1975 (9) TMI 36 - HC - Income Tax

Issues Involved:

1. Whether the amounts designated as "provision for breakages and damages on sales" and "provision for contingencies and bonus" should be included in the capital computation for the purposes of super profits tax under the Super Profits Tax Act, 1963.
2. Whether the amounts designated as "reserve for breakages and damages" and "reserve for contingencies" should be included in the capital computation for the purposes of sur-tax under the Companies (Profits) Sur-tax Act, 1964.
3. Interpretation of the terms "provisions" and "reserves" under the relevant tax laws and their treatment in the context of the aforementioned Acts.
4. Examination of whether the observations made in Vazir Sultan Tobacco Co. Ltd. v. Commissioner of Income-tax conflict with the Supreme Court's decision in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax.

Issue-wise Detailed Analysis:

1. Inclusion of "Provision for Breakages and Damages on Sales" and "Provision for Contingencies and Bonus" in Capital Computation for Super Profits Tax:

The court examined whether the amounts designated as "provision for breakages and damages on sales" and "provision for contingencies and bonus" should be included in the capital computation for the purposes of super profits tax under the Super Profits Tax Act, 1963. The assessment year in question was 1963-64, corresponding to the previous year ending December 31, 1962. The amounts in question were Rs. 2,02,696 for "provision for breakages and damages on sales" and Rs. 1,00,000 for "provision for contingencies and bonus." The court noted that these amounts were shown under "current liabilities and provisions" in the company's balance sheet and were treated as provisions by the company itself. The court held that these amounts were provisions made against anticipated losses and contingencies and were not reserves. Therefore, they should not be included in the capital computation for super profits tax purposes.

2. Inclusion of "Reserve for Breakages and Damages" and "Reserve for Contingencies" in Capital Computation for Sur-tax:

The court also examined whether the amounts designated as "reserve for breakages and damages" and "reserve for contingencies" should be included in the capital computation for the purposes of sur-tax under the Companies (Profits) Sur-tax Act, 1964. The assessment year in question was 1965-66, corresponding to the previous year ending December 31, 1964. The amounts in question were Rs. 4,00,000 for "reserve for breakages and damages" and Rs. 5,00,000 for "reserve for contingencies." The court referred to Explanation 1 to rule (1) contained in the Second Schedule to the Companies (Profits) Sur-tax Act, 1964, which clarified that amounts standing to the credit of an account in the books of a company, which are in the nature of current liabilities and provisions, shall not be regarded as reserves for the purpose of computation of capital. The court held that these amounts were provisions and not reserves, and therefore, should not be included in the capital computation for sur-tax purposes.

3. Interpretation of "Provisions" and "Reserves":

The court referred to the definitions of "provisions" and "reserves" as provided in rule 7 in Part III of Schedule VI of the Companies Act, 1956. A provision is any amount retained to provide for any known liability of which the amount cannot be determined with substantial accuracy, while a reserve is an amount set aside out of profits not designed to meet a liability. The court also referred to various judgments, including the Supreme Court's decisions in Commissioner of Income-tax v. Century Spinning and Manufacturing Co. Ltd. and Metal Box Company of India Ltd. v. Their Workmen, to understand the distinction between provisions and reserves. The court concluded that the amounts in question were provisions and not reserves.

4. Examination of Conflict Between Vazir Sultan Tobacco Co. Ltd. v. Commissioner of Income-tax and Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax:

The court examined whether the observations made in Vazir Sultan Tobacco Co. Ltd. v. Commissioner of Income-tax conflicted with the Supreme Court's decision in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax. The court noted that the reference to Kesoram Industries in the Vazir Sultan case was a mistake and that the court was actually referring to Metal Box Company of India Ltd. v. Their Workmen. The court clarified that there was no conflict between the decisions and that the principles laid down in Metal Box Company were consistent with the observations made in Vazir Sultan. The court upheld the view that provisions for taxation, retirement gratuity, and dividends are provisions and not reserves.

Conclusion:

The court answered the questions referred to it in R.C. No. 34 of 1973 and R.C. No. 35 of 1973 against the assessee and in favor of the department. The amounts in question were held to be provisions and not reserves, and therefore, should not be included in the capital computation for the purposes of super profits tax and sur-tax. The court also found no conflict between the decisions in Vazir Sultan and Kesoram Industries. The respondent was entitled to costs, with an advocate's fee of Rs. 250 in each case.

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