9911796707
TMI Blog2006 (5) TMI 113X X X X Extracts X X X X X X X X Extracts X X X X ..... able and insect resistant. The plywood was specifically designed for use in construction work and the Central Excise department has treated the concrete shuttering p plywood on par with structural plywood and demanded the differential duty on account of short levy in the assessment of several years in the past. The liability on such excise duty for shuttering plywood at Dandeli and Taluppa factory which were still outstanding was as under as at the end of the relevant accounting year: Dandeli Rs. 1,03,96,726 Taluppa Rs. 13,12,597 ---------------- Rs. 1,17,09,323 ---------------- This liability was also disputed before the High Court of Karnataka. The provision made in respect of the above liability became no longer necessary as a result of retrospective amendment brought about in the Central Excise duty and rules. Therefore, the assessee has written back the aforesaid amount to the profit and loss account. Similarly, the Government of Karnataka demanded differential royalty in respect of the forest produce used by the assessee. The provisions were made from year to year in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch a decision of the Tribunal in the case of Pfizer Ltd. in ITA Nos. 7071/Bom./91 and 7078/Bom./91 dated 28-12-1998 was relied upon by the assessee. The Division Bench, after extracting paragraph 6 of the said order, which is reproduced below, went on to give its reasons to say that they were unable to persuade themselves to subscribe to the said view: "In this connection after hearing the parties we are inclined to agree with the view taken by the CIT(A). A provision which was not allowed to be adjusted against profits in the earlier years should now be allowed to be added when the same is written back. A harmonious reading of clause (v) of sub-section (c) of section 32AB with the portion appearing after clause (viii) shows that profit is not allowed to be increased by provision for ascertained liabilities. In other words, profits remain reduced by provision for ascertained liabilities. Therefore, when such a liability is written back, it should go to enhance the profits. Hence, we agree with the CIT(A) and do not disturb his order on the issue." The Division Bench went on to give the reasons for their view as under: "7. Section 32AB sub-section (3) of the Act defines the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ascertained liabilities are allowable deduction under the Income-tax Act. From this, it follows that the pith and substance of section is the determination of current year's profits on which deduction under section 32AB can be allowed. Keeping in view this object, the Legislature has consciously not used the term 'ascertained or unascertained liabilities' while incorporating the provisions relating to reduction of amounts withdrawn from reserves or provisions credited to Profit Loss Account because they do not represent the net result of the working of current year. Since, the language of the section is unambiguous, therefore, in our opinion, nothing can be read into the section, the relevant part of which reads as under: "... and as reduced by any amount or amounts withdrawn from reserves or provisions if such amounts are credited to the Profit Loss Account." 9. The above aspect of the matter has escaped the attention of the learned Bench of the Tribunal. Since, in our view, another view is also possible, which may be more appropriate, we recommend constitution of the Special Bench for deciding this appeal." It is for these reasons that the Division Bench thought it mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elied on the decision of Bombay High Court in Alfa Laval India Ltd v. Dy. CIT [2004] 266 ITR 418. According to him, for working out the relief under section 32AB(3) of the Act, the profits of the business are required to be reduced by the amount or amounts withdrawn from the reserves or provisions, if such amounts are credited to the profit and loss account. There being no dispute that the amounts are credited to profit and loss account, the sum in question shall go to reduce the profit as required by section 32AB(3) of the Act. The provision in this regard as mentioned in the relevant clause, is clear and unambiguous. Nothing should be read into it to bring the view of the assessee possible. 7. We have carefully considered the rival contentions and gone through the record as also the case laws relied upon by both the parties. The provisions of section 32AB(3) have already been reproduced in para 3 above. These provisions have been inserted by the Finance Act, 1986 with effect from 1-4-1987 for and from the assessment year 1987-88. On fulfilment of the requisite condition as provided in the section, the eligible assessee is entitled to obtain a deduction of the lower of the follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons are to be set out in the profit and loss account under the most convenient heads. Clause (viii) dealing with the disclosure of reserves read as under:- "(a) The aggregate, if material, of any amounts set aside or proposed to be set aside, to reserves, but not including provisions made to meet any specific liability, contingency or commitment known to exist at the date as at which the balance sheet is made up. (b) The aggregate, if material, of any amounts withdrawn from such reserves. Clause (ix) dealing with the disclosure of provisions reads as under:- (a) The aggregate, if material, of the amounts to set aside to provisions made for meeting specified liabilities, contingencies or commitments. (b) The aggregate, if material, of the amounts withdrawn from such provisions, as not longer required." 