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TMI Blog1976 (8) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... ond Schedule to the Super Profits Tax Act, 1963, is applicable only to a case where a part of the income of a company is not includible in its total income by virtue of the provisions contained in Chapter III of the Income-tax Act, 1961, and not to a case where a part of the income of the company is not included in its total income by virtue of that part of the income being allowed as deduction under section 84 of the Income-tax Act, 1961 ? " At the outset it may be stated that so far as question No. 2 is concerned, it was common ground that in point of fact no benefit by way of any deduction under section 84 of the Income-tax Act, 1961 had been claimed by or allowed to the assessee-company and if that be the position, the question raised would be clearly academic and as such the same need not be answered. Turning to question No. 1 out of four items which are covered by this question, three items, whether they are includible or not includible in the capital computation for the purpose of super profits tax are covered by decided cases and by decisions which have been delivered by us in this session and as such the question in regard to these three items need not be discussed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d been set apart towards payment of bonus to the employees of the textile section (for the years 1958--supplementary--1959, 1960 and 1961) and the directors' report further stated that for the purpose of making this payment the amount of Rs. 40,00,000 which had been set apart as provision for contingencies had been drawn upon. The Income-tax Officer excluded this sum of Rs. 40 lakhs while computing the capital base of the assessee-company for the assessment year 1963-64. In the appeal which was carried to the Appellate Assistant Commissioner, relying upon the decision in Commissioner of Income-tax v. Security Printers of India P. Ltd. [1972] 86 ITR 210 (All) the Appellate Assistant Commissioner held that the Income-tax Officer was not justified in excluding the said amount from the capital computation. The matter was carried in further appeal to the Tribunal, where the revenue tried to support the Income-tax Officer's order. On behalf of the assessee it was stated that the said sum of Rs. 40 lakhs which was a provision for contingencies had been created in 1961, in view of the pending disputes between the textile mills and workers regarding the bonus payments for earlier years, tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of the amount of Rs. 40 lakhs was rightly regarded by the Tribunal as a reserve includible in the capital computation. The position in law is quite well-settled having regard to the decision of the Supreme Court in Metal Box Co.'s case [1969] 73 ITR 53 (SC) that if an amount is set aside out of the profits and other surplus to provide for any known liability, it would be a provision but if an amount is set aside out of the profits or other surplus not designed to meet a liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance-sheet it would be a reserve. The expression " provision " is defined in sub-clause (a) of clause 7(1) of Part III of Schedule VI to the Companies Act, 1956, thus: " The expression ' Provision ' shall, subject to sub-clause (2) of this clause, mean any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy. " Sub-clause (b) of clause 7(1) defines " reserve " thus : " The expression ' reserve ' shall not, subject as aforesai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apart of the amount of Rs. 40 lakhs should be regarded as a provision not includible in the capital computation. We find considerable force in this contention of Mr. Joshi. The aforesaid position which has been canvassed by Mr. Joshi becomes very clear from the following passage which occurs in Spicer Pegler's Practical Auditing (Fourth Indian Ed.), Part I. Chapter V, which deals with the subject " The Audit of the Impersonal Ledger " under the sub-heading " Contingent liabilities ", at page 149, where the learned authors have stated thus: " (12) Contingent liabilities.--The auditor should ascertain whether there are any transactions outstanding at the date of the balance-sheet which might involve the payment of money at some subsequent date. Such outstandings are termed 'contingent liabilities ', and may be of two classes: the one involving a loss should the liability accrue, and the other involving the acquisition of an asset of corresponding value. It is sufficient for the amount of the contingent liability to be stated on the face of the balance-sheet by way of a note, unless there is a definite probability that a loss will materialise, when specific provision should be m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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