9911796707
TMI Blog1975 (7) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 which shows an increase of approximately Rs. 18 lakhs over the previous year. This result is most encouraging but once again very large sums are required for payment of taxes as, in addition to income and super taxes amounting to Rs. 62,20,706, Rs. 17 lakhs has been provided for payment of surtax, making a total of Rs. 79,20,706 or more than 63% of the profit. It is interesting to note that this provision for payment of surtax is very nearly the same as that for super-tax in the previous year but is, of course, calculated on the increased profit referred to above." The 34th annual general meeting of the assessee was held on the 18th June, 1964, and the recommendations of the directors as contained in the above statement of the chairman were accepted. In the balance-sheet for the year ending 31st December, 1963, Rs. 17,00,000 was shown under the head " Reserve and Surplus " as reserve for surtax appropriation during the year. On the 1st August, 1964, the assessee entered into an agreement in writing with the National Grindlays Bank Ltd., whereunder the assessee obtained a " term loan " of Rs. 50,00,000. The agreement provided for repayment of the said loan in instalments as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the assessment year, of-- (i) its paid up share capital ; (ii) its reserves, if any, created under the proviso (b) to clause (vib) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (11 of 1922), or under sub-section (3) of section 34 of the Income-tax Act, 1961 (43 of 1961) ; (iii) its other reserves as reduced by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or the Income-tax Act, 1961 (43 of 1961) ; (iv) its debentures, if any ; and (v) any moneys borrowed by it from Government or the Industrial Finance Corporation of India or the Industrial Credit and Investement Corporation of India or any other financial institution which the Central Government may notify in this behalf in the Official Gazette or any banking institution (not being a financial institution notified as aforesaid) or any person in a country outside India : Provided that such moneys are borrowed for the creation of a capital asset in India and the agreement under which such moneys are borrowed provides for the repayment thereof during a period of not l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company to meet a known liability either of the super profits tax or the surtax. A mere label of reserve was, according to him, not enough but the real nature and character of the sums set apart had to be looked into. On such reasons, he upheld the order of the Income-tax Officer and held that the amount in question was not a reserve but in reality a provision for tax and though shown in the balance-sheet under the head " Reserves and Surplus ", in the course of the year the amount was converted into a provision for surtax. So far as the term loan was concerned, the Appellate Assistant Commissioner found that the loan was granted by the bank on the 1st August, 1964, and the final instalment was repayable on the 31st July, 1971, completing the seven year period and thus satisfied the provisions of rule (v) of the Second Schedule to the said Act. The provision for repayment of the entire amount of loan in case of default in payment of any instalment on the due date, according to him, could not be said to have reduced the normal period of the duration of the loan. The Commissioner also did not accept the interpretation of the Income-tax Officer as to the purpose of the loan. He o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ember 31, 1963, as reserve for surtax could not be included in computing the capital base under the provisions of the Second Schedule of the Companies (Profits) Surtax Act, 1964 ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that only Rs. 16,00,000 out of the loan of Rs. 50,00,000 taken from the bank qualified for inclusion in the capital base under rule 1(v) of the Second Schedule of the Companies (Profits) Surtax Act, 1964 ? " Mr. Kalyan Roy, learned counsel appearing on behalf of the assessee, contended in respect of question No. 1 that the said sum of Rs. 17,00,000 fulfilled all the tests and conditions of a " reserve " in law as well as in fact. In support of his contentions he cited a number of decisions. First he cited the decision of the Supreme Court in the case of Commissioner of Income-tax v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499. The facts in that case were that in the relevant accounting period, after making provisions for depreciation and taxation, a sum of Rs. 5,08,637 was carried forward in the balance-sheet of the assessee-company. The assessee contended that under the Business Profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st make a declaration or give some indication that the manner of the disposal of or the destination of the amount in question is that it is being carried to reserve. That was looking at the question of the creation of a reserve from the procedural point of view. We are concerned in this case with the nature of a reserve. If I may refer to the definition given in Murray's Oxford Dictionary to which the Supreme Court also referred, but only to give the various meanings of the word ' reserve ' as a verb, the meaning as a noun is given as follows : 'Something stored up, kept back, or relied upon, for future use or advantage ; a store or stock.' An illustration of such use of the word ' reserve ' is drawn from Political Economy by Rogers and the following sentence is quoted : ' It is a maxim in business that a man...should have a hoard or reserve from which he can draw, when the times are untoward. ' Apart from the dictionary meaning of the word 'reserve' I think it can hardly be disputed that nothing can be reserved unless it has been reserved or laid by or stored for use or application in a future contingency which is anticipated as certain or likely. In the actual administrat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner of Income-tax v. Indian Steel Rolling Mills Ltd. [1973] 92 ITR 78 ; (e) another decision of the High Court at Madras in the case of Nagammal Mills Ltd. v. Commissioner of Income-tax [1974] 94 ITR 387 ; (f) a decision of the Punjab and Haryana High Court in the case of Commissioner of Income-tax v. Hindustan Milk Food Mfg. Ltd. [1975] 98 ITR 517 ; (g) an unreported decision of this court in I.T. Reference No. 262 of 1969, in the case of Braithwaite and Co. (India) Ltd. v. Commissioner of Income-tax (since reported in [1978] 111 ITR 729) the same assessee as in this case. In these cases the High Courts considered the nature of respective allocations made by the companies concerned towards taxation, unclaimed dividend, gratuity, bonus and development reserve and proposed dividend, for the purpose of determining whether the same should be treated as reserves for the purpose of computation of capital under the earlier Super Profits Tax Act, 1963. The decision of the Supreme Court in Century Spinning's case [1953] 24 ITR 499 was considered and applied in all these cases. The decision of this court in the case of Indian Steel and Wire Products [1958] 33 ITR 579 (Cal) was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the heading " Provisions for gratuity " was in the nature of " other reserve ". To distinguish between the concepts of " provision " and " reserve ", further, Mr. Roy referred to the Companies Act, 1956. Regulation 87 in Schedule I of the Companies Act provides as follows : " (1) The Board may, before recommending any dividend, set aside out of the profits of the company such sums as it thinks proper as a reserve or reserves which shall, at the discretion of the Board, be applicable for any purpose to which the profits of the company may be properly applied, including provision for meeting contingencies or for equalising dividends ; and pending such application, may, at the like discretion, either be employed in the business of the company or be invested in such investments (other than shares of the company) as the Board may, from time to time, think fit. (2) The Board may also carry forward any profits which it may think prudent not to divide, without setting them aside as a reserve." He submitted that under this regulation, the terms " reserve " and "provision" were inter-changeable. The term " reserve " had a wider connotation and necessarily included all provisions. