1984 (5) TMI 34 - HC - Income Tax

Issues Involved:
1. Classification of the amount credited to the "provision for rent of UNICEF Plant and Machinery Account" as a reserve under the Companies (Profits) Surtax Act, 1964.
2. Interpretation of the terms "reserve" and "provision" under the Companies Act, 1956, and their application in the context of the Surtax Act.
3. Compliance with the instructions from the Government of India regarding the accounting treatment of the plant and machinery received from UNICEF.

Detailed Analysis:

1. Classification of the Amount as a Reserve:

The primary issue was whether the amount of Rs. 12,02,325 credited to the "provision for rent of UNICEF Plant and Machinery Account" qualifies as a reserve under Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The assessee argued that this amount should be considered a reserve for the purpose of computing the capital of the company under the Surtax Act.

2. Interpretation of "Reserve" and "Provision":

The court examined the definitions and distinctions between "reserve" and "provision" as laid out in the Companies Act, 1956. According to the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559, a provision is a charge against profits meant to meet known liabilities, whereas a reserve is an appropriation of profits meant to form part of the capital employed in the business. The court noted that if an appropriation does not qualify as a provision, it is not automatically a reserve; the true nature and character of the sum must be determined.

3. Compliance with Government Instructions:

The Government of India had instructed the assessee to charge an amount equal to the estimated depreciation to the cost of production in the form of rent and make a contra-credit to a suitable reserve. However, the assessee charged the amount to the profit and loss account and credited it to a provision for lease money. This discrepancy was noted, but the court focused on the substance over form.

Court's Findings:

- The court noted that the Government of India had not decided on the mode or terms of transfer of the plant and machinery to the assessee until November 1965. Therefore, there was no known liability on the part of the assessee.
- The court observed that the amounts set aside by the assessee were not for any known, disputed, or contingent liability but were meant to meet the potential cost of acquiring the plant and machinery in the future.
- The court agreed with the assessee's contention that the amount in question should be considered a reserve, as there was no present or future liability that the assessee was required to meet.

Conclusion:

The court concluded that the amount of Rs. 12,02,325 credited to the "provision for rent of UNICEF Plant and Machinery Account" indeed constituted a reserve. Accordingly, it should be included in the computation of the capital of the assessee under the Companies (Profits) Surtax Act, 1964. The question was answered in the affirmative, in favor of the assessee, with each party bearing its own costs.

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