9911796707
TMI Blog1980 (1) TMI 115X X X X Extracts X X X X X X X X Extracts X X X X ..... ful debts on the opening day of the relevant previous year for each asst. yr. under appeal constitute reserves as contemplated under r. 1(iii) of the Second Schedule to the Companies (Profits) Sur-tax Act, 1964 so as to entitle the same for inclusion in computation of the capital of the company for purposes of surtax. The amounts to be considered yearwise as agreed before us, are as under:— Asst. yr. Amounts 1971-72 10,58,576 1972-73 27,21,641 1973-74 29,91,641 1975-76 47,16,641 It was agreed to by the parties before us that the amounts involved in these two issues are as set out above and if these are considered the ground of appeal taken by the assessee need not be referred to at all for any assessee. 4. Opening his arguments regarding the asst. yr. 1971-72 on the first issue, set out in para 2 above, the ld. counsel for the assessee, Shri D.S. Gupta, Advocate, submitted that bad and doubtful debts 'reserve' as on 31st Dec., 1968 or on 1st Jan., 1969 was Rs. 9,99,641.28 as could be seen from the balance sheet at page 13 of the paper book for the asst. yr. 1971-72. During the calendar year 1969, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1970 to 1974. 6. It was submitted that s. 34A of the Banking Regulation Act makes a distinction between a reserve and a provision and for working out chargeable profits under the Act, there is distinction between banking company and other companies. However, it was submitted that there is no such distinction for working out the capital employed. It was argued in nut shell that the amounts set apart as reserves for bad and doubtful debts during the relevant accounting periods are not shown in the printed balance-sheet, that these are shown in the published balance sheet as law permits, that these are out of the income charged to tax under the IT Act, 1961, that these are not allowed as deduction computing the total income under the IT Act and that these are not appropriated for payment of any debt or doubtful debts and, therefore, are reserves within the meaning of r. 2(xi)(b) of the First Schedule to the Act, 1964. The authorities below, therefore, erred in not including these amounts in the reserves for purposes of exclusion from the total income in computing the chargeable profits of a previous year, computed for that year under the IT Act, 1961, as provided under r. (xi)(b) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andum shows that this amount must be treated as a provision and not a reserve. It was further submitted that at page 2 of the paper book for this year, item No. 3 of the minutes of the meeting of the board of directors (66th meeting) held at New Delhi, the approval is sought for provisions and appropriation out of profits for the year 1970-71 and not for the reserve. Therefore, the amount of Rs. 7 lacs is entirely a provision. This is included in the provision for bad and doubtful debts shown at Rs. 10,22,000. He supported his submission by placing reliance upon the ratio of the decision in CIT vs. Burn and Co. Ltd(9). in which, it was submitted, the decision in the case of Shri Ram Mills Ltd(10). has been considered. It was submitted that even the case of Modi Industries(11) supports the above submissions. 9. It was submitted that even s. 34A of the Banking Companies Act makes a distinction between a reserve and a provision. In STA No. 2 of 1977-78 decided on 29th Oct., 1979, it was submitted that it had been argued on behalf of the assessee that if an amount is debited to profit and loss account, it is provision and if it is debited to profit and loss appropriation account, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. counsel for the assessee with the submission that this is an absolutely new case being made out which was not so before the lower authorities at any stage of the proceedings and cannot be entertained as it involves fresh investigation of facts. This allegation is also absolutely untrue and irrelevant and, therefore, cannot be entertained. It was submitted that the figures given at pages 35 and 36 of the paper book are merely by way of arguments and for these arguments one has to see whether there was any evidence. According to the Revenue, however, there was evidence filed at page 5 of the paper book where the directors had treated the amounts of Rs. 27,21,641.28 as a provision. It was therefore, provision and not a reserve. 13. In the rejoinder, the ld. Counsel for the assessee reiterated that unpublished balance sheet is a statutory document which is accepted in banking circles and is recognised by the statute itself, as r. 1(xi)(b) itself speaks of the published balance sheet and impliedly gives an indication of an unpublished balance sheet recognised by Banking Act. Reference was invited to s. 34-A of Banking Regulation Act. In so far as the arguments of the Revenue rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Second Schedule to the Act. This is called statutory deduction and is defined under cl. (8) of s. 2 of the Act as under:— "2(8) : 'Statutory deduction' means an amount equal to ten per cent, of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of two hundred thousand rupees, which ever is greater: Provided that where the previous year is longer or shorter then a period of twelve months, the aforesaid amount of ten per cent, or, as the case may be, of two hundred thousand and rupees shall be increased or decreased proportionately: Provided further that where a company has different previous year in respect of its income, profits and gains the aforesaid increase or decrease as the case may be, shall be calculated with reference to the length of the previous year of the longest duration.......... 16. The First Schedule to the Act provides rules for computing the chargeable profits and in so for as only r. 1 is relevant for our consideration for deciding the issues before us, we reproduce the Schedule only to that extent as under:— "In computing the chargeable profits of a previous year, the total income c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such sums does not exceed the highest of the aggregate of such sums if any, so transferred during any one of the three years prior to the previous year. Whichever is higher: (xii) the amount of any deduction from the income tax chargeable on the total income allowed under the annual Finance Act in connection with export of any goods or merchandise by manufacture of any articles to any person who exports them out of India. 17. Now coming back to the case before us, we find that as noted supra, the assessee has to be granted "statutory deduction" from the chargeable profits before the net chargeable profits are arrived at. This statutory deduction is based upon the capital employed in the industrial undertaking. The rules for computing the capital of a company for purposes of surtax are provided in the Second Schedule. In so far as rule of the Second Schedule is material for deciding the issue before us, we also reproduce the Second Schedule to that extent as under: 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 asst. yr., or— (i) its paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusions provided in r. 1 of the First Schedule from the total income computed for a particular year under the IT Act. 19. The first issue before us is with regard to cl. (xi) of r. 1 of the First Schedule as the assessee claims that the amounts mentioned against each year in para 2 supra are covered by sub-cl. (b) ibid. The second issue relates to claims that the amounts mentioned in para 3 supra are covered by cl. (iii) of r. 1 of the Second Schedule as these are reserves falling within the ambit of this clause. If the first claim of the assessee is accepted, the amounts shown in para 2 supra will be excluded from the total income computed for that year under the IT Act while computing the chargeable profits under the First Schedule. If the second claim is found to be in order, the sums shown in para 3 supra will be entitled to the inclusion into the capital for computing the capital of the company for purposes of sur-tax under cl. (iii) of r. 1 of the Second Schedule to the Act. 20. We take up the second issue first. The following catens of cases has been considered by us in the case of M/s Punjab State Small Industries Corporation Ltd:— (i) CIT vs. Standard Vacuum Oil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstitute reserve for cl. (iii) of r. 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. 21. Now we come to the first issue involved in these appeals. In so for as cl. (xi) of the First Schedule to the Act is concerned it is clear that sub-cl. (b) of this clause itself unpublished balance-sheet in so far as the Banking Companies are concerned. We, therefore, are in agreement with the contentions raised on behalf of the assessee that there is a statutory recognition to the factum of there being two balance sheets in the case of banking companies one being published and other being unpublished. This is so because of the banking Regulation Act which statutorily recognises the unpublished balance-sheet and provides for it. The legislature in its wisdom has thought it proper not to expose the banking companies of the country in all its working aspects to the general public. Protection of public confidence in banking may have been the reason but we are not concerned with its reasons. The fact is that the Act recognises two balance sheets, one unpublished for shareholders and other published for public at large. 22. Now the Revenue has contended that because the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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