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TMI Blog1973 (5) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... ional tax paid for 1961-62 3,93,851 ----------------- 5,02,358 ------------------ The provision for taxation as on March 31, 1961, was Rs. 2,91,493 as against the actual tax liability for 1961-62 of Rs. 2,85,343 leaving a surplus of Rs. 6,150. The appropriations towards gratuity were as under : Rs. Provision for gratuity as on 1-4-1961 2,20,181 Addition during the year 22,178 ------------------- 2,42,359 Less : Payments during the year 9,765 ------------------ 2,32,594 -------------------- In working out the capital base for the purpose of ascertaining the amount of standard deduction under the Super Profits Tax Act, 1963, the assessee included the following sums apart from the capital of Rs. 53,82,682 : Rs. Development rebate reserve 1,30,950 General reserves 33,104 Repairs and renewal reserve 1,55,174 Balance in the profit and loss account 9,761 Provision for taxation 3,27,643 Proposed dividend 5,23,604 Reserve for gratuity 2,32,595 The Super Profits Tax Officer considered the development rebate reserve and the general reserve as capital and rejected the claim in respect of the other items for the reason that they were merely provisions for specific liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r computing the capital of a company for the purpose of super profits tax. Rule 1 of that Schedule which comes up for consideration in this case is as follows: " 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 the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or the Income-tax Act, 1961 (43 of 1961), diminished by the amount by which the cost to it of the assets the income from which in accordance with clause (iii) or clause (vi) or clause (vii) of rule 1 of the First Schedule is not includible in its chargeable profits, exceeds the aggregate of : (i) any money borrowed by it which remains outstanding (ii) the amount of any fund, any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive of their nature. But, according to the assessee, the expression " other reserves " occurring in rule 1 will include any reserve not allowed in the computation of profits under the Income-tax Act, apart from the development reserve which is an allowable item under the Income-tax Act, and, therefore, the reserve need not be a tied up reserve, and a mere reserve or a provision will come under the word " reserve ". The Supreme Court in Commissioner of Income-tax v. Century Spinning and Manufacturing Co. considered a somewhat similar provision in rule 2(1) of Schedule 2 to the Business Profits Tax Act, 1947, which read : " Where the company is one to which clause (a) of 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. . . " Their Lordships of the Supreme Court observed, after referring to the various dictionary meanings of the word "reserve", that the item " reserve " is not defined in that Act, that, therefore, it must be given the ordinary natural meaning as understood in common ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts is removed from the immediate business of the company 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. " In Aluminium Industries Ltd v. Commissioner of Income-tax the Kerala High Court came to consider the meaning of the expression " reserve " in rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, with which we are concerned. The court applied the test propounded by the Supreme Court in Century Spinning and Manufacturing Cos. case holding that the considerations governing the question under the Super Profits Tax Act, 1963, were substantially the same as those under the Business Profits Tax Act, 1947, that in order to constitute a reserve, there must be a clear intention to show that it was either a general reserve or a specific reserve but that a mass of undistributed profits is not a reserve even though it is shown in the balance-sheet as a reserve. The decisions referred to above indicate that the term " reserve " means a sum specifically set apart for future use or for a specific occasion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility for gratuity to employees under industrial awards is deductible as a debt owed on the valuation date under the Wealth-tax Act, 1957, and it held that the liability of the assessee to pay gratuity to its employees on determination of employment was a mere contingent liability which arose only when the employment of the employee was determined by death, incapacity, retirement or resignation, that such a liability did not exist in praesenti and, therefore, could not be deducted as a debt in computing the net wealth of the assessee, nor can such a contingent and future liability be taken into account for computing the assets of the assessee under section 7(2)(a) of the Wealth-tax Act, 1957. In Commissioner of Income-tax v. Standard Vacuum Oil Co., the Supreme Court dealt with a case where amounts had been set apart as " earned surplus ". This sum did not, merge into the account of the subsequent year. It represented a specific account into which were added the net profits of the year and appropriations were made out of it and the balance was regarded as " earned surplus " at the end of the year. This account was specifically allocated for utilisation for the purpose of business y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision made for taxes. According to the assessee an excess or overshot provision is to be treated necessarily as a reserve, for the sum set apart is used for the business of the assessee and reference is also invited to the Circular No. 2-P(XV-6) dated 5th February, 1968, of the Central Board of Revenue which treats an excess provision as a reserve. That circular directs that an excess provision in the development rebate reserve account over and above the minimum statutory percentage should be taken to come under the words " other reserves " occurring in rule 1 of Schedule 2. In Commissioner of Income-tax v. Security Printers of India (P.) Ltd. , the term " reserve " in rule 1 of the Second Schedule to the Super Profits Tax Act was construed as a sum specifically kept apart for future use or application in a future contingency which is anticipated and provisions made for bonus, for taxation and for proposed dividends by a company were treated as " reserves ". In this case the question is limited as the assessee has claimed only the excess provision for tax as a reserve. We are definitely of the view that the sum of Rs. 6,150 which is an excess provision for taxation and which was av ..... X X X X Extracts X X X X X X X X Extracts X X X X
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