1981 (4) TMI 49 - HC - Income Tax

Issues Involved:
1. Inclusion of the secret reserve in the capital base for the computation of super profits tax.
2. Inclusion of the taxation reserve in the capital base for the computation of super profits tax.
3. Inclusion of the depreciation reserve in the capital base for the computation of super profits tax.

Detailed Analysis:

1. Inclusion of the Secret Reserve in the Capital Base for the Computation of Super Profits Tax:
The primary issue was whether the secret reserves maintained by the assessee-bank could be included in the capital base for the purpose of computing the super profits tax under the Super Profits Tax Act, 1963. The assessee-bank had not shown the amount of Rs. 76,58,687 in its published balance-sheet but had merged it in investments. The Tribunal ruled that this amount constituted moneys kept available for the use of the bank and could be treated as a reserve for contingency, despite the absence of express authorization from the Board. The Tribunal inferred that the reserve must have been created with the requisite authority from the board of directors, even though evidence of such authority was not available.

The court examined the legal definition of "reserve" and referred to the Supreme Court decision in CIT v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499, which stated that an amount must be specifically earmarked and appropriated as a reserve by the requisite authority to qualify as a reserve. The court also considered the Banking Regulation Act, 1949, which allows banks to maintain secret reserves not disclosed in the published balance-sheet, recognizing the necessity of such reserves for healthy banking practices.

The court concluded that the secret reserve of Rs. 76,58,687 was indeed created by the board of directors and was reflected in the books of account, satisfying the conditions laid down by the Supreme Court. Therefore, the amount was eligible to be included in the capital base for the computation of super profits tax.

2. Inclusion of the Taxation Reserve in the Capital Base for the Computation of Super Profits Tax:
The second issue concerned the inclusion of the taxation reserve of Rs. 1,31,00,548 in the capital base. The Income Tax Officer (ITO) allowed only Rs. 39,33,579 as reserve, considering the excess over the known liability. The Tribunal, however, held that the taxation reserve was a provision and not a reserve. The court noted that the Tribunal's decision was influenced by the Supreme Court ruling in CIT v. Damodaran [1980] 121 ITR 572, which clarified that such provisions could not be treated as reserves. Consequently, the court did not find it necessary to answer this question as it was conceded that the Tribunal's reference of this question was not valid.

3. Inclusion of the Depreciation Reserve in the Capital Base for the Computation of Super Profits Tax:
The third issue was whether the depreciation reserve of Rs. 85,84,302 (later corrected to Rs. 69,03,280) could be included in the capital base. The ITO and the Appellate Assistant Commissioner (AAC) both held that the bank had no actual reserve but had only claimed the amount written off from various assets as a reserve. The Tribunal upheld this view, stating that the existence of such a reserve was not proven. As with the taxation reserve, the court did not answer this question due to the precedent set by the Supreme Court in CIT v. Damodaran, rendering the Tribunal's reference invalid.

Conclusion:
The court affirmed that the secret reserve of Rs. 76,58,687 maintained by the assessee-bank should be included in the capital base for the computation of super profits tax under the Super Profits Tax Act, 1963. The questions regarding the taxation reserve and depreciation reserve were not answered as they were not validly referred by the Tribunal, following the Supreme Court's decision in CIT v. Damodaran. The revenue was ordered to pay the costs of the assessee.

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