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TMI Blog1992 (10) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... e purpose of determining the super profits tax payable under the provisions of the Super Profits Tax Act, 1963, the Income-tax Officer computed the capital of the respondent-company under the Second Schedule to the Super Profits Tax Act, 1963. In so computing the capital, the Income-tax Officer excluded (1 ) provision for taxation amounting to Rs. 8,40,514, and (2) the proposed dividend of Rs. 4,46,875. The Income-tax Officer also disallowed the claim of the assessee for adding a sum of Rs. 52,567 to the capital base of the company on the footing that it was a reserve. The amount of Rs. 52,567 was the excess of book depreciation written off by the assessee in its profit and loss account over the depreciation which was allowed to the assessee under the Income-tax Act, 1961. In respect of this excess depreciation, the Tribunal has stated that the assessee had debited a larger amount of depreciation to the profit and loss account and had adjusted the value of its fixed assets as shown in the schedule to the balance-sheet accordingly, thus reducing its profit as per its profit and loss account and its reserves and surplus appearing in the balance-sheet. The Income-tax Officer, however, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the Companies (Profits) Surtax Act, 1964. While considering rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, which is similar to the Second Schedule to the Companies (Profits) Surtax Act, 1964, the Supreme Court in Vazir Sultan Tobacco Co. Ltd.'s case [1981] 132 ITR 559 said that though the expression "reserve" is not defined, since it occurs in taxing statutes and is applicable to companies only and to no other assessable entities, the expression has to be understood in its popular sense, that is to say, the sense or meaning that is attributed to it by men of business, trade and commerce and by persons interested in or dealing with companies. Therefore, the meanings attached to the words "reserve" and "provision" in the Companies Act, 1956, dealing with the preparation of the balance-sheet and the profit and loss account would govern their construction for the purposes of the Super Profits Tax Act or the Companies (Profits) Surtax Act. In its oft-quoted passage, the Supreme Court has said (headnote): "The broad distinction between the two is that whereas a 'Provision' is a charge against the profits to be taken into account against gross receipts in the profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opriation made by the board of directors by way of recommending a payment of dividend cannot, in the nature of things, be a reserve and the concerned amounts so set apart would have to be excluded from the capital computation. In view of the above position, as far as question No. 1 is concerned, the provision for taxation, in so far as it covers the existing liability of the company is a "provision" and not a "reserve". It would not, therefore, be includible in the capital computation. Any excess amount, however, can be treated as a reserve and would qualify for the purpose of being added to the capital base of the company. The Tribunal is directed to work out the amounts accordingly. As far as the proposed dividend is concerned, it does not fall in the category of a "reserve" and cannot be included in the capital base of the assessee-company for the purposes of the Super Profits Tax Act, 1963. Question No. 2 deals with excess depreciation. The assessee had debited a larger amount of depreciation to the profit and loss account consequently reducing its profits in the profit and loss account and its reserves and surplus in the balance-sheet. The assessee adjusted the value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in arriving at the value of fixed assets". Part I-B of Schedule VI sets out the vertical form of the balance-sheet. It also requires fixed assets to be shown as (a) gross block, (b) less depreciation, (c) net block, and (d) capital work-in-progress. This clearly goes to show that the company is required to show in the balance-sheet the value of its fixed assets in the manner so prescribed including the quantum of depreciation provided by the company. Part III of Schedule VI is headed "Interpretation: 7. (1) For the purposes of Parts I and II of this Schedule, unless the context otherwise requires, (a) the expression 'provision' shall, subject to sub-clause (2) of this clause, mean any amount written off or retained by way of providing for depreciation ; . . (b) the expression 'reserve' shall not, subject as aforesaid, include any amount written off or retained by way of providing for depreciation.... (2) Where (a) any amount written off or retained by way of providing for depreciation. . . . ; or (b) any amount retained by way of providing for any known liability ; is in excess of the amount, which in the opinion of the directors is reasonably necessary for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The amount of depreciation which is shown in the profit and loss account is a provision. There is no dispute on this question. The only dispute is in relation to the excess amount of depreciation so shown and the provision so made. For reasons set out earlier, excess provision so made is to be treated as a reserve. Our attention was also invited to a decision of the Madras High Court in the case of United Nilgiri Tea Estates Co. Ltd. v. CIT [1974] 96 ITR 734. In that case, the Madras High Court was, inter alia, concerned with a similar case and it held that the amount at the credit of the depreciation reserve account in excess of the amount allowed for tax purposes stands on the same footing as excess provision for development rebate and hence it will have to be treated as a reserve for the purposes of the Super Profits Tax Act, 1963. In the subsequent case of CIT v. English Electric Co. of India Ltd. [1985] 151 ITR 116, the Madras High Court, inter alia, held that the depreciation claimed by the assessee in excess of the amount allowable under the Income-tax Act had to be taken as excess provision for depreciation. This was to be taken note of as a reserve in the computation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be expended but it is to be retained for future use. Hence, such excess provision amounts to a reserve within the meaning of rule 1 of Schedule II of the Super Profits Tax Act, 1963, and can be included in the computation of capital for purposes of the Super Profits Tax Act. Dr. Balasubramanian, however, drew our attention to two judgments of this High Court, one being in the case of CIT v. Zenith Steel Pipes Ltd. 1990] 181 ITR 291 and the other being in the case of CIT v. Indian Dyestuff Industries Ltd. [1991] 191 ITR 168. In the former case, the assessee had claimed in its books an amount of depreciation which was less than what was allowed under the provisions of the Income-tax Act. The assessee transferred the amount representing the difference between the depreciation claimed in the returns and the depreciation debited in the books, from its general reserves to general reserve account No. 1. This amount was, in the subsequent assessment years, capitalised for the issue of bonus shares. For the assessment year 1967-68, in which year the amount was not so capitalised, the court said that the difference between the depreciation actually allowed to the assessee and the depreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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