1980 (5) TMI 21 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 3,50,000 described as reserve for pension and the sum of Rs. 3,00,000 described as reserve for roofing repairs in the balance-sheet of the company were reserves within the meaning of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Detailed Analysis:

1. Treatment by the Surtax Officer:
The Surtax Officer treated the amounts of Rs. 3,50,000 (reserve for pensions) and Rs. 3,00,000 (reserve for roofing repairs) as reserves and included them in the computation of the capital of the assessee-company under the Companies (Profits) Surtax Act, 1964.

2. Commissioner's View:
The Commissioner of Income-tax, Central, Calcutta, disagreed with the Surtax Officer's treatment, asserting that the amounts were wrongly included as reserves. He considered the amounts as provisions set aside to meet the liabilities of the assessee-company and sought to revise the Surtax Officer's order under section 16 of the Companies (Profits) Surtax Act, 1964. The Commissioner issued a notice to the assessee and, after considering the explanation, set aside the Surtax Officer's order and directed a fresh assessment.

3. Tribunal's Decision:
The assessee appealed to the Tribunal, arguing that the disputed amounts were reserves. The Tribunal reviewed the provisions of the Companies Act and relevant Supreme Court decisions (CIT v. Century Spinning & Manufacturing Co. Ltd., CIT v. Standard Vacuum Oil Co., and Metal Box Co. of India Ltd. v. Their Workmen). The Tribunal found that the amounts were shown as reserves in the balance-sheet and had not been used for any known or imminent liability. Thus, the Tribunal held that the amounts were not provisions but reserves and set aside the Commissioner's order, allowing the appeal.

4. Supreme Court Decisions Referenced:
- CIT v. Century Spinning and Manufacturing Co. Ltd.: Defined reserves as profits not distributed as dividends but kept apart for future use.
- CIT v. Standard Vacuum Oil Co.: Held that reserves built from sources other than profits might be admissible for inclusion in capital.
- Metal Box Co. of India Ltd. v. Their Workmen: Distinguished between provisions (charges against profits for anticipated losses) and reserves (appropriation of profits retained as part of the capital).

5. High Court's Analysis:
The High Court examined the distinction between provisions and reserves, referencing several cases:
- Commr. of IT & SPT v. Burn and Co. Ltd.: Discussed tests for determining reserves.
- Hyderabad Asbestos Cement Products Ltd. v. CIT: Held that provisions for contingencies and bonuses are definite liabilities and not reserves.
- CIT v. Hindustan Milk Food Mfg. Ltd.: Stated that directors must apply their mind and indicate their intentions for treating an amount as a reserve.
- Indian Steel and Wire Products Ltd. v. CIT: Held that surplus carried forward without allocation does not become a reserve.
- CIT v. Century Spg. & Mfg. Co. Ltd.: Treated provision for contingencies as a provision for a known contingent liability.
- CIT and SPT v. Eyre Smelting Pvt. Ltd.: Listed characteristics of provisions and reserves.
- Braithwaite & Co. (India) Ltd. v. CIT: Found that an amount set apart for surtax was a provision for taxation.

6. Conclusion:
The High Court concluded that the amounts set aside for pensions and roofing repairs were provisions for meeting liabilities, not reserves. The Tribunal's decision to treat these amounts as reserves and reverse the Commissioner's findings was not justified. The High Court answered the question in the negative, favoring the revenue, and held that each party should bear its own costs.