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TMI Blog1982 (4) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... investments totalling Rs. 20 lakhs written off in the years 1957 to 1961 which did not appear in the balance-sheets for the previous years was placed and as such we did not have the advantage of considering the submissions on behalf of the parties in respect of the same. We, therefore, decline to deal with these aspects and would not answer the question relating to these two items. The assessee is a limited company and this reference relates to the assessment years 1963-64, 1964-65 and 1965-66. The assessee claimed before the ITO that in working out the super profits tax liability for the assessment year 1963-64 and the surtax liability for the assessment years 1964-65 and 1965-66, the goodwill amounting to Rs. 39,63,686, written off in the accounts for the year ending on 31 St December, 1956, should be included in the capital computation. The ITO, however, did not accept the claim of the assessee-company. It would be relevant to refer to certain portions of the order of the ITO, wherein he, dealing with those two items, inter alia, observed as follows: " The balance-sheet of the company for the year does not show the existence of such reserves. There is no provision in the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance company or a banking company or a company engaged in the generation or supply of electricity or any other class of companies which are governed by an Act governing such class of companies. It, therefore, follows that the state of affairs reflected by the balance-sheet of the assessee-company must be a true and fair view of the state of affairs as at the end of the year to which it relates. It automatically follows, therefore, that if the assessee claims that the value of the assets as shown in the balance-sheet was not a true value of the assets, the onus was on the assessee to prove the claim which in the instant case has not been done. On the other hand, we find from Schedule 'G' of the balance-sheet of the assessee-company as on 31st December, 1961, i.e., after the write-off of the investment reserve and investments written off, that the value of the quoted investments according to the market value was Rs. 95,37,444 and according to the book value was Rs. 94,01,389, which clearly goes to show that the book value of the assets shown in the balance-sheet was almost the same as the market value. It has also not been shown to us in spite of the contentions of the learned depart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs with the profit and loss account surplus and we have to take accounts as they stand. Taking all these facts into consideration we are of the view that the Revenue authorities rightly did not accept the claim of the assessee-company that the goodwill written off, investment written off and investment reserve written off should be included in the capital computation. The order of the AAC on the point, therefore, appears to be correct and is confirmed. " Upon these, the question as indicated above, has been referred to this court. The main contention urged on behalf of the assessee, before us, was that in this case indisputably the company had acquired goodwill on payment of certain sums of money amounting to Rs. 39 lakhs. It was not case of the company generating its own goodwill or building up its own reputation year by year. It was further contended that it was nobody's case that the company had suffered such loss of reputation or had lost its goodwill. It was, therefore, submitted that the goodwill, as an asset, when it was shown in the previous year, was there, and a value was given to that asset. That value was written off but the value of that asset remained in the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, went on to observe that the expression " reserve " had not been defined in the S.P.T. Act, 1963, or the C. (P.) S. T. Act, 1964. The dictionaries, according to the Supreme Court, did not make any distinction between the two concepts " reserve " and " provision " while giving their primary meanings whereas in the context of those Acts a clear distinction between the two was implied. Though the expression " reserve " was not defined, according to the Supreme Court, since it occurred in the taxing statutes applicable to companies only and to no other assessable entities, the Supreme Court was of the view that the expression had to be understood in its popular sense, viz., in the sense or meaning that was attributed to it by men of business, trade and commerce and by persons interested in or dealing with companies. Therefore, according to the Supreme Court, the meaning 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 purpose of the two enactments. The broad distinction between these two was that whereas " provision " was a charge aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being gathered from the surrounding circumstances. The following aspects provided some guidelines, viz., (a) a mass of undistributed profits could not automatically become a reserve and somebody possessing the requisite authority must clearly indicate that a portion thereof had been earmarked or separated from the general mass of profits with a view to constituting it either a general reserve or a specific reserve, (b) the surrounding circumstances should make it apparent that the amount so earmarked or set apart was, in fact, a reserve to be utilised in future for a specific purpose and on a specific occasion, and (c) a clear conduct on the part of the