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TMI Blog1977 (11) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... d Rs. 82,333 representing the premium deposits, unearned premium, provision for outstanding claims, provision for taxation, proposed dividends and balance in the profit and loss account, respectively, did not fall under rule 2(i) or rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ? " Assessment Year 1967-68 : " Whether, on the facts and in the circumstances of the case, it has been rightly held that the sums of Rs. 93,250, Rs. 2,25,067, Rs. 25,17,281, Rs. 13,97,886, Rs. 7,48,110 and Rs. 7,071 representing the premium deposits, unearned premium, provision for outstanding claims, provision for taxation, proposed dividends and balance in the profit and loss account, respectively, did not fall under rule 2(i) or rule. 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ? " Before we proceed further, we would like to clarify the error in the years that have been mentioned. The facts as seen from the question purporting to be for the year 1966-67 actually relate to the year 1967-68 and those mentioned for the year 1967-68 are those applicable to the year 1966-67. With this clarification, we shall now proceed to deal with the questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 of the Second Schedule, namely, assets the income from which is required to be excluded under clauses (iii), (vi) and (viii) of r. 1 of the First Schedule. After determining the value of these assets as on the first day of the year of account, sub-rr. (i) and (ii) of r. 2 provide that the portion of such assets shall be reduced further by the borrowing and particularly, under sub-r. (ii), under which the question arises, by any fund, surpluses and reserves which are not to be included for the purpose of r. 1 of the Second Schedule. On the basis of this provision in r. 2 of the Second Schedule, the assessee has contended that the following amounts shown in the balance-sheet at page 18, namely, Rs. 24,36,239 under the heading " Reserves or Contingency Accounts ", the sums of Rs. 1,82,346, Rs. 50,709 and Rs. 16,70,197 falling under " Estimated liability in respect of outstanding claims whether due or intimated " which amounts sum up to Rs. 19,03,252, as also the provision towards unearned premium and premium deposits of the amounts Rs. 2,40,197 and Rs. 91,510 as seen at page 20 of the balance-sheet falling under the heading " Liabilities " as well as the sum of Rs. 6,42,524 which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no stretch of imagination can this be called as reserve and cannot be taken into account because this amount is also a receipt and shown in the balance-sheet only for the purpose of balancing the account. The total sum of the premium for the full year cannot be treated as the income of the year in question though already taken into account for the purpose of determining the income on the right hand side. A word about the premium deposits. These are amounts made available to the company for the insurance policies that may have to be issued by the company in future. Prudent parties make available to the insurance company fairly large sums of money for the purpose of adjusting the premium payable in future policies to be issued to ensure immediate coverage on request and in order to avoid delay. Such sums shown do not belong to the company. In fact, we consider that they will be amounts held in trust for a specific purpose by the company. They have naturally to be shown in the balance-sheet and they have been rightly, we consider, shown under the heading " Liabilities " and such amounts cannot be treated as the funds of the company coming out of its profits. We are aware that monie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y meeting of the company. The decision is in Kesoram Industries and Cotton Mills Ltd. v. CWT [1966] 59 ITR 767. We consider that this principle laid down by the Supreme Court is certainly applicable for the purpose of deciding whether on the first day of the year of accounting in question there was an accrued liability for payment of dividend by the company. It was not contended on behalf of revenue that there was any such accrued liability on the first day of the year of accounting. Reference was then made to the decision of the Supreme Court in CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566 and it was submitted that if appropriation to reserves has been made by the general body it will date back to the first day of the year in question, because it must be taken to be a reserve made on the first day of the year in question. This decision only dealt with the reserves which were for purposes other than the reserves for the purpose of payment of dividends. Therefore, this decision cannot be taken as an authority for the proposition that an appropriation made towards the reserve for the purpose of payment of dividend, apart from making the appropriation later effective fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m has, therefore, to be treated as not a reserve. " The provision in r. 2 of the Second Schedule, which in the main paragraph as well as in sub-r. (i) specifically refers to the date with reference to which the capital referred to in the first paragraph will have to be computed as well as the date on which the borrowings had to be computed, generally gives the impression that the question as to liability must be considered with reference to that crucial date, namely, first day of the accounting year. This is also clear, it appears to us, from sub-r. (i) of r. 2 which in its wake attracts r. 1 of the Second Schedule which specifically at the beginning refers to that date. It is inconceivable that reserves which fall under r. 1 must be reserves as on the first day of the year in question but reserves for the purpose of sub-r. (ii) of rule 2 must be with reference to some other date. We consider, therefore, that even for the purpose of sub-r. (ii) of r. 2, though sub-r. (ii) does not specifically refer to any specific date, that date must be the 1st day of the year of account. The question, therefore, is whether any amount shown to represent a dividend proposed by the directors repr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a reserve--and we will assume so without deciding the question that it represented merely a provision, and assume again that there is a distinction between a provision for an uncertain and unaccrued liability and a reserve made for meeting any contingent liability--we think that it will be a reserve that will fall under r.1 of the Second Schedule. If the amount will fall under r.1 of the Second Schedule then the amount cannot be excluded for the purpose of sub-r. (ii) of r. 2 and, therefore, the assessee has in any case to fail on this aspect as well. What we have said is enough to dispose of the case completely ; but we have to refer to the contention of the counsel for the revenue who had done investigation with reference to the Explanation to r. 2 of the Second Schedule and took us through the form of balance-sheet prescribed under the Companies Act. She contended that the dividend is one of the items of liabilities, in the form prescribed under the Companies Act and has, therefore, necessarily to be included for the purpose of computing the value of the reserve in determining the value of the capital assets under r.1 of the Second Schedule. Counsel for the assessee contended th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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