8. It has been held in Tamil Nadu Mercantile Bank Ltd.'s case, that it is the computation made in accordance with section 32AB(3), which is to be the basis for determining 20 per cent of the profits of the business for the purposes of section 32AB(1)(ii). The computation of income under the provisions of the Income-tax Act is of no relevance for the purpose of determining th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of accounting. This proposition has since been approved by the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. 10. The sum and substance of the computation is that the book profit after depreciation under the Income-tax Act and before income-tax and surtax shall be considered as profit of the year. The provision for meeting ascertained liability is always treated as charged to the profit and loss account, as any other expenditure. That is why if any amount is set aside as provision for meeting liability other than an ascertained liability, the amount is required to be increased if it is debited to the profit and loss account. It will have the same character as "Reserve". Simply put, both provision and reserves as understood under Company Law are required to be added back if they relate to unknown or unascertained liability. A provision or a reserve for known or ascertained liability is to be treated as an expenditure. A provision and a reserve for unknown or unascertained liability is not so and, therefore, requires to be added if it is debited to the profit and loss account. Payment of dividend if debited to the profit and loss account, is again an appropriation of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12. Now we will discuss the above in the light of the facts of the present case. In the earlier years, when the provisions were made on account of differential excise duty in respect of structural plywood as also royalty payable to the Government of Karnataka, these provisions were debited to the profit loss account to the exact amount of liabilities demanded from to time by the respective authorities. These provisions were claimed as part of business expenses in the profit and loss account. In the nature of these liabilities, in our opinion, they are not in the nature of reserves or simplicitor provisions in the nature of reserves. If a provision is made in excess of what is ascertained, although it is mentioned as a provision, but it will assume the characteristic of the reserve. Any provision made for meeting known and ascertained liabilities is really debitable expenditure to the profit and loss account. The Tribunal has already directed to allow them as expenses when the liabilities were provided in the accounts from year to year basis and the aggregate of the precise amount was already claimed as revenue expenditure and deduction in the earlier years. As a result of certain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S.T. Act, 1964. The dictionaries do not make any distinction between the two concepts "reserve" and "provision" while giving their primary meanings, whereas in the context of those Acts a clear distinction between the two is implied. Though the expression "reserve" is not defined since it occurs in taxing statutes applicable to companies only and to no other assessable entities, the expression has to be understood in its popular sense, that is to say, the sense or meaning that is attributed to it by men of business, trade and commerce and by persons interested in or dealing with companies. Therefore, the meanings attached to the words "reserves" and "provisions" in the Companies Act, 1956, dealing with the preparation of the balance sheet and the profit and loss account would govern their construction for the purposes of the two enactments. The broad distinction between the two is that whereas a "provision" is a charge against the profits to be taken into account against gross receipts in the profit and loss account, a "reserve" is an appropriation of profits, the asset or assets by which it is represented being retained to form part of the capital employed in the business.' 14. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the withdrawal or writing off of the same if credited to the profit and loss account in the subsequent year when the provision is no longer required by the assessee. 17. The fact that the term "an amount or amounts withdrawn from reserves and provisions" are not qualified with the words "for meeting the liabilities other than ascertained liabilities" and, therefore, the reduction has to be irrespective of the fact whether they were for ascertained or unascertained liability, in our opinion, has no force, if seen in the context of the object of defining the profits of the business for the purposes of this section which is to ensure uniformity and to reduce uncertainty about the interpretation of this term. If this be so, there would result an anomalous situation. That is to say that in the year when this liability was debited, the profits of the company would not have to be increased because it was for an ascertained liability; on the contrary when that amount is written off in the subsequent year, the profits arc to be reduced even though the said liability has been allowed as a deduction, being in the nature of an ascertained liability. 18. In the light of our above discussion ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
