1971 (12) TMI 27 - HC - Income Tax

Whether, on the facts and in the circumstances of the case, it was rightly held that, (1) proposed dividends, (2) provision for taxation, (3) credit balance of profit and loss account, (4) depreciation reserve (being excess of book depreciation over depreciation allowed in the income-tax assessment) represented reserves and were to be included in the computation of capital under the Super Profits Tax Act, 1963

Issues Involved:
1. Proposed dividends
2. Provision for taxation
3. Credit balance of profit and loss account
4. Depreciation reserve (excess of book depreciation over depreciation allowed in income-tax assessment)

Detailed Analysis:

1. Proposed Dividends:
The court held that the item of Rs. 4,17,500 representing proposed dividends cannot be treated as a reserve. The board of directors of the assessee made a proposal to the shareholders that the amount be distributed as dividends and made a provision for that amount in the balance-sheet of the year ending December 31, 1961. The amount was earmarked for payment of dividends and was not treated by the directors as a reserve. The court referenced the rule laid down in Century Spinning & Manufacturing Co. Ltd., stating that the amount remained a mass of undistributed profits liable to be distributed as dividends upon the acceptance of the recommendation by the shareholders. It was not set apart as a reserve for any purpose and, therefore, could not be treated on January 1, 1962, as a reserve for the purposes of Schedule II, rule 1 of the Super Profits Tax Act.

2. Provision for Taxation:
The item of Rs. 19,16,028 shown as provision for taxation consists of Rs. 12,41,028 representing the provision for taxation during the preceding accounting year and Rs. 6,75,000 representing the provision made during the year. The provision was made for taxation in anticipation of quantification of the tax liability. It was a provision, not a reserve, made for a current liability, the liability having already accrued when the income was earned and awaited merely quantification by assessment. It was not a reserve because it was designed to meet a liability known to exist on the date of the balance-sheet. Consequently, the item representing provision for taxation cannot be treated as a reserve for the purpose of the Super Profits Tax Act.

3. Credit Balance of Profit and Loss Account:
The third item of Rs. 12,679 represents the credit balance of the profit and loss account. There is nothing to show that this credit balance was set apart by the assessee for some future use. The position is similar to that which obtained before the Calcutta High Court in Indian Steel & Wire Products Ltd., where it was held that an unappropriated balance shown in the balance-sheet carried forward to the next year would not constitute a reserve because the manner of its disposal or its destiny had not been indicated by the assessee. Therefore, this item cannot be described as a reserve.

4. Depreciation Reserve:
The last item, Rs. 2,23,185, described as a depreciation reserve, is the excess of book depreciation over the income-tax allowed depreciation. It is sometimes described as a "secret reserve." In the absence of any evidence to show that this amount was set apart for future use, the court, having regard to the test laid down by the Supreme Court, cannot treat this item as a reserve. Despite references to authoritative texts on accountancy, the court was bound by the Supreme Court's rulings to hold that this is not a reserve.

Conclusion:
The court concluded that the four items-proposed dividends, provision for taxation, credit balance of profit and loss account, and depreciation reserve-do not represent "reserves" and cannot be included in the computation of capital under the Super Profits Tax Act, 1963. The question referred was answered in the negative. The Commissioner of Income-tax was entitled to costs assessed at Rs. 200, with counsel's fee assessed in the same figure.

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