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TMI Blog1985 (7) TMI 161X X X X Extracts X X X X X X X X Extracts X X X X ..... d development rebate reserve for the purpose of computing the chargeable profits of the company. Similarly, for computing the capital of the assessee for working out the statutory deduction the ITO deducted the balances in the contingency reserve account, foreign exchange fluctuation reserve account and development rebate reserve account. After, reducing the above amounts from the capital as shown by the assessee the standard deduction was computed. 3. The assessee filed an appeal before the Commissioner (Appeals). The contention of the assessee was both in respect of computation of chargeable profits as well as computation of capital. It was contended that for the purpose of chargeable profits, the amounts transferred to contingency reserve, the amount transferred to foreign exchange fluctuation reserve and amount transferred to development reserves should be deducted. For this purpose, reliance was placed on the decision of the Delhi High Court in the case of the assessee for the assessment year 1963-64. This case is reported in Addl. CIT v. Punjab National Bank [1983] 142 ITR 673 (Delhi). In that case a question arose whether contingency reserve was to be treated as a reserve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment of dividends within India, its income by way of any interest or fees for rendering technical services received from Government or a local authority or any Indian concern ; (xi) in the case of a banking company--- (a) any sum which during the previous year is transferred by it to a reserve fund under sub-section (1) of section 17 of the Banking Companies Act, 1949 (10 of 1949), or is deposited by it with the Reserve Bank of India under sub-clause (ii) of clause (b) of sub-section (2) of section 11 of that Act ; not exceeding the amount required under the aforesaid provisions to be so transferred or deposited, as the case may be, or (b) any sum transferred by it during the previous year to any reserves in India including reserves not shown as such in its published balance sheet insofar as the sums transferred to such reserves are attributable to income chargeable to tax under the Income-tax Act and have not been allowed as a deduction in computing its total income under that Act, and insofar as the aggregate of such sums does not exceed the highest of the aggregate of such sums, if any, so transferred during any one of the three years prior to the previous year, whiche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 590.82 lakhs transferred to the other reserves in this year, the assessee was entitled for a deduction of Rs. 534.78 lakhs which had been transferred to reserves in 1977. As the ITO had merely allowed a deduction of Rs. 85 lakhs in the computation of chargeable profits, the Commissioner (Appeals) directed that a further amount of Rs. 449.78 lakhs should be further deducted in computing the chargeable profits. 5. The Commissioner (Appeals) also considered the treatment of the balance in the contingency reserve, foreign exchange fluctuation reserve and development reserve as on1-1-1978in the computation of capital under the Second Schedule to the Act. Relying on the Delhi High Court's decision in the case of the assessee, the Commissioner (Appeals) held that the balances in these accounts had to be treated as interest and were forming part of the capital for working out the standard deduction. 6. Another question which came up for consideration before the Commissioner (Appeals) was regarding the deduction under rule 1(viii). This provides for the exclusion of income by way of dividends from an Indian company. The question was whether the amount of gross dividend was to be de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serves'. He contended that the language used was not 'any other reserves'. It was, therefore, submitted that the implied language should include the amount transferred to the statutory reserves also. On this interpretation, it was submitted that the deduction from the chargeable profits would come to Rs. 603.28 lakhs. 8. The departmental representative submitted that the language of the relevant rule was very clear and the two deductions were alternative to each other as the language was disjunctive. Relying on the order of the Commissioner (Appeals), it was submitted that the claim of the assessee that both could be allowed, ran contrary to the language and spirit of the provision. In this connection, it was submitted that the assessee's reliance on the Finance Minister's speech delivered in 1963 is not of much help and the language of the statute itself should be interpreted. It was, therefore, contended that the Commissioner (Appeals) was justified in directing the computation of chargeable profits in the manner that he did. 9. We have carefully considered the rival submissions and we have perused the provisions of the First Schedule. The language of rule 1(xi) provides for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal Bank's case. The question which arose for consideration was about the nature of the contingency reserve account and charity reserve account. While deciding this question, their Lordships observed that there was no known liability or contingency which could make this account as a provision. Their Lordships held that describing it as a contingency reserve could not make it a provision as the contingency was only a possible contingency. In respect of the charity reserve, it was held by the High Court that there was no existing liability and, therefore, it was a reserve. The question of the deduction under rule 1(xi)(a) or (b) did not as such arise either before the Tribunal or before the High Court. Even in the later years in the case of the assessee-company, this question has not arisen in this manner. We have looked into the directions given by the learned Commissioner (Appeals) and we find that he has ascertained as to which sum was higher of the two and he has directed that the higher amount should be deducted in computing the chargeable profits. The direction of the learned Commissioner (Appeals) is in accordance with law and we do not find any merit in the submission of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and loss account, a reserve is an appropriation of profit or assets by which it is represented is retained to form part of the capital employed in the business. The Supreme Court observed that the true nature and character of the appropriation must be determined with reference to the substance of the matter and surrounding circumstances have to be looked into for this purpose. Their Lordships laid down some guidelines as under : (a) The mass of contributed profit cannot automatically become a reserve. (b) There should be a clear conduct on the part of the directors to create a reserve. Where the amount is set apart for a specific liability, it is a provision and not a reserve. If a provision for known or existing liability is made in excess of the amount, that would be necessary for this purpose, the excess should be treated as a reserve. 12. Applying the above principles, we have no hesitation in upholding the order of the learned Commissioner (Appeals) that the contingency reserve, foreign exchange fluctuation reserve and development reserve were in the nature of reserves and amounts transferred to these reserves had to be deducted in computing the chargeable profits and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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