1989 (2) TMI 52 - HC - Income Tax

Summary

Issues:
1. Treatment of proposed dividend as a reserve for surtax computation.
2. Treatment of staff welfare fund as a reserve for surtax computation.

Analysis:

Issue 1: Treatment of Proposed Dividend as a Reserve
The first issue pertains to whether the sum of Rs. 2,00,000 proposed as a dividend reserve in the balance sheets for the assessment years 1973-74 and 1974-75 should be treated as a reserve for computing capital under the Companies (Profits) Surtax Act, 1964. The court, in line with CIT v. British India Corporation Ltd., held that the amount was not a reserve but a provision to discharge an existing liability. The liability for dividend payment had already been quantified at Rs. 2,00,000, indicating it was not a case of constituting a reserve but setting aside funds for a committed liability. Consequently, the amount was rightly not treated as a reserve for surtax computation.

Issue 2: Treatment of Staff Welfare Fund as a Reserve
The second issue concerns the treatment of a staff benefit reserve of Rs. 5,000 created under "Staff Welfare Fund" for the assessment year 1973-74. The assessee claimed that this reserve should be considered for computing capital under the Companies (Profits) Surtax Act, 1964. The court, considering Addl. CIT v. Minerals and Metals Trading Corporation of India Ltd., determined that the reserve was not intended to meet a known liability but was earmarked for employee benefits as per defined policies. As such, the reserve qualified for a 20% deduction and was to be treated as a reserve for surtax computation.

Further Considerations for the Second Issue
The judgment also addressed the assessment year 1974-75 concerning the staff benefit reserve. It clarified that if any amount remained unappropriated from the previous year or if a new reserve was created, the assessee would be entitled to a 20% deduction on the total reserve amount. The court emphasized that any remaining amount from the previous year's reserve or new additions constituted eligible deductions. Noteworthy was the mention of specific appropriations made against the reserve of Rs. 5,000, indicating the need to consider such details in light of the court's opinion on the matter.

In conclusion, the court ruled in favor of the assessee on the treatment of the staff welfare fund as a reserve for surtax computation, allowing a 20% deduction on the reserve amount. The judgment provided clarity on the distinction between reserves and provisions, ensuring compliance with the Companies (Profits) Surtax Act, 1964.