1973 (9) TMI 24 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Tribunal was right in allowing the claim for deduction of the annual sum of Rs. 4 lakhs only to the extent allowed by it in the corresponding income-tax appeal.
2. Whether the Tribunal was right in not treating the following three items as 'reserve' within the meaning of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, for the purpose of computing the capital of the assessee:
a. Provision for taxation
b. Proposed dividend
c. Provision for bonus

Issue-Wise Detailed Analysis:

1. Deduction of the Annual Sum of Rs. 4 Lakhs:
The Tribunal's decision to allow the claim for deduction of the annual sum of Rs. 4 lakhs only to the extent allowed by it in the corresponding income-tax appeal was contested. The court referred to its decision in Income-tax Reference No. 169 of 1969 [Braithwaite & Co. (India) Ltd. v. Commissioner of Income-tax [1978] 111 ITR 542 (Cal)], which covered this question. Based on the reasons stated in the earlier judgment, the court held that the Tribunal was not right in its decision. Consequently, the question was answered in the negative, against the department and in favor of the assessee.

2. Treatment of Items as 'Reserve':
The second issue involved whether certain items could be treated as 'reserve' within the meaning of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, for computing the capital of the assessee. The items in question were:
a. Provision for taxation
b. Proposed dividend
c. Provision for bonus

The court examined the facts and findings of the Tribunal. The Super Profits Tax Officer had computed the capital of the company without including these items as reserves. The Appellate Assistant Commissioner and the Tribunal had upheld this computation. The Tribunal had specifically noted that the provision for taxation, proposed dividend, and provision for bonus did not constitute reserves.

a. Provision for Taxation:
The court agreed with the Tribunal that the provision for taxation is not a reserve. It was treated as a provision set aside to meet a definite liability, and liability to tax arises on the last date of the previous year. Thus, it was not considered a reserve.

b. Proposed Dividend:
The court referred to the Supreme Court's decision in Commissioner of Income-tax v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499, which held that a proposed dividend does not constitute a reserve. The proposed dividend remains a mass of undistributed profits and cannot be considered a reserve.

c. Provision for Bonus:
The provision for bonus was also not considered a reserve. The Tribunal and the court agreed that it is an appropriation for meeting a definite liability to be incurred at the end of the year. Hence, it does not constitute a reserve.

The court also considered various precedents and definitions of 'reserve' and 'provision' from case law and accounting principles. It concluded that amounts set aside for meeting existing liabilities cannot be considered reserves. The court emphasized that a reserve is an amount set apart for future use or contingency, not for meeting an existing liability.

Conclusion:
The court answered the first question in the negative, against the department and in favor of the assessee. The second question was answered in the affirmative, in favor of the revenue and against the assessee. There was no order as to costs.