1982 (5) TMI 74 - AT - Income Tax

Summary

Issues Involved:

1. Whether the debenture stock redemption reserve should be considered a reserve or a provision.
2. Whether the general reserve should be diminished by the proposed dividend amount.

Issue-Wise Detailed Analysis:

1. Debenture Stock Redemption Reserve:

The primary issue was whether the debenture stock redemption reserve of Rs. 24,00,000 created by the assessee should be considered a reserve or a provision. The Commissioner contended that the debenture stock redemption reserve was a provision and not a reserve, thus it should not be included in the capital base for statutory deduction purposes. The Commissioner argued that the reserve was created to meet a known liability, i.e., the redemption of debentures, and therefore, it should be treated as a provision.

The assessee's representative countered by stating that the debenture stock redemption reserve was not specifically represented by earmarked investments and thus could not be treated as a sinking fund. They argued that the reserve was created out of the appropriation of profits and not out of the profit and loss account, meaning it was a reserve and not a provision. The representative cited the Supreme Court decision in Vazir Sultan Tobacco Co. Ltd. v. CIT, which distinguished between a reserve and a provision, arguing that the debenture stock redemption reserve should be considered a reserve.

The Tribunal examined the principles of accountancy and the guidelines from the Supreme Court decision in Vazir Sultan Tobacco Co. Ltd. The Tribunal concluded that the debenture stock redemption reserve created by the assessee was indeed a reserve based on several factors:
- It was recommended by the Directors in their report.
- It was created out of the surplus profit of the assessee.
- It appeared in the Profit and Loss Appropriation Account and not in the Profit and Loss Account.
- It did not diminish the assets of the assessee and was shown under 'Reserve and Surplus' in the Balance Sheet.
- It did not create any charge on the profit, and the reserve created was not an allowable deduction.

The Tribunal also referred to the decision in Addl. CIT v. Bharat Fritz Werner (P.) Ltd., where a similar reserve was considered part of the capital base. Consequently, the Tribunal held that the ITO was justified in not excluding the sum of Rs. 24,00,000 from the capital base, and the Commissioner's order on this issue was reversed.

2. General Reserve and Proposed Dividend:

The second issue was whether the general reserve should be reduced by the proposed dividend of Rs. 24,32,250 for the year 1973. The Commissioner argued that the ITO's inclusion of this amount in the capital base was erroneous, citing the Supreme Court decision in Vazir Sultan Tobacco Co. Ltd., which stated that amounts set aside for dividends should not be considered part of the reserve for capital computation purposes.

The Tribunal agreed with the Commissioner on this issue, maintaining that the proposed dividend amount should be excluded from the capital base. Consequently, the action of the Commissioner on this issue was upheld.

Conclusion:

The Tribunal's decision resulted in a partial allowance of the appeals. The order of the Commissioner was maintained regarding the exclusion of the proposed dividend of Rs. 24,32,250 from the capital base. However, the Tribunal reversed the Commissioner's direction to exclude the debenture stock redemption reserve of Rs. 24,00,000 from the capital base, thus maintaining the original order of the ITO on this issue.