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TMI Blog1979 (2) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... r Profits Tax Act, 1963, were applicable to this case ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that 'dividend payable' and 'provision for Federal, foreign and State income-tax' are not reserves for the purpose of computing capital of the company in accordance with the Second Schedule to the Super Profits Tax Act, 1963 ? " These references, as stated earlier, are in relation to the assessment made under the Super Profits Tax Act, 1963 (Act 14 of 1963), hereinafter referred to as " the Act ". The references have been made in terms of s. 19 of the Act read with s. 256(1) of the I.T. Act, 1961. The relevant facts are that the assessee, M/s. Heckett Engineering Co., is a branch of M/s. Harsoo Corporation, which is incorporated in the United States of America. In India the company carries on business of reclaiming iron and steel contents from slag and scrap with its headquarters at Jamshedpur in the State of Bihar. For the assessment year in question, namely, the assessment year 1963-64, the accounting year is the calendar year 1962. In terms of the S.P.T. Act, such part of the chargeable profits, as exceed the amount of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reign income, he held that its nature and character was the same as that of " retained earnings " and, therefore, this amount should also be taken into consideration in determining the capital base of the company as on the first day of the relevant accounting year. The assessee further pressed its case that the provisions for dividend and the provision for taxation as made in the balance-sheet, should also be treated as " reserves. " for the purpose of computing its capital. The AAC, however, did not accept this plea. The revenue then preferred an appeal before the Tribunal against treating " retained earnings " and " unremitted foreign income as " reserves" for the purpose of computing the assessee's capital. The assessee on the other hand filed a cross-objection. In the cross-objection, the assessee raised two grounds, the first of which was that the assessee was not liable to the charge, of super profits tax, inasmuch as it could not be considered to be a " company " for the purpose of the Act. The second ground was that in computing the capital base, the provisions for dividend and provisions for taxation were to be treated as " reserves ". The Tribunal rejected both the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... declaring the assessee to be a company would continue in force even after the repeal of the Indian I.T. Act, 1922, and enforcement of the new Act (I.T. Act, 1961). I think the contention on behalf of the revenue is well founded. The charge of super profits tax is on a company. The word " company " has not been defined in the S.P.T. Act, but sub-s. (10) of s. 2 of the Act says : " All other words and expressions used herein but not defined and the Income-tax Act shall have the meanings respectively assigned to the in that Act." Under the Indian I.T. Act, 1922, " company " was defined in sub- s. (5A) of s. 2 to mean : (i) any Indian company, or (ii) any association, whether incorporated or not and whether Indian or non-Indian which is was assessable or was assessed as a company for assessment for the year ending on the 31st day of March, 1948, or which is declared by general or special order of the Central Board of Revenue to be a company for the purposes of this Act. As stated, the assessee had been declared to be a company under this Act. This Act was repealed by the I.T. Act, 1961, and now under sub-s. (17) of s. 2 of the I.T. Act, 1961, " company " has been defined in mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions contained in s. 297(2)(k) of the I.T. Act, 1961. Learned counsel for the assessee has referred to the decision of the Supreme Court in the case of Bengal Immunity Co. Ltd. v. State of Bihar [1955] 6 STC 446 (SC); AIR 1955 SC 661 and, on that basis, has submitted that a fiction created for a certain purpose, namely, in the instant case, for the purpose of the Indian I.T. Act, 1922, cannot be extended for the same purpose for another Act, namely, the I.T. Act, 1961. I do not think the proposition, taken in isolation of the facts of that case, can be used with any advantage in the instant case. I, therefore, do not find any relevancy of the ratio laid down in the said case for the instant case. This question is, therefore, answered against the assessee, that is to say, question No. 1 in the assessee's reference has to be answered in the affirmative. I now pass on to deal with the question relating to " reserves ", which question is common in both the references. In the reference made at the instance of the Commissioner the items are :-(i) retained earning, and (ii) unremitted foreign income. In the reference made for the assessee the items are : (i) provision for divi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act that they are used in the business but that they are consciously kept back and not distributed amongst the shareholders as dividends. " This matter was taken in appeal to the Supreme Court, which decision is reported in [1953] 24 ITR 499 (CIT v. Century Spinning and Manufacturing Co. Ltd.). Their Lordships accepted the connotation of the expression " reserve " as given by Chief Justice Chagla. Their Lordships observed : " The term 'reserve' is not defined in the Act and we must resort to the ordinary natural meaning as understood in common parlance. " Their Lordships then gave the dictionary meaning of the word it reserve ". One of such dictionary meanings is--" To keep for future use or enjoyment; to store up for some time or occasion ; to refrain from using or enjoying at once. " It was further observed that : " What is the true nature and character of the disputed sum, must be determined with reference to the substance of the matter and when this is borne in mind, it follows that on the 1st of April, 1946, which is the crucial date, the sum of Rs. 5,08,637 could not be called a ' reserve ' for nobody possessed of the requisite authority had indicated on that date the man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tried