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TMI Blog1971 (8) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... n for bonus, provision for taxation and provision for proposed dividends represented ' reserves' and were to be included in the computation of capital under the Super Profits Tax Act, 1963 ?" The assessee is a private limited company. During assessment proceedings under the Super Profits Tax Act, 1963, for the assessment year 1963-64 (the relevant previous year being the financial year ending March 31, 1963), the assessee claimed that the following three items of reserves should be considered while computing its capital investment. (a) provision for bonus Rs. 5,000 (b) provision for taxation Rs. 81,000 (c) provision for proposed dividends Rs. 52,500 The Income-tax Officer rejected the claim on the ground that these amounts were de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver is greater. The Second Schedule contains rules for computing the capital of a company for the purposes of super profits tax, and rule 1 declares : " Subject to the other provisions contained in this Schedule, the capital of a company shall be the sum of the amounts, as on the first day of the previous year relevant to the assessment year, of its paid up share capital and of its reserve, if any, created under the proviso (b) to clause (vib) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (11 of 1922), or under sub-section (3) of section 34 of the Income-tax Act,. 1961 (43 of 1961), and of its other reserves in so far as the amounts credited to such other reserves have not been allowed in computing its profits for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in Commissioner of Income-tax v. Century Spg. Mfg. Co. Ltd. considered a somewhat comparable provision of the Second Schedule to the Business Profits Tax Act, 1947. Rule 2(1) of that Schedule read: " Where the company is one to which rule 3 of Schedule I applies, its capital shall be the sum of the amounts of its paid-up share capital and of its reserves in so far as they have not been allowed in computing the profits of the company for the purposes of the Indian Income-tax Act, 1922. . .." The Supreme Court observed : " The term 'reserve' is not defined in the Act and we must resort to the ordinary natural meaning as understood in common parlance. The dictionary meaning of the word 'reserve' is : 1(a) To keep for future ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit and loss account may either declare a dividend to be paid to the shareholders or may appropriate the balance to a suspense account or to reserves. Before recommending any dividend it is open to the directors to set aside out of the profits of the company such sum as they might think proper as a reserve fund for acquiring property for the company or providing for payment of rent for meeting contingencies or for equalising dividends or for any other purpose of the company which they may think fit. " In Commissioner of Income-tax v. Vasantha Mills Ltd. the Madras High Court upheld the assessee's claim that a sum of Rs. 9,00,000 shown as provision made in the relevant year of account for the payment of income-tax and excess profits tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by way of a provision against future contingencies and a reserve is thus created, although after being carried to the reserve, the amount in question may be invested or re-employed in the business, if the articles so permit." Elaborating further, he said : " A reserve as I have endeavoured to explain is by its very nature a fund which is created and maintained for the purpose of being drawn upon in future. . . . A reserve is created only out of the whole or a part of the surplus profits as they are found to be in the hands of the company at the end of the year and it is a reserve against a contingency which still lies in the future." Our attention was drawn on behalf of the revenue to Aluminium Industries Ltd v. Commissioner of Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestioned that the provision was made by the requisite authority. An attempt has been made before us on behalf of the revenue to raise those questions, but we are unable to permit those points to be raised as they were not raised before the Tribunal. There is no dispute that the three items have actually been debited to the assessee's profit and loss account and that they have not been allowed as a deduction for the purposes of income-tax assessment. In our opinion, the provision for bonus, the provision for taxation and the provision for proposed dividends are entitled to be treated as " reserves " for the purposes of rule 1 of the Second Schedule to the Super Profits Tax Act, and they should be included in the computation of capital und ..... X X X X Extracts X X X X X X X X Extracts X X X X
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