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TMI Blog1980 (11) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... ining to trade marks), was a 'reserve' within rule I of the Second Schedule to the Super Profits Tax Act, 1963 ? The facts giving rise to this reference are as follows : (a) The assessee is a limited company. For the assessment year 1963-64, with which we are concerned in this reference, the relevant previous year was the year ending on 30th June, 1962, in respect of the computation of its capital as on 1st July, 1961, as per r. 1 of the Second Schedule to the said Act. The assessee claimed that the following amounts should be included in the said capital : (1) Provision for additional customs duty in the sum of Rs. 10,50,385, (2) Provision for taxation in the sum of Rs. 1,01,69,824, and (3) Provision towards depreciation of certain trademarks in the sum of Rs. 1,07,50,000. It appears that there were some disputes between the assessee and the Customs authorities in respect of the levy of customs duty on certain goods imported by the assessee. Provisional assessments were made by the Customs authorities on the assessee. The assessee did not pay the amounts payable under the said provisional assessments, but set aside certain lump sums from year to year. At the end of the assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,000 represented the provision towards diminution in the value of the trademarks and it was in no way different from the provision made for depreciation in respect of the other assets, and hence the said sum could not be said to be a reserve. It is from this decision of the Tribunal that the aforesaid three questions have been referred to us for determination. Before going into the contentions of the parties it would be useful to refer to certain relevant statutory provisions. Section 4 of the said Act is the charging section and imposes a tax in respect of chargeable profits. Clause (5) of s. 2 defines the expression " chargeable profits " as the total income of an assessee computed under the I.T. Act, 1961, for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule. Clause (9) of s. 2 defines " standard deduction " as follows: "'Standard deduction means an amount equal to six per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of fifty thousand rupees, whichever is greater." There are two provisions to this clause which are not material for o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the Supreme Court regarding what could be considered as a " reserve " which would have to be added back while working out the gross profit of a company under the Second Schedule to the Payment of Bonus Act, 1965. The appellant-company had sought to deduct a certain sum, which represented the estimated liability of the company under two gratuity schemes framed by it, from the gross receipts in the profit and loss account. This estimated liability bad been worked out on the basis of the actuarial valuation and the company bad made provision for such liability spread over a number of years. The contention of Mr. Chari, who represented the respondents, namely, the workmen of the company, was that the only amount which could be debited from the gross profits shown under the P L a/c. was the amount actually paid by the company and it was not entitled to debit in that account any amount worked out by it as its estimated liability. One of the questions which arose before the Supreme Court was whether such an appropriation by the company amounted to a reserve or a provision and, if it was reserve, it had to be added back while computing the gross profits. In this regard, the Suprem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Second Schedule to the said Act, that before any amount or sum qualifies for inclusion in the capital computation of a company the amount or sum must be a " reserve ". On a consideration of the definitions of the expressions " provision " and " reserve " in cl. 7(1)(a) of Pt. III of Sch. VI to the Companies Act and the decision of the Supreme Court in the case of Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53; 39 Comp Cas 410 (SC), it is clear that where an amount is set aside out of profits and other surpluses to provide for any known liability of which the amount cannot be determined with substantial accuracy, the same is provision; but if the amount so set aside is not designed to meet a liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance-sheet, it will be a reserve. Applying this test, it was held that the amount set aside on account of the provision for taxation from the gross profits of the company would have to be regarded as a provision and not as a reserve. It was pointed out that, the balancesheet of the company as on 31st December, 1961, and the P L a/c. for the year which ended on 31st Decemb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid that in respect of these provisional assessments there was no liability on the assessee as contended by Mr. Dastur. It is possible that these provisional assessments might have been set aside in future, but until that was done, there was undoubtedly a liability on the assessee as represented by these provisional assessments. That the assessee disputed the correctness of these provisional assessments and took steps to challenge the same would show that this liability could not be ascertained at that time, but this would not negate the existence of the liability itself. As the amount in question was set apart by the board of directors of the assessee-company or meeting that liability, the directors having authority to so set it apart, it could not be said that the said amount constituted a mere reserve and did not amount to a provision. In fact, turning to the balance-sheet of the assessee-company, which has been tendered before us by consent, we find that an aggregate amount of Rs. 23,56,811 has been shown as the provision for additional customs duty in the balance-sheet as on 30th June, 1961. With regard to this provision for the additional customs duty it was contended by Mr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts Tax Act. Moreover, as pointed out by the Division Bench of the Calcutta High Court in A. P. V. Engineering Co. Ltd. v. CIT[1979] 119 ITR 937, the said Act, namely, the SPT Act, 1963, was meant to apply only to companies and not to other categories of assessees. The object of the said Act was to impose a tax on a certain part of the commercial profits of joint stock companies. It would be more appropriate to construe the words and expressions in such a statute according to their commercial sense and not by their dictionary meaning. Even according to the dictionary, one of the basic tests of a reserve is that it is set apart for a future use. Making a provision for a known liability appears to be a use of the fund in presents and not in futuro. It would be unrealistic to treat an amount earmarked for the payment of a known liability to be something set apart for future use. In any event, such an amount cannot be treated as part of the capital of the assessee-company employed in the business. As pointed out by the Division Bench of the Calcutta High Court, the decision of the Supreme Courtin Century Spg. and Mfg. Co. Ltd. [1953] 24 ITR 499, was not based solely upon the ordinary or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt from this, and even on the basis that this statement made by the counsel for the assessee was correct, it would not show as to what the compromise or settlement referred to in the statement was nor does it show as to what was the amount found payable on account of additional customs duty and from where what amount was paid. In view of this, we uphold the objection of Mr. Joshi that it is not at all open to Mr. Dastur to take up this contention before us. The next question which must be considered is regarding the provision on account of trade marks. In this connection, the submission of Mr. Dastur is that the amount set aside as provision for trade marks could not be regarded as a provision made for depreciating assets. It was submitted by him that, in any event, there was no material before the Tribunal on which it could come to the conclusion that the trade marks in question had depreciated in value. In our opinion, this contention must also be rejected. It may be pointed out that in the balance-sheet of the assessee as on 30th June, 1961, in Sch. III, inter alia, are shown the fixed assets of the assessee-company. One item of these assets, which have been shown, is " trade ..... X X X X Extracts X X X X X X X X Extracts X X X X
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