1981 (9) TMI 34 - HC - Income Tax

Summary

Issues:
1. Inclusion of amounts as 'reserves' under the Super Profits Tax Act, 1963.
2. Classification of an amount set apart for proposed dividend as 'reserve' or 'provision'.

Analysis:
1. The case involved determining whether certain amounts were includible as 'reserves' under the Super Profits Tax Act, 1963. The provisions for bad and doubtful debts and retirement benefits were agreed to be considered as reserves due to being set apart on an ad hoc basis. Hence, they were included in the computation of capital without much dispute.

2. The contentious issue revolved around an amount of Rs. 40,00,000 set aside as a proposed second interim dividend. The Income Tax Officer (ITO) and the Appellate Authority Commission (AAC) deemed it a provision, while the Income-tax Appellate Tribunal considered it a reserve. The Tribunal's decision was based on the directors' resolution recommending the dividend and shareholder approval, indicating the amount was separated from undistributed profits and available for future use.

3. The High Court analyzed the nature of the amount set apart for the proposed dividend based on precedent. Referring to the Shree Ram Mills case, the court emphasized that for an amount to be considered a reserve, it must be separated from profits with a clear purpose for future use in business. The court noted that the directors' resolution and balance sheet indicated the proposed dividend related to profits earned during the accounting year.

4. The court rejected the argument that shareholder approval post-accounting year end affected the classification, stating that the resolution and approval related back to the accounting year. Consequently, the court concluded that the amount set aside for the proposed second interim dividend could not be treated as a reserve but only as a provision for the Super Profits Tax Act, 1963.

5. Therefore, the court ruled in favor of the assessee for items 1 and 3, considering them as reserves. However, for item 2, the amount set apart for the proposed dividend, the ruling was against the assessee, classifying it as a provision. As both parties succeeded partially, each was directed to bear their own costs.