1986 (7) TMI 86 - SC - Income Tax

Whether the provision for additional cane price amounting to ₹ 8,16,000 was rightly treated as a reserve forming part of the assessee s capital for the purposes of assessment to super profits tax for the year under consideration ? Held that - In the present case, when the evidence clearly discloses that there was no liability at all on the assessee requiring it to set apart a sum as charge against its profits and there was never any intention to make payments to the cane growers nor was any payment ever made, but, on the contrary, the assessee reversed the entries in a subsequent year in its books, it is apparent that the amount cannot be described as a provision . It can only be described as a reserve . It was part of the capital which fell for computation under rule I of the Second Schedule. Appeal dismissed.

Summary

Issues:
Interpretation of the expression "reserves" in the Second Schedule to the Super Profits Tax Act, 1963.

Analysis:
The case involved an appeal against the judgment of the High Court of Allahabad regarding the meaning of "reserves" under the Super Profits Tax Act, 1963. The assessee had debited amounts to its profit and loss accounts for liability towards additional cane price payable to cane growers. The Appellate Tribunal considered the liability unreal and imaginary, categorizing it as a "reserve" rather than a "provision." The High Court affirmed this view, leading to the appeal in the Supreme Court.

The Supreme Court analyzed the concept of "reserves" in the context of the Super Profits Tax Act and the Companies Act. Referring to previous decisions, the court distinguished between "provisions" and "reserves." Provisions are charges against profits for anticipated losses, while reserves are appropriations of profits retained as part of the capital. The court emphasized that the true nature of the sum retained determines whether it is a provision or a reserve, irrespective of how it is described in the balance sheet.

In this case, the court found that the amount debited by the assessee did not represent a liability as no payments were made to cane growers, and the entries were reversed in subsequent years. Therefore, the amount was deemed a "reserve" forming part of the capital under the Second Schedule. The court dismissed the appeal, upholding the High Court's decision that the provision for additional cane price should be treated as a reserve for the purpose of super profits tax assessment.

In conclusion, the Supreme Court affirmed that the amount in question qualified as a reserve rather than a provision, as it did not represent a genuine liability but was retained as part of the capital. The court's decision aligned with the interpretation of "reserves" under the Super Profits Tax Act, emphasizing the distinction between provisions and reserves in commercial accountancy.