1978 (6) TMI 23 - HC - Income Tax

Summary

Issues Involved:
1. Whether the provision for taxation amounting to Rs. 3,35,914 qualifies as a reserve under the Super Profits Tax Act, 1963.
2. Whether the balance of unappropriated profit of Rs. 11,41,689 qualifies as a reserve under the Super Profits Tax Act, 1963.

Detailed Analysis:

1. Provision for Taxation as a Reserve:
The assessee argued that the provision for taxation amounting to Rs. 3,35,914 should be included in the capital base as a reserve under Rule 1 of the Second Schedule to the S.P.T. Act, 1963. The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) held that this amount was a provision against a known liability and not a reserve. The Tribunal upheld this view, stating that the amount was earmarked for tax liability calculated on actual book profits, thus qualifying as a provision and not a reserve.

The court referred to prior decisions in Braithwaite & Co. (India) Ltd. v. CIT [1978] 111 ITR 729 (Cal) and Duncan Brothers & Co. Ltd. v. CIT [1978] 111 ITR 885 (Cal), which followed the Supreme Court's principles in Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53. These cases established that a provision for taxation does not qualify as a reserve under the S.P.T. Act, 1963.

Mr. Kalyan Roy, counsel for the assessee, argued that the distinction between a reserve and a provision under the Companies Act, 1956, was irrelevant for the S.P.T. Act, 1963. He cited various Supreme Court decisions, including Century Spinning & Manufacturing Co. Ltd. [1953] 24 ITR 499 (SC), to support his contention. However, the court found that the definitions in the Companies Act, 1956, which distinguish between reserves and provisions, were relevant and applicable.

The court concluded that the provision for taxation could not be considered a reserve as it was earmarked for a known liability, thereby affirming the Tribunal's decision.

2. Balance of Unappropriated Profit as a Reserve:
The assessee also claimed that the balance of unappropriated profit amounting to Rs. 11,41,689 should be treated as a reserve. The ITO, AAC, and Tribunal all held that this amount was a mass of undistributed profits without any allocation or appropriation, and thus did not qualify as a reserve.

The court referred to the Supreme Court's decision in Century Spinning & Manufacturing Co. Ltd. [1953] 24 ITR 499 (SC), which held that undistributed profits not earmarked for any specific purpose do not qualify as reserves. The court also noted that the Companies Act, 1956, and prevailing principles of accountancy distinguish between reserves and unappropriated profits.

The court held that the amount of Rs. 11,41,689 was unappropriated profits and not a reserve, thereby affirming the Tribunal's decision.

Conclusion:
The court answered the question referred in the affirmative and in favor of the revenue, holding that neither the provision for taxation amounting to Rs. 3,35,914 nor the balance of unappropriated profit amounting to Rs. 11,41,689 qualified as reserves within the meaning of Rule 1 of the Second Schedule of the S.P.T. Act, 1963. There was no order as to costs.