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TMI Blog1980 (4) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... provision for taxation. (2) 15,49,700, being proposed dividend. (3) 2,35,000, being provision for contingencies. The previous year for the assessee-company for the assessment year in question began on August 1, 1961, and ended on July 31, 1962. The aforesaid sums stood on the credit side of the respective accounts in the books of the company as on August 1, 1961. The company was assessed to super profits tax for the said previous year disallowing the said sums as being components of its capital under the aforesaid provision. It was the contention of the assessee-company that the aforesaid three sums constituted reserve and as such the said sums were part of its capital. The ITO rejected the assessee's claim on the ground that there was a difference between reserve and provision and that reserve was properly meant for appropriation of profits for no specific purpose, representing no known liability and inasmuch as according to the ITO the said sums were provided for known liabilities they were in the nature of provisions for specific purposes and hence they would not form reserve, and could not be included in the computation of the assessee's capital. Against the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the revenue's contention that the reservation of a fund for meeting a known and existing liability in future could not constitute reserve. According, to the Tribunal further, the sub-division of reserve into a provision made in the Companies Act, 1956, and the definition of reserve and the provision given in r. 7 in Pt. III of Sch. VI of the Companies Act, 1956, was not of an exhaustive nature and that they provided a rough and ready-made method for classifying certain funds for the limited purpose of presenting them in the balance-sheet for the convenience of and for giving a proper picture of the financial position of the company to its members. The said definitions did not hold good even for the purposes of the remaining provisions of the said Act and that there was no warrant or justification for importing those definitions of reserve and provision given therein into the SPT Act for construing the term as reserve as used in r. I of Sch. II to the Act. The Tribunal also held that there was no rigid rule or practice for the setting apart of reserves and provisions, and there was nothing to prevent the company from transferring its entire profit for the year before providing for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ember 31, 1961, also the said sum of Rs. 40 lakhs had been debited as " provision for contingencies ". Therefore, on the relevant date, being the first day of the previous year, i.e., January 1, 1962, the said sum of Rs. 40 lakhs stood appropriated as provision for contingencies. In the directors' report which was submitted to the shareholders of the assessee-company for the year ended December 31, 1962, it was stated that out of the gross profit of Rs. 3,77,93,273, a sum of Rs. 77,00,425 had been set apart towards payment of bonus to the employees of the textile section for the years 1958, 1959, 1960 and 1961. The directors' report further stated that for the purpose of making this payment the amount of 40,00,000 which had been set apart as provision for contingencies had been drawn upon. The ITO excluded this sum of Rs. 40,00,000 while computing the capital base of the assessee-company for the assessment year 1963-64. In the appeal before the AAC, the Commissioner held relying on the decision in CIT v. Security Printers of India (P.) Ltd. [1972] 86 ITR 210 (A11), that the ITO was not justified in excluding the said amount from the capital computation. The matter was carried in fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the nature of a reserve for being included in the capital base of the assessee. For its said conclusion this court relied upon 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. The relevant observations of the Supreme Court in that case may be cited with benefit here. The Supreme Court in that case on the point stated as follows (p. 68) : " An amount set aside out of profits and other surpluses, not designed to meet a liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance-sheet is a reserve but an amount set aside out of profits and other surpluses to provide for any known liability of which the amount cannot be determined with substantial accuracy is a provision." The facts in our case are materially different from the facts in the Century Spg. Mfg. Co. Ltd.'s case [1977] 108 ITR 431 decided by this court and satisfies the test of reserve laid down by the Supreme Court in the Metal Box Company's case [1969] 73 ITR 53. In the balance-sheet for the year ending July 31, 1961, the aforesaid amount of Rs. 2,35,000 had been shown under the he ..... X X X X Extracts X X X X X X X X Extracts X X X X
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