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Issues Involved
1. Whether the dividend equalisation reserve qualifies as a "reserve" under the Super Profits Tax Act, 1963, and the Companies (Profits) Surtax Act, 1964. Issue-wise Detailed Analysis Issue 1: Qualification of Dividend Equalisation Reserve as a "Reserve" The primary question is whether the dividend equalisation reserve is a "reserve" or merely a "provision" under the relevant tax laws. The distinction is crucial because if it is classified as a "reserve," it will be included in the capital computation for abatement in surtax and super profits tax assessments. Relevant Statutory Provisions: - Super Profits Tax Act, 1963: Section 4 imposes a tax on chargeable profits exceeding the standard deduction, defined as 6% of the capital computed per the Second Schedule. - Companies (Profits) Surtax Act, 1964: Similar provisions exist, with the Second Schedule detailing the computation of capital, including reserves. Key Definitions: - Provision: Amounts set aside for known liabilities or anticipated expenses, not accurately determinable. - Reserve: Appropriations of profits set aside for future use, not meant to meet specific liabilities or contingencies. Tribunal's Findings: The Tribunal, relying on principles of accountancy, determined that the amounts in question are "reserves." This conclusion was based on: 1. Textbook Definitions: Differentiating "provisions" and "reserves" as per accounting standards. 2. Purpose of Reserves: Including equalising dividends, promoting financial stability, and providing for future contingencies. Court's Analysis: The court upheld the Tribunal's decision, emphasizing the clear distinction between "provision" and "reserve." The court referred to: 1. Accounting Literature: Citing Frank H. Jones and J.R. Batliboi, the court noted that reserves are portions of profits set aside for future use, including equalising dividends. 2. Statutory Provisions: The Companies Act, 1956, and its predecessors, which explicitly distinguish between provisions and reserves. 3. Supreme Court Precedents: - Century Spinning and Manufacturing Co Ltd. [1953] 24 ITR 499 (SC): Reserves precede dividend distribution. - Metal Box Company of India Ltd. v. Their Workmen, [1969] 73 ITR 53 (SC): Reserves are appropriations of profits, not meant to meet specific liabilities. Conclusion: The court concluded that the "dividend equalisation reserve" qualifies as a "reserve" under the Second Schedule of both the Super Profits Tax Act, 1963, and the Companies (Profits) Surtax Act, 1964. This classification is supported by accounting principles, statutory definitions, and judicial precedents. Judgment The court answered the questions in the affirmative, ruling in favor of the assessees. The dividend equalisation reserves are to be included in the capital computation for the purpose of calculating the standard deduction under the relevant tax laws. The assessees are entitled to their costs, with counsel's fee set at Rs. 500 for T.Cs. Nos. 287 and 289 of 1972.
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