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of the company. If the profit set apart was earmarked for providing for any known liability then such a reserve would be in the nature of a provision but if it was intended to be used for a future purpose not presently ascertained but anticipated in praesenti then it could not be a provision but must be treated as a reserve. In the form of the balance-sheet contained in Part I of the annexure to Schedule VI of the Companies Act there was a specific heading " Reserve and Surplus ", the item No. 4 in which was " other reserve, specifying the nature of each reserve and the amount in respect thereof " and items Nos. 5, 6 and 7 were respectively, (a) surplus, i.e., balance in the profit and loss account after providing for proposed allocation, namely, dividend, bonus or reserve, (b) proposed addition to reserve, and (c) sinking fund. Correspondingly, under the head " Current Liabilities and Provision ", sub-head " Provision " came, (1) provision for taxation ; (2) proposed dividend ; (3) for contingencies ; (4) provident fund scheme ; (5) for insurance and similar several bonus schemes ; (6) other provisions. Mr. Roy contended that for the purposes of rule 1 of the Second Sched ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irectors of the assessee in their report to the shareholders proposed a number of appropriations out of the profits of the year ending on the 31st March, 1963. The appropriations were under the headings " Plant Modernization and Rehabilitation Reserve, Loan Redemption Reserve, Reserve for the Development Rebate, Dividend Reserve and Reserve for Super Profits Tax ". The assessee claimed that all the above appropriations should be computed as reserves for the purpose of calculating the capital base of the company. The Mysore High Court held that from the Explanation to rule 1 of the Second Schedule to the Act it was clear that the amounts standing to the credit of any account which was in the nature of any item under the heading " Current Liabilities and Provisions " in the column relating to the liabilities in the form of balance-sheet shall not be recorded as a reserve. Applying this test the High Court held that the amounts standing to the credit of " Dividend reserve " and " Reserve for super-tax " were in the nature of items " Provisions for taxation " and " Proposed dividend " and, therefore, could not be regarded as a reserve for the purpose of the computation of capital. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,000 which was reserved for payment of surtax at the annual general meeting of the assessee on the 18th June, 1964, must be related back to the balance-sheet of the company as on the 31st December, 1963. Therefore, on the 1st January, 1964, it had to be ascertained what was the nature of this allocation. The resolution of the company became effective on the 1st January, 1964, and on that date this amount of Rs. 17,00,000 stood separated from the profits of the company and, therefore, could not form part of the profits. It also could not be stated to be a provision for taxation, as, on the 1st January, 1964, the Companies (Profits) Surtax Act, 1964, had not come into operation and, therefore, on the 1st January, 1964, it could not be stated that the said amount was in the nature of a provision for any known liability. This allocation, on the other hand, fulfilled all the tests of a reserve in its ordinary meaning. It is nobody's case that this amount was in the nature of items Nos. 5, 6 and 7 under the heading " Reserve and Surplus " in the statutory form of the balance-sheet nor could it be described as any of the items under the heading " Current Liabilities and Provision " in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectors to appropriate for surtax in August, 1964, is effective from the 1st January, 1964, then it is effective for all purposes and the nature of the appropriation, i.e., its character as a provision for a known liability cannot undergo a metamorphosis and change into an appropriation of a different character. In this view of the matter, we are of the opinion that the said sum of Rs. 17,00,000 shown in the balance-sheet as on the 31st December, 1963, as a reserve for surtax was in the nature of a provision for taxation within the meaning of the Explanation in rule 1 to the Second Schedule of the Act and could not be included in computing the capital base of the company for the purpose of determination of chargeable profits. On question No. 2, Mr. Roy contended that the said loan of Rs. 50,00,000 was a single loan. The fact that the said loan would be repaid in a number of instalments would not convert it into a number of separate loans of different amounts. The agreement in respect of the loan specifically provided that repayment would start from the 31st of July, 1967, and end on the 31st July, 1971. Mr. Roy submitted that the period calculated from 1st August, 1964, to 31s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to two years with effect from 1st April, 1956, the proceedings which were available before the amendment had become barred before that date. This decision does not in our opinion apply in the facts and circumstances of this case. No doubt, under section 9 of the General Clauses Act, in computing a period of time prescribed by a statute one day has to be excluded, but in the instant case, we are construing the period of repayment provided in an agreement. We cannot import rules of computation from the General Clauses Act for computing periods as contained in agreements. There are statutes which provide for computation of time in certain agreements. The Transfer of Property Act in section 110 provides for computation of time limited by a lease. Mr. Pal could not cite any particular statute which could be called in aid for computation of time in the instant case. In the premises, we do not accept the contention of Mr. Pal and we hold that the agreement in specific terms provided for the repayment of the loan during a period of not less than 7 years. Lastly, Mr. Pal contended that the agreement provided for repayment of the entire amount of loan in the case of default in payment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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