1978 (11) TMI 13 - HC - Income Tax

Summary

Issues Involved:
1. Whether the amount of Rs. 8 lakhs formed part of the reserves as on April 1, 1962, for purposes of computation of capital under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963.
2. Whether the Tribunal was right in law in allowing the additional ground to be raised for the first time before it.
3. Whether the amounts of Rs. 71,808 and Rs. 1,24,974, respectively, for "provision for taxation" and "provision for dividends" could be treated as "reserve" to be included in the computation of the assessee's capital under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963.

Issue-wise Detailed Analysis:

1. Rs. 8 Lakhs as Part of Reserves:
The assessee contended that Rs. 8 lakhs should be considered as part of the reserves as on April 1, 1962, based on a resolution passed by the shareholders on September 29, 1962. However, the Tribunal held that this amount did not form part of the reserves for the purposes of computation of capital under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963. The court referred to CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566, but distinguished the facts of the present case from those in the cited case. The court found that the transfer of Rs. 8 lakhs to the reserve account was not made in the books of account during the accounting year ending March 31, 1962, but only in the subsequent year. The resolution did not indicate that it should be related back to the previous year, nor was there any recommendation from the directors to that effect. Consequently, the court held that the amount of Rs. 8 lakhs did not form part of the reserves as on April 1, 1962, and answered the question in the affirmative, against the assessee and in favor of the revenue.

2. Allowing Additional Ground:
The Tribunal allowed the assessee to raise an additional ground during the appeal, which was opposed by the revenue. The court referred to rule 11 of the Income-tax (Appellate Tribunal) Rules, 1963, which grants the Tribunal discretion to allow new grounds to be raised. The court cited previous decisions, including CIT v. Ram Sanehi Gian Chand [1972] 86 ITR 724 and CIT v. Hazarimal Nagji & Co. [1962] 46 ITR 1168, to support this discretion. Therefore, the court held that the Tribunal was right in allowing the additional ground to be raised and answered the question against the revenue and in favor of the assessee.

3. Treatment of Provisions as Reserves:
The Tribunal treated the amounts of Rs. 71,808 (provision for taxation) and Rs. 1,24,974 (provision for dividends) as reserves. The court distinguished between "reserve" and "provision," explaining that a reserve is set apart for an unknown future liability, whereas a provision is kept apart for a known liability. The court found that both the provision for taxation and the provision for dividends were for known liabilities and could not be treated as reserves. The court referred to several judgments, including Nagammal Mills Ltd. v. CIT [1974] 94 ITR 387 (Mad) and Orient Paper Mills Ltd. v. CIT [1978] 113 ITR 550 (Cal), which supported this view. Consequently, the court held that the amounts in question could not be treated as reserves and answered the question in the negative, in favor of the revenue and against the assessee.

Conclusion:
The court disposed of the references accordingly, providing clear answers to each of the issues raised.