is clear that there is some amount of doubt as to whether the expression 'reserve' should be understood in ordinary sense or in the sense of commercial accountancy. The introduction of the Explanation to Rule 1 of the Second Schedule of the Super Profits Tax Act, 1963, indicates also that there was doubt, because the said Explanation has been introduced for the purpose of the removal of doubts. In construing the provisions of a fiscal statute it is well settled that such construction should be preferred which is in favour of the taxpayer.

9. The specific exclusion of certain limited items by the Explanation introduced in Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, from the concept of 'reserve' is also, in our opinion, a significant pointer indicating that the expression 'reserve' in the Companies (Profits) Surtax Act, 1964, should be understood in the ordinary sense.

10. The question whether any particular amount should be allowed as reserve in particular cases had fallen for consideration before this court as well as other High Courts. In the case of Braithwaite & Co. (India) Ltd. v. Commissioner of Income-tax (Income-tax Reference No. 262 of 1969--Judgment delivered on 10th/11th September, 1973) : [1978]111ITR729(Cal) , a Division Bench of this High Court had occasion to consider whether the provision for taxation for proposed dividend and provision for bonus be considered to be 'reserve' within the meaning of Rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, for the purpose of computing the capital of the assessee. Mr. Justice A. N. Sen, who delivered the judgment, exhaustively considered the points and referred to several decisions. Mr. Justice A. N. Sen has referred to the ratio. of the Supreme Court decision in the case of Commissioner of Income-tax v. Century Spinning & . : [1953]24ITR499(SC) and, referring to the observations of the Supreme Court made at page 504 of the report, has observed that the expression 'reserve' which was used in Rule 2 could only mean the profit earned by a company and not distributed as dividends to the shareholders but kept back by the directors for the purposes which might be put to use in future. Analysing the facts the Division Bench found that provision for proposed dividend in that case could not be considered to be reserve in terms of the aforesaid rule. The court further held that provision for taxation and provision for bonus also could not be considered to constitute 'reserve'. Some of the aspects of this question were again considered in the case of Braithwaite & Co. (India) Ltd. v. Commissioner of Income-tax : [1978]111ITR825(Cal) : There, of course, the court was concerned with the Companies (Profits) Surtax Act, 1964, and with Rule 1 of the Second Schedule of that Act. But the court observed at page 834 of the report that the provisions of the earlier Act, with which we are concerned, viz., the Super Profits Tax Act, 1963, were not in pari materia with the provisions of the Companies (Profits) Surtax Act, 1964, particularly in view of the Explanation to Rule 1 of the Second Schedule to the Act of 1964 which was not there in the earlier Act. In the case of Duncan Bros, and Co. Ltd. v. Commissioner of Income-tax : [1978]111ITR885(Cal) , the court was concerned with the question whether the provision for taxation was reserve so as to form part of the capital under Rule 2 of the Companies (Profits) Surtax Act, 1964, as well as the Super Profits Tax Act, 1963. The court after reviewing the position held that 'provision for taxation' could not be held to be reserve as the item was really a provision for payment of an existing liability.

11. Question of reserve in the context of Schedule II of the Business Profits Tax Act, 1947, had also been considered by this court in the case of Indian Steel & Wire Products Ltd. v. Commissioner of Income-tax : [1958]33ITR579(Cal) . There Chief Justice Chakravartti referred to the definition of reserve and observed that, apart from the dictionary meaning of the word 'reserve', it could hardly be disputed that nothing could be reserved unless it had been reserved or laid by or stored for use or application in a future contingency which was anticipated as certain or likely. The question was again considered by this court in the case of Commissioner of Income tax v. Standard Vacuum Oil Co. : [1963]47ITR642(Cal) and reliance was placed on the observations of the court at page 660 of the report. But this precise question, with which we are concerned in the instant reference, did not seem to have fallen for consideration. The decision of the Calcutta High Court was affirmed by the Supreme Court in the case of Commissioner of Income-tax v. Standard Vacuum Oil Co. : [1966]59ITR685(SC) , discussed before. Our attention was also drawn to the observations of the court in the case of Vazir Sultan Tobacco Co. Ltd. v. Commissioner of Income-tax : [1974]96ITR248(AP) , Hyderabad Asbestos Cement Products Ltd. v. Commissioner of Income-tax : [1976]105ITR822(AP) [FB], Commissioner of Income-tax v. Century Spg. & Mfg. Co. Ltd. : [1977]108ITR431(Bom) and also Commissioner oj Income-tax v. Security Printers of India (P.) Ltd. : [1972]86ITR210(All) . It is not necessary, in the context of the particular controversy we are 'discussing, to refer to these decisions in detail. We must, however, note another decision of the Bombay High Court in the case of Shree Ram Mills Ltd. v. Commissioner of Income-tax : [1977]108ITR27(Bom) . Mr. Justice Tulzapurkar, speaking for the Division Bench, pointed out thus :

(i) a mass of undistributed profits cannot automatically become a 'reserve' for the purpose of Rule 1 of Schedule II of the Super Profits Tax Act, 1963, and somebody possessing the requisite authority must clearly indicate that the amount has been separated from the general mass of profit with a view to constitute it as a reserve ;

(ii) it should be apparent from the surrounding circumstances that the amount so set apart is 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 a sum from out of the mass of undistributed profits avowedly for the purpose of distribution as dividend would'be destructive of making that amount a reserve; and

(iv) having regard to the purpose of the Rules framed for the purpose of computing the capital of the company for the purpose of the Super Profits Tax Act, the amount so set apart should be available to the assessee for the purpose of its business.

