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TMI Blog1991 (8) TMI 164X X X X Extracts X X X X X X X X Extracts X X X X ..... nation, he found that the capital base had been wrongly determined by the Assessing Officer. According to the CIT, the error arose this way: In its accounts relating to the accounting year ending on 3 1-3-1978, the assessee had made a provision for taxation in a sum of Rs. 1,08,00,000. The Assessing Officer had computed the capital base, inter alia, on the basis of the said figure. The actual tax liability of the assessee, however, came to Rs. 1, 16,40,276. Had the latter figure been taken into reckoning, the capital base of the assessee would have shrunk by a sum of Rs. 8,40,276 (Rs. 1,16,40,276 - Rs. 1,08,00,000) and the sur-tax payable by the assessee would have gone up pro tanto. The CIT, therefore, concluded that the impugned sur-tax a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovision for taxation actually made by the assessee was made on a reasonable basis. He, therefore, urged that the assessee is entitled to succeed. 5. Shri K.L. Tilakchand, the learned departmental representative, strongly supported the impugned order of the CIT (Appeals). 6. On hearing the rival submissions, we consider that the assessee is entitled to succeed. 7. The Income-tax Act imposes a charge on the total income of the assessee. On its part, the Companies (Profits) Sur-tax Act, 1964, levies an additional tax on the total income of a company in the manner stipulated by the Act. Sur-tax is levied basically on the excess of the chargeable profits over the statutory deduction. The First Schedule to the Act contains the Rules for com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Surtax Act does not contain any definition of the term "Reserve". Secondly even the Companies Act, 1956 contains a negative definition of the said term. Thirdly, there is the anxiety of the tax-payer to enlarge the capital base by bringing under its pale as many items as possible under the heading "Reserves". Fourthly, the question whether a particular sum set apart by the company is a 'provision' or a 'reserve' was a bone of contention till the Supreme Court handed down its decision in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 FM 559. 10. Particularly, as respects provision for taxation and provision for proposed dividends, the legislative intent was that they are provisions simpliciter, and not a reserve and that conse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision of Rs. 108 lakhs made for taxation was made on a reasonable basis. It is elementary that provision for taxation is made on the basis of book profits. For a fact, given the book profits, quantification of the provision to be made towards taxation is a simple arithmetical exercise. Even so, there may be cases where the book profits themselves had not been arrived at on the basis of well accepted accounting principles. For example, a company might claim depreciation on land ; or again it may charge to revenue account an expenditure which is clearly capital in nature. It is in such cases that the test of reasonableness is to be applied and it must be held that deflating of book profits by such devices and the resultant shortfall in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le deduction. The line taken by the Supreme Court in the latter case was that, in so far as the tax pertains to business assets, the distinction that the company could not be said to be paying the tax in its capacity as a trader was not well founded. Immediately thereafter the President promulgated the Income-tax (Amendment) Ordinance, 1972, which was replaced later by the Income-tax (Amendment) Act, 1972, which inserted with retrospective effect from 1-4-1962 sub-section (iia) into section 40(a), the result of the retrospective amendment being to bring the legal position in conformity with the Supreme Court decision in the case of Travancore Titanium Products Ltd. 14. Now, if during the subsistence of such a controversy, the assessee-compa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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