1993 (2) TMI 7 - SC - Income Tax

Held that the provision made by the assessee in its books for meeting the anticipated liability of tax (under section 23A of the Indian Income-tax Act 1922) was indeed a provision and not a reserve - High Court was right in holding it to be a provision and not a reserve - hence should not be included in capital computation of assessee under rule I of the Second Schedule to the Super Profits Tax Act 1963

Summary

Issues:
1. Interpretation of whether a certain amount should be considered a provision or a reserve for the computation of capital under the Super Profits Tax Act, 1963.

Analysis:
The case involved an appeal by the assessee against the Gujarat High Court's judgment regarding the inclusion of certain amounts in the computation of capital under the Super Profits Tax Act, 1963. The main issue revolved around whether an amount set apart for contingent liability (taxation) should be considered a provision or a reserve. The assessee, a private limited company, had set aside a sum of Rs. 4,50,000 in its books to meet a taxation liability under section 23A of the Indian Income-tax Act, 1922. However, following a successful appeal in the East Punjab High Court, it was held that no action could be taken against the assessee under section 23A. The assessee argued that the amount should be treated as a reserve for the purposes of the Act. The Income-tax Officer disagreed, leading to an appeal before the Tribunal.

Subsequently, the Tribunal, considering a similar case for the assessment year 1964-65, held that the amount in question was a reserve. Following this decision, the Tribunal also allowed the appeal for the assessment year 1963-64. However, the High Court ruled in favor of the Revenue, stating that the amount constituted a provision, not a reserve, based on the distinction between the two concepts in commercial accountancy. The High Court relied on the decision in Metal Box Co. of India Limited v. Their Workmen [1969] 73 ITR 53, emphasizing that provisions are charges against profits while reserves are appropriations of profits retained as part of the capital employed in the business.

The Supreme Court, in its judgment, upheld the High Court's decision, stating that the provision made by the assessee for the anticipated tax liability was indeed a provision and not a reserve. The Court emphasized that the assessee's own characterization of the amount as a provision, coupled with the absence of it being set apart or appropriated as a reserve, supported the conclusion. Thus, the appeal was dismissed, and the Court affirmed the High Court's ruling that the amount in question should be treated as a provision, not a reserve, for the computation of capital under the Super Profits Tax Act, 1963.