12. We would respectfully agree with the aforesaid tests laid down by the Division Bench of the Bombay High Court for determining 'reserve' for the computation of capital in our present context. It may, however, be pointed out that such reserves need not be exclusively set apart from 'profits' but may be from other available surplus as was indicated by the Supreme Court in the case of Commissioner of Income-lax v. Standard Vacuum Oil Co. : [1966]59ITR685(SC) . But the Division Bench of the Bombay High Court considered the items with which the court was concerned in the light of the definitions of the expressions 'provision' and 'reserve' in Clause 7(1)(a) of Part III of Schedule VI to the Companies Act, 1956, and tests of commercial accountancy as mentioned in the case of Metal Box Co. of India Ltd. v. Their Workmen : (1969)ILLJ785SC . With great respect to the learned judges of the Division Bench we are inclined to think that such considerations were not necessary. We are inclined to take the view that the expression 'reserve' in Rule 1 of Schedule II meant reserve in the ordinary sense and need not be considered in contradistinction to 'provision'.

13. But in view of the nature of the items with which we are concerned, we need not rest our decision solely on this aspect of the platter. As mentioned hereinbefore even if we consider the question on the principle that the expression 'reserve' has to be understood in contradistinction to 'provision', then we must examine the items provided, for. In order to be a provision it must be a provision for a liability, which is a known liability, though the actual amount might not be quantified. A contingent liability which cannot be ascertained with any substantial accuracy may be considered to be a 'provision' in contradistinction to 'reserve' but not mere possibility of an obligation which has not matured into a liability. See the observation in the case of Commissioner of Income-tax v. Forbes Forbes Campbell & Co. Ltd. : [1977]107ITR38(Bom) . Now, here one item is taxation contingency reserve. This is not a provision for taxation of the year in question but following prudent financial policy the estimated tax saving for claiming the initial and double depreciation have been set aside in this reserve. There was no known liability for this account. Therefore, in our opinion, the Tribunal was right in considering that this should not be taken as 'provision' and, therefore, should be considered as 'reserve'. The other item was provision for bonus. Bonus was payable after the annual general meeting of the company and also after settlement had been arrived at by and between the company and the union. There was no statutory liability for bonus. In the case of Commissioner of Income-tax v. Swadeshi Cotton & Flour Mills P. Ltd. : [1964]53ITR134(SC) , the Supreme Court observed that an employer who followed the mercantile system of accounting incurred a liability towards profit bonus only when the claim, if made, was settled amicably or by industrial adjudication. In the instant case, no liability had' arisen and, therefore, this was not in respect of a known liability. The third item was provision for provident institution and long service bonus. It has been stated that this reserve was to cover the payment to those employees, who had joined the provident fund after (sic) 1925, and for payment as and when they retire. But who would be retiring and what would be their amount This liability was also not known. It is not only a question of there being no quantification. Whether there would at all be any liability was also not known. See the observation of the Supreme Court in Standard Mills Co. Ltd. v. Commissioner of Wealth-tax : [1967]63ITR470(SC) . Therefore, this could not also be considered to be a provision. If that is the position, then these are, in our opinion, rightly considered by the Tribunal as 'reserves' in the light of Rule 1 of the Second Schedule of the Superprofits Tax Act, 1963. These were merely obligations which might mature into liabilities but the quantum of which cannot be ascertained by any normal method of accountancy, actuarial or otherwise. Counsel for the revenue, however, contended that in respect of provision for taxation contingency some amounts might have been allowed in computing company's profits for the purpose of the Indian Income-tax Act, 1922, or the Income-tax Act, 1961. But if that was so, then to the extent the amounts have been allowed in the computation of its profit should be disregarded. In that view of the matter, we answer the question referred to us in the affirmative and in favour of the assessee with this addition that if in respect of any of the items any part of the amounts have been allowed in the computation of its profits for the purposes of the Indian Income-tax Act, 1922, or the Income-tax Act, 1961, the same should be disregarded.

14. Before we part with this master, we may observe that counsel for therevenue drew our attention to certain observations in the case ofCommissioner of Income-tax v. Tata Sons Pvt. Ltd. : [1974]97ITR128(Bom) , for the proposition that we should not depart from the view takenin the other decisions in respect of an all-India matter. We are in respectfulagreement with the said observations. In this case, no question of departure from the views of any other Bench decision of this court or any otherHigh Court arises. We have; tried to follow the decision of the SupremeCourt.

15. In the facts and circumstances of this case, each party will pay andbear its own costs.

Sudhindra Mohan Guha, J.

16. I agree.


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