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TMI Blog1985 (10) TMI 135X X X X Extracts X X X X X X X X Extracts X X X X ..... erve for the purpose of computation of capital under rule 1(ii) of the Second Schedule to the Act. In the grounds, the assessee claims that the excess amount of provision for income-tax over and above the actual liability is reserve in the light of ratio of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 and that amount having not been allowed as deduction in income-tax assessment for the year 1979-80 should have been deducted from chargeable profits as well as included in the capital computation for the assessment year 1980-81. 2. In the assessment for the assessment year 1980-81, the assessee claimed, inter alia, in the revised return that the excess provision for income-tax of Rs. 96,53,305 should be deducted from chargeable profits. According to the ITO, the tax payable for the current year 1978 relevant for the assessment year 1979-80 as per modification order dated 4-1-1983 was Rs. 3,29,37,695 of which the assessee paid Rs. 2,33,00,051 and the balance of Rs. 96,37,644 was payable. Therefore, he concluded that the claim of excess provision for the calendar year 1978 could not be accepted. In this view of the matter, the ITO held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a corollary to his decision, namely, the excess provision for tax was not a reserve for the purpose of rule 1(xi)(b) of the First Schedule, he consequently held that it could not be included for the purpose of computation of capital under rule 1(ii) of the Second Schedule. Hence, the appeal by the assessee. 5. The learned representative of the assessee besides reiterating the grounds which survived for consideration maintained that rule 1(xi)(b) of the First Schedule permits deduction from chargeable profits any sum transferred to the reserve which sum is attributable to the income chargeable to tax but is not allowed as a deduction. According to him, the assessee made a provision of Rs. 4,25,91,000 for tax for 1979-80 but the actual was Rs. 3,29,37,695 resulting in excess, provision of Rs. 96,53,305 as on 1-1-1979 which is the first day of the accounting year relevant to the assessment year 1980-81. This excess, he maintained, of course, relying upon the decision of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. constituted 'reserve' and as such became eligible for deduction from chargeable profits under rule 1(xi)(b) of the First Schedule. For this proposition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computation did not arise at all. Factually, the ITO had demonstrated that there was no case of excess provision but, on the other hand, the assessee was to pay balance of Rs. 96,37,644 to the department towards tax. In view of these circumstances, he pointed out that the issue assumed greater significance and it was essential to go into the question whether in fact there was excess provision at all or not in the assessment year 1979-80 and whether the excess provision would constitute reserve for the purpose of computation of chargeable profits and capital computation. Relying on the findings given by the ITO and the Commissioner (Appeals) in this regard, he urged that there was no excess provision at all. Even if there was an excess provision, the assessee was bound to get the benefit only for Rs. 14,70,021 which pertains to the assessment year 1980-81 and not Rs. 96,53,305. Regarding the assessee's claim for including the excess provision for tax in the capital computation, he referred to rule 1A of the Second Schedule to the Act and pointed out that in the case of any shortfall in the provision of taxes or proposed dividends, such shortfall is to be deducted from the capital co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 1979-80 and the Tribunal did consider the issue in extenso with reference to the applicability of the ratio of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. to the excess provision for tax and came to the conclusion that in the light of the ratio of the Supreme Court, it constituted 'reserve'. On our part, we adopt the reasons and conclusions drawn by the Tribunal in paragraphs 4 to 9 of its order in the assessment year 1979-80 for this year also, inasmuch as similar contentions were also raised on behalf of the department in that year. However, we wish to observe that the issue is highly dialectical in nature. While the assessee claimed excess provision for tax was in the nature of secret reserve, the revenue opposed the claim stating that such provision was not transferred to 'reserve'. Thus, there is thesis and antethesis, and therefore, the issue is to be resolved by synthesis. In our view the ratio of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. insofar as it is applicable to the excess provision for tax made in the account by the assessee partakes the nature of reserve or secret reserve as styled by the assessee and, therefore, it shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder rule 1A of the Second Schedule there is provision for deducting for any shortfall in the provision for tax and there is no specific provision for including excess provision in the capital computation, nonetheless by reading both the rule 1A of the Second Schedule and Explanation together, such excess provision could be added to the capital computed under rule 1(ii) of the Second Schedule, inasmuch as, the Explanation gives clear indication that in respect of proposed dividend, the reasonable amount is specified to be the amount of dividend declared or made by the company on or after the first-day of the previous year relevant to the assessment year for the previous year immediately preceding the first mentioned previous year and there is provision regarding what is considered to be reasonable amount of provision for taxation in terms of rule 1A of the Second Schedule. Thus, on the facts and in the circumstances of the case, there are merits in the grounds taken by the assessee and, therefore, we are inclined to accept them. In this view of the matter, therefore, we reverse the orders of the authorities on these points only and direct the ITO to allow the claims of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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