to attach any other meaning to the expression " reserve " than what has been expressed by the Supreme Court in the aforesaid decisions. I do not consider it necessary to make a note of all those High Court decisions, because it would be just multiplying the case-law without deriving any further benefit by mentioning them. Thus, on the basis of the decisions discussed above, the expression " reserves " must be understood in its ordinary natural meaning as understood in common parlance and that it should be determined by keeping in view the nature and character of the sum with reference to its substance. If a certain sum has been set apart by a person possessed of the requisite authority to do so for future use or enjoyment, or is set apart for using it and enjoying it at once, such sum set apart is a " reserve ". While setting apart sums out of the profits of the company, the amount set apart are sometimes described as " provision " and sometimes as " reserves ". Part III of the VIth Schedule of the Companies Act, 1956, has given a different connotation to the said two expressions; whereas " provisions " has been defined to mean " any amount written off or retained by way of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sum set apart as " reserve " or a " provision " does not help in understanding the true nature of the sum set apart. For example, an amount set apart from the profits might be described as a " reserve " and yet it may be required by virtue of an existing demand to be spent out the very next day. Thus, although the name given to the amount set apart is " reserve ", in substance it is not so. Similarly, an amount when set apart is described as " provision " and yet it is not required to meet any existing demand. Such an amount would necessarily be an amount available for future use and, therefore, a " real reserve ". I also respectfully agree with the aforesaid decision of the Madras High Court, in so far as it says that the definition of the expressions " provision " and " reserve " given in the Companies Act, 1956, will not be relevant for understanding the meaning of the said terms for the purposes of the S.P.T. Act. It is one of the cardinal principles of interpretation of statutes that the definition given to an expression in one statute should not be imported into another unless the circumstances so demand. Now, the interpretation of the expression " provision " and " reserve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3] 92 ITR 78 (Mad), 3. CIT v. Security Printers of India (P.) Ltd. [1972] 86 ITR 210 (All) and 4. CIT v. Aryodaya Ginning and Manufacturing Co. Ltd. [1957] 31 ITR 145 (Bom). In fact one of the principles enunciated by the Bombay High Court in its decision has since been approved by the Supreme Court in the case of CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566. The following decisions have, however, taken the view that if a " reserve " has been created against an existing liability, it does not qualify as a " reserve " for the purpose of forming the capital base of the company as on the first day of the accounting year. 1. Hotz Hotels Pvt. Ltd. v. CIT [1975] 101 ITR 596 (HP), 2. Hyderabad Asbestos Cement Products Ltd. v. CIT [1976] 105 ITR 822 (AP) [FB], 3. Shree Ram Mills Ltd. v. CIT [1977] 108 ITR 27 (Bom), 4. Braithwaite and Co. (India) Ltd. v. CIT [1978] 111 ITR 729 (Cal), 5. Mettur Industries Ltd. v. CIT [1978] 114 ITR 439 (Mad), 6. Nagammal Mills Ltd. v. CIT [1974] 94 ITR 387 (Mad), 7. CIT v. Hind Lamps Ltd. [1973] 90 ITR 487 (All) and 8. CIT v. British India Corporation (P.) Ltd. [ 1973] 92 ITR 38 (All). The reasons which have weighed in taking such a view in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (m) of the W.T. Act, 1957, and as such was deductible in computing the net wealth. The Supreme Court held that it was a debt owed on the valuation date. Some of these decisions have, therefore, taken the view that if a provision has been made for a liability which, though unascertained but must arise, was a debt owed and consequently cannot form a " reserve " for the purpose of computing the capital base of a company. The Bombay High Court in its decision in the case of Shree Ram Mills Ltd. [1977] 108 ITR 27 has been guided by this Principle. It cannot be denied that the setting apart of a sum to meet the taxation liability is an amount set apart to meet a debt which has to be paid out of the amount set apart. The question, however, is not that the amount so set apart is at some point of time to be paid out, but the question involved is whether having set apart that amount for a particular purpose, it could still form a " reserve " for the purpose of computing the capital base of a company as on a particular date. It has to be borne in mind that the computation is required to be made having regard to the state of affairs as present on the first day of the accounting year relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh for deciding as to whether an amount set apart as reserve could be taken into consideration for computing the capital base should be that the said reserve had not been allowed as deduction in computing the profits of the company for the purpose of income-tax. This contention, in my opinion, goes a little too far, for the simple reason that only such amounts can be taken into consideration in computing the capital of the company, whose true nature and character is that of a reserve meaning thereby an amount which can flow into the capital base of the company, having been created as reserve on the first day of the relevant accounting year. Coming now to the facts of the instant case, the three items which are required to be considered, as stated earlier are: (i) The retained earning and the unremitted foreign income; (ii) an amount set apart towards the proposed dividends; and (iii) the amount set apart as provision for Federal, foreign and State income-tax. With regard to the first item, I need only add to what has been found by the Tribunal that these amounts, besides being classified under the head " Capital ", were required to be retained in that shape under the law of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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