1978 (11) TMI 18 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sum of Rs. 9 lakhs claimed as reserve for super profits tax qualifies as a reserve under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, and should be included in the computation of capital for the purpose of the said Act.

Detailed Analysis:

Background:
The case revolves around the interpretation of whether a sum of Rs. 9 lakhs, claimed as a reserve for super profits tax, qualifies as a reserve under the Companies (Profits) Surtax Act, 1964. The issue was referred to the court at the instance of the revenue, and a separate reference arising from another application made by the assessee was directed to appear as a separate reference.

Relevant Legislation:
- Super Profits Tax Act, 1963: Introduced a tax on chargeable profits exceeding the standard deduction.
- Companies (Profits) Surtax Act, 1964: Replaced the Super Profits Tax Act, 1963, and introduced a surtax on chargeable profits exceeding the statutory deduction.

Key Provisions:
- Section 4 of the Super Profits Tax Act, 1963: Introduced the charge of super profits tax.
- Second Schedule to the Act: Defined the computation of capital, including reserves.
- Section 2(5) and Section 4 of the Companies (Profits) Surtax Act, 1964: Defined chargeable profits and introduced the charge of surtax.
- Rule 1 of the Second Schedule: Provided the method for computing the capital of a company, including reserves.

Facts:
The ITO excluded the reserve for super profits tax amounting to Rs. 9 lakhs from the computation of capital for determining the statutory deduction. The AAC upheld this decision, considering the amount as a provision rather than a reserve. The assessee appealed to the Tribunal, which accepted the assessee's contention and directed the ITO to include the amount in the computation of capital.

Tribunal's Findings:
The Tribunal observed that the Super Profits Tax Act came into effect after January 1, 1963, and thus, there was no liability towards super profits tax on that date. The Tribunal held that the amount should be treated as a reserve and not a provision.

Revenue's Argument:
The revenue argued that the amount should be treated as a provision for taxation, relying on the case of Braithwaite & Co. (India) Ltd. v. CIT. They contended that the Bill introduced should be treated as a known contingent liability.

Assessee's Argument:
The assessee argued that at the time of finalizing the accounts, the Bill had not yet received the President's assent, and thus, there was no liability. The assessee distinguished the Braithwaite case and cited other decisions to support their contention.

Court's Analysis:
The court noted that a Bill introduced in Parliament does not create any liability, contingent or otherwise. It emphasized that on the relevant date, there was no Act in place, and the amount earmarked should be treated as a reserve. The court referred to the Braithwaite case, which stated that appropriations made with retrospective effect retain their nature and character.

Judgment:
The court rejected the revenue's contention and held that the sum of Rs. 9 lakhs should be treated as a reserve for the purpose of the Surtax Act, 1964. The question was answered in the affirmative and in favor of the assessee. There was no order as to costs.

Conclusion:
The court concluded that the provision of Rs. 9 lakhs is to be treated as a reserve for the purpose of the Surtax Act, 1964, and should be included in the computation of capital. The judgment was agreed upon by both judges, with no separate judgments delivered.