1985 (10) TMI 135 - AT - Income Tax

Summary

Issues Involved:

1. Whether the excess provision for income-tax can be considered as a reserve and deducted from chargeable profits under rule 1(xi)(b) of the First Schedule to the Companies (Profits) Surtax Act, 1964.
2. Whether the excess provision for income-tax can be included in the capital computation under rule 1(ii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Issue-wise Detailed Analysis:

1. Excess Provision for Income-Tax as Reserve:

The assessee claimed that the excess provision for income-tax of Rs. 96,53,305 should be deducted from chargeable profits under rule 1(xi)(b) of the First Schedule. The Commissioner (Appeals) held that this amount could not be considered as a reserve and thus could not be deducted from chargeable profits. This decision was based on the reasoning given in his orders for the assessment years 1976-77 and 1979-80, where he followed the Supreme Court's judgment in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT. The Commissioner (Appeals) argued that the Supreme Court's analogy regarding gratuity reserves did not extend to excess provisions for income-tax, which are considered provisions for a known and existing liability.

The Tribunal, however, noted that in the assessee's own case for the assessment year 1979-80, it had already been decided that the excess provision for tax constituted a 'reserve' in light of the Supreme Court's ratio in Vazir Sultan Tobacco Co. Ltd. The Tribunal adopted the reasons and conclusions from its previous order, emphasizing that the issue is dialectical, with the assessee viewing the excess provision as a secret reserve and the revenue opposing this view. The Tribunal concluded that the excess provision for tax should be treated as a 'reserve' for the purpose of rule 1(xi)(b) of the First Schedule.

2. Inclusion of Excess Provision in Capital Computation:

The assessee also claimed that the excess provision for tax should be included in the capital computation under rule 1(ii) of the Second Schedule. The Commissioner (Appeals) had held that since the excess provision was not considered a reserve, it could not be included in the capital computation. The Tribunal, however, noted that this issue was consequential to the finding that the excess provision for tax was a 'reserve' under rule 1(xi)(b) of the First Schedule.

The Tribunal referred to the chart filed by the assessee, showing various items of reserves for the assessment year 1980-81 and earlier years. It concluded that the excess provision for tax of Rs. 96,53,305 should be included in the capital computation under rule 1(ii) of the Second Schedule, consistent with the Supreme Court's ratio in Vazir Sultan Tobacco Co. Ltd. Although rule 1A of the Second Schedule provides for deducting shortfalls in tax provisions, the Tribunal held that excess provisions could be added to the capital computation by reading rule 1A and the Explanation together.

Conclusion:

The Tribunal reversed the orders of the authorities on these points, directing the ITO to allow the claims of the assessee. The appeal succeeded partly, with the Tribunal recognizing the excess provision for income-tax as a reserve deductible from chargeable profits and includable in the capital computation.