directors in setting apart a sum from out of the mass of undistributed profits avowedly for the purpose of distribution as dividend in the same year would run counter to any intention of making that amount reserve. The Supreme Court, in this connection, followed the principles laid down in the case of CIT v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499 (SC). The Supreme Court further observed that an amount set apart by the board of directors of a company for liability to taxation in respect of the profits which ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ression " written off " is not clear on the true intention of the persons capable of deciding for the company, as to what purpose this amount was being written off and transferred to the P L a/c. It is true, as was contended on behalf of the assessee, that it was not a reasonable view to take that the company had lost its goodwill and that was why the goodwill was written off. Even assuming that the company had the goodwill and the value of it did not depreciate but remained the same, the purpose of transferring the value of the tangible assets to the P L a/c and keeping it for the purpose of user in the future is not manifest. No inference can be drawn from the fact that this sum was available for future use and/or was kept for the purpose of future use by the company. If that is not there, then looking at the substance of the matter, in our opinion, on the basis of the principles laid down by the Supreme Court, it is difficult to accept that this sum was treated or kept for user in future by the board of directors or by the persons who were capable of making decision on behalf of the company and as such entitled to be taken into the capital computation on the relevant date. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AC, are not evident before us and it was the assessee, who was claiming this amount to be so included, who has to prove them. We may also observe that according to one view-view of Frank H. Jones in his book Guide to Company Balance-Sheets and Profit Loss Account, 8th edn., p. 150, goodwill was normally disposable only when the business as a whole was sold. The author noted, apart from nationalisation or the absorption of a company in group, this eventuality was improbable except in the event of financial crisis, when the asset would have little or no value. It may be argued from one point of view that goodwill is an intangible asset, the value of which could never form part of a reserve in the sense that the value or the sum represented by the goodwill would be available to the company for the future purpose of its business, because, so long as the company is going concern, and is existing, its goodwill has a value and that sum would not be available to the company for the purpose of its user. But it is not necessary for us to actually decide this aspect of the matter. Reliance was placed on behalf of the assessee on a decision of the Chancery Division in the case of Stapley. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s was shown in that case to be a sum of not less than pounds 40,000. The learned judge's decision proceeded on the basis that it was shown that there was this asset and, therefore, there was this value. This case was discussed in the book Guide to Company Balance-Sheets and Profit Loss Account by Mr. Frank H. Jones as we have mentioned hereinafter. After setting out the facts the author noted that Mr. Justice Russell in refusing the injunction expressed the view that the P L a/c need not be treated as a continuous account in such a manner that no dividend can be declared out of one year's profits until any debit to profit and loss in respect of prior years is made good. If pounds 40,000 had been carried to reserve it could have been subsequently distributed as dividend. It made no difference that the company instead of carrying the sum to reserve had utilised it to write down goodwill. The shareholders had approved the directors' previous report and the proposal but they had not bound themselves to give up their claims to the profits that had been carried to reserve and employed to write off goodwill. In brief, these profits had not been permanently capitalised. The principle l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been valued at below the market value for the obvious purpose of creating secret reserves. As has been pointed out earlier, in the books of account the mode by which the said figure of Rs. 76,58,687 has been shown to have been arrived at is by working out the difference between the market value of the securities and shares which is shown as Rs. 23,00,71,555.37 and the market value of the investments which is shown as Rs. 22,24,12,868,18 (which is the figure which is shown as the total value of the items mentioned in the said Entry No. 4). The figure of Rs. 76,58,687.19 is shown in the books of account as standing to the credit of the account which is called the premium and discount account. This figure, as stated earlier, reflects the balance after the sale of shares and securities. It is because the assessee-company has stated the amount standing to the credit of the said account, that the company is impelled to show the value of its total investments in securities and shares less by the said amount. That is the purpose and the role which this amount, which is otherwise called secret reserves, serves in the balance of the accounts of the company as reflected in the published ..... X X X X Extracts X X X X X X X X Extracts X X X X
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