9911796707
TMI Blog1990 (4) TMI 91X X X X Extracts X X X X X X X X Extracts X X X X ..... stion, the unilateral writing off of the said sum to the P. L. account did not result in any taxable income. It would also appear that, in its accounts relating to the said year, the assessee created what was styled as Contingency Reserve in a sum of Rs. 35,76,704. The said amount was inclusive of the sum of Rs. 34,87,647 which the assessee company owed to the colliery company. (As for the balance of amount of Rs. 89,057, to a specific query in this regard from the Bench, the assessee's counsel stated that it related to certain other debts owed by the assessee). 3. For the purpose of computing capital under Schedule II of the Act the assessee treated the said sum of Rs. 35,76,704 as a reserve. On his part, the ITO, observing that the said reserve had been created to cover the debt of Rs. 34,87,647 owed by the assessee to the colliery company, held that the liability, even on the assessee's own showing, not having ceased, the so called contingency reserve is nothing but a provision. In this view of the matter, therefore, the ITO excluded the said sum of Rs. 35,76,704 from the capital base of the assessee company, and made a surtax assessment of the assessee for the assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as figuring as contingency reserve. (ii) It is well settled that a fund created for payment of a liability which had already arisen or fallen due would constitute a provision. (iii) In the present case, the major liability of Rs. 34,87,647 representing the moneys owed by the assessee to the colliery company had arisen or fallen due. The existence of the liability was already known to the appellant. Therefore, it is a provision. (iv) It is equally well settled that the mere unilateral writing back to the P. L. account of a debt due to a creditor will not extinguish the liability. (v) In the case of Elgin Mills Ltd. contingency reserve did not come up for consideration. Hence that case cannot avail the assessee. The decision in the case of Laxmi Sugar Oil Mills Ltd. which turned on the peculiar facts of the case is distinguishable and hence cannot help the assessee. In view of the foregoing, therefore, the CIT(Appeals) dismissed the assessee's appeal for the assessment year 1981-82. 8. The CIT(Appeals) allowed the assessee's appeal relating to the assessment year 1982-83 observing as follows : "For the assessment year 1982-83, the factual position is entirely differen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(Appeals) on this issue. 11. As respects the departmental appeal for the assessment year 1982-83, the learned Departmental Representative drew our appointed attention to the fact that it was the assessee which transferred the contingency reserve to the general reserve, and contended that this unilateral action on the part of the assessee could not convert what is in substance a provision into reserve. He therefore, urged that the Department is entitled to succeed. In the course of the argument, Shri Biswas made a faint attempt to contend that the unilateral action on the part of the assessee was hit by the ratio of McDowell Co. Ltd. v. CTO [1985] 154 ITR 148 (SC). 12. On his part, Shri Srikrishna Ayyar strongly supported the impugned order of the CIT(Appeals) on this issue. He contended that, with the transfer of the contingency reserve to the general reserve, the assessee came to acquire proprietor's interest in the sum in question and that consequently there is no case for treating the sum in question as a provision. In this regard, he relied on the Supreme Court decision in the case of Laxmi Sugar Oil Mills Ltd. 13. We have looked into the facts of the case. We have c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained on a scientific basis. Appropriation for proposed dividends It is neither a 'provision' not a 'reserve'. It is not a provision because there is no known or existing liability. It is not a reserve because nobody possessed of the requisite authority had indicated on that date the manner of its disposal or destination. The creating of reserves out of profits is a stage distinct in point of fact and anterior in point of time to the stage of making recommendations for payment of dividend and, under the scheme of the Companies Act, 1956, appropriation made by the board of directors by way of recommending a payment of dividend cannot, in the nature of things, be a reserve. Also, the doctrine of relating back is not applicable because the directors are not competent to declare dividends. However, the directors' recommendations are generally accepted and hence in substance the retention is a provision. Payment of dividend out of general reserves From the commercial point of view, dividends are paid out of current year's income ; only if the current year's income is insufficient to cover the proposed dividends, accumulated past profits can be drawn on. Hence in cases where the current ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merged with general reserve, it cannot be regarded as a reserve. 21. From the point of view of authority also the assessee has no case. In the very case of Vazir Sultan Tobacco Co. Ltd. the Supreme Court has held that in cases where no appropriation for dividend is made out of assessment year's profit and where dividend is paid out of general reserve, the reserve must be diminished by the amount of the dividend distributed. 22. It is noteworthy that while dealing with appropriation for proposed dividend, the Supreme Court held that such an appropriation is, in the ultimate analysis, a provision. An attempt was made to invest the amount required for paying out dividend (which, had a separate appropriation been made in that regard, would have been a provision) with the colour of reserve by the simple expedient of not making a separate appropriation in that regard and by paying the dividend out of general reserve. The Supreme Court refused to countenance the attempt and held that the dividend paid out of general reserve must go to diminish the general reserve. 23. As we see it, implicit in this decision is the consideration based on first principles that what is truly a provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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