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TMI Blog1976 (11) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... T.C. No. 120 of 1974, in which the assessee is different, the question that has been referred to this court is : " Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the dividend equalisation reserve of Rs. 2 lakhs credited under the head ' reserves and surplus ' in the balance-sheet of the assessee-company is ' reserve ' and as such includible in the capital computation for super profits tax assessment for 1963-64 ? " Thus, it will be seen that T.C. No. 289 of 1972 and T.C. No. 120 of 1974 deal with the Super Profits Tax Act, 1963, while T.C. No. 287 of 1972 deals with the Companies (Profits) Surtax Act, 1964. Notwithstanding the reference to the two Acts in question it is the common case that the material provisions with which we are concerned in these references are the same. Both the Acts were enacted for the purpose of subjecting to a special tax the profits made by certain companies. Section 4 of the Super Profits Tax Act, 1963, provided that subject to the provisions contained in that Act, there shall be charged on every company for every assessment year commencing on and from the 1st day of April, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aph 1 of the Second Schedule to the Super Profits Tax Act, 1963, it will go into the computation of the capital for the purpose of calculating the " standard deduction ". The provisions in the Companies (Profits) Surtax Act are similar. However, Paragraph 1 of the Second Schedule to that Act has been recast in a different form with greater detail and the same is as follows : " 1. Subject to the other provisions contained in this Schedule, the capital of a company shall be the aggregate of the amounts, as on the first day of the previous year relevant to 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 (XI of 1922), or under sub-section (3) of section 34 of the Income-tax Act, 1961 (XLIII 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 (XI of 1922), or the Income-tax Act, 1961 (XLIII of 1961) ; (iv) its debentures, if any, issued by it to the public ; an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different from the term " reserve " has always been recognised by statutes as well as by courts in this country and also in England. There was a time when the word " reserve was indiscriminately used to denote what really constituted " provision and also what constituted only a " reserve ". But that indiscriminate use has now become a thing of the past, in view of the changes effected in the provisions of the Companies Act itself. In the well-known book by Frank H. Jones, Guide to Company Balance-sheets and Profit and Loss Accounts, sixth edition, there is a separate chapter, namely, Chapter IX on " Provisions and reserves ". That Chapter opens up by stating: " Provisions and reserves contrasted.--When the first edition of this book was published in 1938, the author strongly deplored the inadequacy of accounting nomenclature in this country which was unable to employ separate and distinct terms to denote, (1) provisions made out of profits for specific purposes, and (2) profits already earned which are set aside (i.e., reserved) for future use or for distribution. The expression ' reserve ' was loosely used to refer to either, and as they differ as widely as the proverbial c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o meet possible losses peculiar to the character of the company's operations (e.g., obsolescence of plant, changes of habit necessitating altered production, etc.). (6) To redeem loans (e.g., debentures) or redeemable preference shares. (7) To set aside sums for future taxation." It is significant to note that the very second object for which I reserve can be created, as stated by the author, is to equalise dividends. The meaning of the expression " dividend equalisation fund " is given in J. R. Batliboi's Advanced Accountancy as follows : " This fund is created by setting aside a portion of distributable profits in good years as a provision for less prosperous years, so that whenever the company may not make sufficient profits to enable it to declare the usual dividend it may have recourse to this fund. The amount representing this fund need not necessarily be invested in outside securities. Even where there is no specific dividend equalisation fund, a company can always draw upon its reserve fund, if any, for the purpose of equalising dividends." It is with reference to such an object only that the same author, namely, Frank H. Jones, at page 245 of his book, Guide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all, 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. " This regulation 87(1) of Table " A " of the First Schedule to the Companies Act, 1956, corresponds to regulation 99 of Table " A " of the First Schedule to the Indian Companies Act, 1913. The significant thing to be noticed in our Act is the specific reference to a reserve for equalising dividends. Section 211 of the Companies Act, 1956, provides for the form and contents of balance-sheet and profit and loss account. The said form of balance-sheet is given in Part I of Schedule VI and the form of profit and loss account is given in Part II of Schedule VI. As far as Part I dealing with the balance-sheet is concerned, there is the express heading as " reserves and surplus ". Under that heading, several sub-headings are given, such as : " (1) Capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titute only a " reserve " and not a " provision " even after taking into account the Explanation to paragraph I of the Second Schedule to the Companies (Profits) Surtax Act, 1964. This conclusion of ours derives support from two decisions of the Supreme Court. The first is Commissioner of Income-tax v. Century Spinning and Manufacturing Co Ltd. [1953] 24 ITR 499 (SC), wherein, with reference to regulation 99 of Table " A " of the First Schedule to the Indian Companies Act, 1913, the Supreme Court stated : Reference was made to sections 131 (a) and 132 of the Indian Companies Act. Section 131(a) enjoins upon the directors to attach to every balance-sheet a report with respect to the state of company's affairs and the amount, if any, which they recommend to be paid by way of dividend and the amount, if any, which they propose to carry to the reserve fund, general reserve or reserve account. The latter section refers to the contents of the balance-sheet which is to be drawn up in the Form marked F in Schedule III. This form contains a separate head of reserves. Regulation 99 of the 1st Schedule, Table A, lays down 'that the directors may, before recommending any dividend set aside ..... X X X X Extracts X X X X X X X X Extracts X X X X
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