1972 (9) TMI 44 - HC - Income Tax

Super Profits Tax Act 1963 - Whether amounts provided for taxation gratuity and dividends are reserves or provision for the purpose of Super Profits Tax

Summary

Issues Involved:

1. Whether the provisions for taxation, retirement gratuity, and dividends can be treated as reserves for computing the capital for the purpose of super profits tax under the Second Schedule to the Super Profits Tax Act, 1963.

Issue-wise Detailed Analysis:

1. Provisions for Taxation, Retirement Gratuity, and Dividends as Reserves:

The primary issue is whether the amounts set aside for taxation (Rs. 33,68,360), retiring gratuity (Rs. 9,08,106), and dividends (Rs. 18,41,820) can be considered "reserves" under the Second Schedule of the Super Profits Tax Act, 1963. The Super Profits Tax Officer rejected the assessee's contention, classifying these amounts as current liabilities and provisions, not reserves. The Appellate Assistant Commissioner initially accepted the assessee's view, but the Income-tax Appellate Tribunal reversed this decision, agreeing with the department that these amounts did not qualify as reserves.

Legal Definitions and Accounting Principles:

The judgment delves into the definitions and distinctions between "reserves," "provisions," and "liabilities" as understood in both accounting principles and legal context. According to the Companies Act, 1956, a "reserve" is an amount set aside out of profits not meant to meet any known liability, whereas a "provision" is for known liabilities of uncertain amounts. The Supreme Court's interpretation in Metal Box Company of India Ltd. v. Their Workmen and other cases was cited to clarify these definitions.

Taxation Provisions:

The liability to pay income tax is considered a present liability, even if the exact amount is determined later. This makes the provision for taxation a "provision" and not a "reserve." This interpretation aligns with the Supreme Court's judgment in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax, which defined a debt as a present obligation to pay an ascertainable sum.

Retirement Gratuity:

The provision for retiring gratuity is also deemed a known liability, as it is a contractual obligation to pay employees upon retirement or death. Although the exact amount may vary, the liability itself is known, making it a "provision" rather than a "reserve."

Dividends:

Regarding dividends, the directors' recommendation to pay dividends creates a liability that shareholders can enforce once ratified. This recommendation earmarks the amount specifically for dividend payment, classifying it as a "provision" and not a "reserve."

Judicial Precedents:

The judgment references several cases, including Commissioner of Income-tax v. Century Spinning and Manufacturing Company Ltd., Indian Steel and Wire Products Ltd. v. Commissioner of Income-tax, and others, to support the distinction between reserves and provisions. These cases emphasize that the substance of the allocation, not just its terminology, determines its classification.

Conclusion:

The court concluded that the amounts set aside for taxation, retiring gratuity, and dividends are provisions, not reserves. Therefore, they cannot be included in the computation of the company's capital for super profits tax purposes. The question was answered in the negative, and the assessee was directed to pay the costs of the reference to the department, with an advocate's fee of Rs. 250.