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TMI Blog1975 (2) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... m Industrial Finance Corpn. of India. 10,00,000 (2) Gratuity Reserve 85,000 The ITO did not consider these items as reserves for the purpose of computation of capital. On appeal, the AAC however found that the reserve regarding Rs. 10 lakhs was created out of taxable profits and it was a free reserve available for distribution. It was actually used for issue of bonus shares. He was satisfied that it was a reserve which has to be added to the capital base. The reserve for gratuity was also found to be of similar nature. The Department has now come on appeal before us. 3. With regard to the asst. yr. 1966-67, the only item to be considered is the reserve for the repayment of the loan from the Industrial Financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to by the ITO or the AAC. The assessee had entered into a negotiation with this Corporation for the purpose of finance as a result of which they were allowed a total loan of Rs. 30 lakhs. This was sanctioned some time in August, 1958 and it was paid in four monthly instalments. According to the terms of the contract, the assessee should repay Rs. 2-1/2 lakhs every years. We have to consider the position as at the beginning of the accounting year, i.e., 1st April, 1962 in respect of the appeal for 1963-64. By that time the assessee had repaid Rs. 7-1/2 lakhs and the outstanding amount to this creditor was Rs. 22-1/2. The company had created a reserve account in which certain moneys had been transferred by them out of the taxed profits. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ans was not from these funds and the ultimate use of the funds was also for an entirely different purpose. We therefore, conclude that this reserve has nothing to do with the repayment of the loan from I.F.C.I. Since this is a reserve created out of taxed profits by an appropriation approved by the shareholders it is in no way different from a general reserve. We therefore, think that the treatment given to this reserve should be exactly like any other reserves created by the company. 6. In the case of CIT vs. Periakaramalai Tea Produce Co. Ltd. 92 ITR 65 (Ker), the Kerala High Court after reviewing the decision on this point had summed up what a reserve is as follows :— "It appears to us in the light of what has been said by the Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st. yr. 1970-71, the reasoning given in the earlier para should be applicable and the reserves of Rs. 7-1/2 lakhs and Rs. 94,000 should be taken into account in the computation of the capital base. The AAC was influenced by the fact that certain amounts were due to these two creditors. But as we noted above, the amounts which have fallen due for repayment have not been repaid out of these two accounts. They had nothing to do with them. Therefore, the AAC would b in error in holding that a part of the reserve of I.F.C.I. and the entire reserve for repayment of I.C.I.C.I. is not in the nature of reserves. The assessee's appeal has to be partly allowed. 10. The learned Departmental Representative argued that the reserves were created for th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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