DIPAK KUMAR SEN. J. - (1.) M/s Shaw Wallace and Co. Ltd., Calcutta, the assessee, was assessed to surtax under the Companies (Profits) Surtax Act, 1964, in the asst. yr. 1966-67, the accounting year ending on 31st Dec., 1965. In the computation of capital for the purpose of surtax as on 1st Jan., 1965, the ITO excluded a sum of Rs. 26,342 which was shown as provision for contingencies.
(2.) BEING aggrieved, the assessee preferred an appeal from the assessment to the AAC. It was contended before the AAC that though the said amount was stated to be a provision, the same was actually a reserve, as there were no specific items of liabilities in view for which the said amount had been set apart. The AAC accepted the contention of the assessee and held, inter alia, that there was no specific item contemplated or mentioned in the accounts of the assessee against which the said amount was intended to be adjusted. He held that the said appropriation was made for uncertain and unascertained liabilities and the same could be used for the purposes of the business of the assessee without any restriction. He found that there was little distinction between this item of provision and other reserves. It was held that the said amount should be included as a reserve in the capital computation of the assessee. The appeal was allowed. Being aggrieved, the Revenue preferred an appeal before the Tribunal. The Tribunal accepted the findings of the AAC and also the conclusion reached by him and held that the said amount under the head "Provision for contingencies" should be equated with the general reserve and should be included in the capital computation of the assessee for the purpose of quantifying the statutory deduction. The appeal of the Revenue was dismissed. On an application of the Revenue under s. 256(1) of the IT Act, 1961, r/w s. 18 of the Companies (Profits) Surtax Act, 1964, the Tribunal has referred the following question, as a question of law arising out of its order, for the opinion of this Court : "Whether, on the facts and in the circumstances of the case, the Tribunal was right both in facts and in law in holding that the provision for contingencies being Rs. 26,342 should be treated as a reserve for the purpose of computation of capital under the provisions of the Companies (Profits) Surtax Act, 1964 ?" At the hearing, learned advocate for the Revenue drew our attention to the Explanation under rule I of the Second Schedule to the Surtax Act containing rules for computing the capital of a company for the purpose of surtax, which reads as follows: "Explanation.--For the removal of doubts it is hereby declared that any amount standing to the credit of any account in the books of a company as on the first day of the previous year relevant to the assessment year which is of the nature of item (5) or item (6) or item (7) under the heading RESERVES AND SURPLUS' or of any item under the heading 'CURRENT LIABILITIES AND PROVISIONS' in the column relating to 'Liabilities' in the 'FORM OF BALANCE-SHEET' given in Part I of Schedule VI to the Companies Act 1956 (1 of 1956), shall not be regarded as a reserve for the purposes of computation of the capital of a company under the provisions of this Schedule."
(3.) LEARNED advocate contended that in the instant case the said amount of Rs. 26,342 having been shown under the heading "Current liabilities and provisions" should be treated as a provision and not as a reserve. He submitted that, in any event, there was no finding by any of the authorities below that the said amount had been appropriated from the undistributed mass of profits by the persons in the management of the assessee for the purpose of being treated as a reserve. In support of his contentions, he cited the following decisions: (a) CIT vs. Jugantar P.Ltd. (1981) 128 ITR 619. In this case, a Division Bench of this Court considered the said Explanation to rule I in the Second Schedule of the Surtax Act and held that as the liability in that case, namely, a provision for gratuity, has been shown under an item under the heading "Current liabilities and provisions" and inasmuch as the said liability had been quantified with a certain amount of certainty and had been provided for, the same could not be considered as a reserve. In that case, however, the item was shown as a reserve for gratuity and not as a provision. (b) Vazir Sultan Tobacco Co. Ltd. vs. CIT (1981) 132 ITR 559. This decision of the Supreme Court was cited for the proposition that if any retention or appropriation of a sum fell within the definition of a "provision" as defined in the Companies Act, 1956, it could never be a reserve. It was observed in this case that the true nature and character of the appropriation must be determined with reference to the substance of the matter and the intention and purpose of the appropriation which had to be gathered from the surrounding circumstances. It is, however, to be noted that the Supreme Court did not expressly decide the scope and effect of the Explanation to rule I in the Second Schedule to the Surtax Act and observed that the said Explanation was only declaratory of the existing legal position. (c) CIT vs. Hindustan Lever Ltd. (1986) 160 ITR 700. In this case, a Division Bench of the Bombay High Court held that an appropriation made by way of a reserve for gratuity would have to be regarded as a provision made for a contingent liability and, as such, could not be treated as reserve. In that case, however, a contingency reserve had also been appropriated for payment of possible demands of excise duty and sales tax. It is found as a fact that no assessment was made either on excise duty or sales tax and no liability had accrued. It was held that the amount set apart under the head contingent reserve could be treated as a reserve and included in computation of the capital. Learned advocate for the Revenue also drew our attention to an earlier decision of this Court in Braithwaite and Co. (India) Ltd. vs. CIT (1978) 111 ITR 825. In that case, the form of the balance- sheet provided in the Companies Act, 1956, was considered and it was held that an appropriation under the head "Reserve for surtax" was in the nature of a provision for taxation within the meaning of the Explanation in rule I of the Second Schedule to Surtax Act and could not be included in computing the capital base of the company. Learned advocate for the assessee contended, on the other hand, that in the instant case, it has been found as a fact that no item of liability was mentioned in the accounts of the assessee nor was any contemplated against which the said amount of Rs. 26,342 had been set apart. It was found further that the liability was wholly uncertain and unascertained. It was submitted that in the facts found it must be held that the said amount was intended to be set apart as a reserve and not for providing for any known and certain liability. Even assuming there was some liability in the contemplation of the assessee, no amount having been ascertained in respect of such liability, the entire amount set apart for meeting such liability should be held to be an excess and should be treated as a reserve. In support of her contention, learned advocate for the assessee cited the following cases: (a) CIT vs. Indian Standard Wagon Co. Ltd. (1979) 116 ITR 539 (Cal). In this case, an amount was set apart in the accounts as provision for labour retiring gratuity. The question arose before a Division Bench of this Court as to whether the said amount could be treated as a reserve and be included in the capital of the assessee for the purpose of the Surtax Act. It was held that as the item could not be ascertained with any substantial accuracy by following any normal method of accountancy or actuarially, the same could not be considered to be a contingent liability but should be treated as a reserve. (b) CIT vs. Laxmi Sugar and Oil Mills Ltd. (1986) 161 ITR 168 (SC). In this case, a sum was set apart in the accounts of the assessee as provision for additional cane price payable to cane growers under a price link formula to be fixed by the authority appointed under the Sugar Cane Price Control Order, 1955. The item was shown under the head "Current liabilities and provisions." No payment to the cane growers was actually made during the accounting year and the amount was credited back to the profit and loss account. The question before the Supreme Court was whether the said amount set apart qualified as a reserve and could be included in the capital for the purpose of computing super profits tax under the Super Profits Tax Act, 1963. It was held by the Tribunal, the High Court and ultimately the Supreme Court that as there was no liability at all on the assessee requiring it to set apart a sum as a charge against its profit and as there was no intention to make any payment to the cane growers and as no such payment was made and further as the amount was brought back into the profit and loss account, the said amount must be held to be a reserve and could not be described as a provision. It was held further that mere description by the assessee in the balance-sheet was not conclusive of the fact whether an item set apart was a provision or a reserve.;