1977 (6) TMI 23 - HC - Income Tax

Chargeable Profits, Computation Of Capital, Gratuity Reserve, Reserve For Doubtful Debts, Super Profits Tax

Summary

Issues Involved:
1. Validity of initiation of reassessment proceedings under section 9(b) of the Super Profits Tax Act, 1963, for the assessment year 1963-64.
2. Inclusion of rehabilitation reserve, reserve for doubtful debts, and gratuity reserve in computing the capital base for determining the statutory deduction for the assessment years 1965-66 and 1966-67.

Issue-wise Detailed Analysis:

1. Validity of Initiation of Reassessment Proceedings under Section 9(b) of the Super Profits Tax Act, 1963

For the assessment year 1963-64, the assessment was sought to be reopened under section 9(b) of the Super Profits Tax Act, 1963, on the ground that certain reserves created for specific purposes and the excess of the development reserve were considered for capital computation for determining the standard deduction. The assessee contended that there was no new "information" to warrant the reopening of the assessment under section 9(b), as it was a mere change of opinion. This contention was accepted by the Appellate Assistant Commissioner and the Tribunal, referencing the settled legal position in Kasthurbhai Lalbhai's case [1971] 80 ITR 188 (Guj).

Section 9(b) allows the Income-tax Officer to reassess if he has "information" that chargeable profits have escaped assessment. The term "information" has been judicially interpreted to mean knowledge derived from an external source concerning facts or law relating to the assessment. Mere change of opinion does not constitute "information." This principle was reinforced by the Supreme Court in Commissioner of Income-tax v. A. Raman and Co. [1968] 67 ITR 11 (SC) and subsequent cases.

In the present case, the Tribunal found that the Income-tax Officer was merely proceeding on second thoughts on the same material, which constituted a change of opinion rather than new information. Therefore, the initiation of reassessment proceedings under section 9(b) was not warranted. The first question was answered in the affirmative, in favor of the assessee and against the revenue.

2. Inclusion of Rehabilitation Reserve, Reserve for Doubtful Debts, and Gratuity Reserve in Computing the Capital Base for Determining the Statutory Deduction

For the assessment years 1965-66 and 1966-67, the Tribunal had to determine whether the rehabilitation reserve, reserve for doubtful debts, and gratuity reserve created by the assessee were includible in computing the capital base for determining the statutory deduction. The legal position on what constitutes a reserve for the computation of the capital base is well-settled, as seen in Commissioner of Income-tax v. Mafatlal Chandulal & Co. Ltd. [1977] 107 ITR 489 (Guj).

Reserves are appropriations out of profits, whereas provisions are charges against profits. Provisions are set apart to meet present or anticipated liabilities known at the date of the balance-sheet. However, amounts set aside out of profits not designed to meet a known liability are treated as reserves. This distinction was crucial in determining the includibility of the reserves in question.

- Rehabilitation Reserve: The Tribunal found it to be part of the general reserve, not intended as a provision against any anticipated liability, and thus, it was includible in the capital base.
- Reserve for Doubtful Debts: It was created without reference to outstanding sundry debtors in the balance-sheet and was not meant to meet any anticipated or known existing liability, making it includible in the capital base.
- Gratuity Reserve: This reserve was kept for future years without reference to any ascertained liability, with no actuarial valuation, and was not a provision for an anticipated known liability. Therefore, it was also includible in the capital base.

The Tribunal's findings were consistent with the legal principles governing reserves and provisions. Consequently, the second question was answered in the affirmative, against the revenue and in favor of the assessee.

Conclusion:
Both questions were answered in the affirmative, in favor of the assessee and against the revenue, with costs awarded to the assessee.