1981 (5) TMI 16 - HC - Income Tax

Summary

Issues Involved:
1. Whether the "staff benefit reserve" and "self-insurance reserve" constituted reserves within the meaning of Rule 1 of Schedule II to the Companies (Profits) Surtax Act, 1964.
2. Whether the "staff bonus reserve" constituted a reserve within the meaning of Rule 1 of Schedule II to the Companies (Profits) Surtax Act, 1964.

Issue-wise Detailed Analysis:

1. Staff Benefit Reserve and Self-Insurance Reserve:
The primary issue was whether the amounts set apart by the assessee under the "staff benefit reserve" and "self-insurance reserve" could be considered as "reserves" under Rule 1 of Schedule II to the Companies (Profits) Surtax Act, 1964. The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) initially opined that these amounts were "current liabilities and provisions" and not "reserves." However, the Tribunal reversed this decision, holding that these amounts were indeed "reserves."

- Staff Benefit Reserve: The Corporation allocated a portion of its surplus every year under different heads, including the "staff benefit reserve," for implementing various benefit schemes. The Tribunal found that there was no obligation on the part of the company to incur any expenditure in this respect, and the application of money was purely discretionary. Thus, the amounts set apart could not be described as provisions for any known liability and were correctly treated as reserves by the Tribunal.

- Self-Insurance Reserve: The Corporation operated a self-insurance scheme to economize on insurance charges for imported commodities. The Tribunal concluded that this was a fund built up by the company to offset future losses due to marine transit risks not covered by regular insurance. There was no obligation on the part of the company to incur this expenditure, and hence, the amounts set apart were not provisions but reserves.

The High Court agreed with the Tribunal, stating that the amounts set apart under these heads did not constitute provisions for any known liability and were rightly considered reserves.

2. Staff Bonus Reserve:
The second issue was whether the "staff bonus reserve" constituted a reserve. The AAC argued that this reserve was a provision for a statutory liability under the Bonus Act, 1965, and thus a contingent liability. The Tribunal, however, held that there was no definite liability in the year under consideration, and the amounts set apart were reserves.

- Staff Bonus Reserve: The reserve was created to meet the statutory liability under the Bonus Act, which required the company to pay a minimum bonus even in the absence of sufficient profits. The Tribunal found that the amounts set apart were for a future contingent liability, the exact amount of which could not be determined with substantial accuracy at the date of the balance-sheet. The High Court agreed with the Tribunal's conclusion, stating that the amounts set apart did not constitute a provision for any known liability as there was no definite probability of the company having to meet these liabilities as of the relevant dates.

Conclusion:
The High Court affirmed the Tribunal's decision, holding that the "staff benefit reserve," "self-insurance reserve," and "staff bonus reserve" constituted reserves within the meaning of Rule 1 of Schedule II to the Companies (Profits) Surtax Act, 1964. The amounts set apart under these heads did not fall under the category of "current liabilities and provisions" and were correctly treated as reserves by the Tribunal. The questions referred were answered in the affirmative and in favor of the assessee, with costs awarded to the assessee.