1975 (12) TMI 24 - HC - Income Tax

Summary

Issues Involved:
1. Whether the provision for taxation constitutes a reserve for the purpose of computing capital under the Super Profits Tax Act, 1963.
2. Whether the provision for taxation should be deducted from the cost of investments in computing the capital under the Super Profits Tax Act, 1963.
3. Whether the provision for taxation should be deducted from the cost of investments in computing the capital under the Companies (Profits) Surtax Act, 1964.

Issue 1: Whether the provision for taxation constitutes a reserve for the purpose of computing capital under the Super Profits Tax Act, 1963.

The assessee argued that the provision for taxation should be considered a reserve for computing its capital under the Super Profits Tax Act, 1963. The assessee cited various legal precedents, including the Supreme Court's decision in Commissioner of Income-tax v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499 (SC), which defined a reserve as "something stored up, kept back, or relied upon for future use or advantage." The assessee also referenced Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax [1966] 59 ITR 767 (SC), which held that the liability to pay income tax was a debt arising on the valuation date.

The revenue contended that a provision for taxation is not a reserve but an amount set aside to meet an existing liability. The Tribunal supported this view, stating that a provision for taxation could not be considered a reserve as it was set aside to meet a perfected debt.

The court, following the precedent set by the Division Bench in Braithwaite & Co. (India) Ltd. v. Commissioner of Income-tax [1978] 111 ITR 729 (Cal) and the Allahabad High Court in Commissioner of Income-tax v. Hind Lamps Ltd. [1973] 90 ITR 487, held that a provision for taxation is not a reserve. It concluded that a provision for an existing liability cannot be considered a reserve set apart for future contingencies. Therefore, the court answered the first question in the affirmative, in favor of the revenue.

Issue 2: Whether the provision for taxation should be deducted from the cost of investments in computing the capital under the Super Profits Tax Act, 1963.

The assessee argued that the provision for taxation should be deducted from the cost of investments in computing the capital under clause (ii) of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963. The Tribunal, however, held that such a provision did not qualify for any deduction as it was not a fund or surplus.

The court examined the relevant rules and concluded that the provision for taxation did not constitute a fund within the meaning of the said rules. It noted that the term "fund" should be understood in its context, which implies a source of payment for some assets but not an amount earmarked for a particular liability. Therefore, the court answered the second question in the affirmative, in favor of the revenue.

Issue 3: Whether the provision for taxation should be deducted from the cost of investments in computing the capital under the Companies (Profits) Surtax Act, 1964.

For the assessment year 1964-65, the assessee claimed that the provision for taxation should be deducted from the cost of investments under rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The Tribunal rejected this claim, stating that the provision for taxation did not qualify as a fund.

The court reviewed the arguments and relevant rules and concluded that the provision for taxation did not constitute a fund within the meaning of the rules. It noted that the term "fund" should be understood in its context, which implies a source of payment for some assets but not an amount earmarked for a particular liability. Therefore, the court answered the question in the negative, in favor of the assessee.

Conclusion:

The court held that the provision for taxation is not a reserve and cannot be deducted from the cost of investments in computing the capital under the Super Profits Tax Act, 1963. However, the court held that the provision for taxation should be deducted from the cost of investments in computing the capital under the Companies (Profits) Surtax Act, 1964. The court's decision reflects a nuanced understanding of the terms "reserve" and "fund" in the context of fiscal statutes.