Sabyasachi Mukharji, J. - (1.) The assessee is a resident company. This reference relates to the question of computation of capital for the super profits tax assessment for the assessment year 1963-64, accounting year of which ended off 30th April, 1962. The assessee filed a return disclosing the chargeable profits at Rs. 37,02,218. While computing the capital base for the purpose of super profits tax, the assessee claimed that the following items should be included in the capital of the company : JUDGEMENT_565_ITR114_1978Html1.htm
(2.) The Super Profits Tax Officer observed that it was clear that the first five items had been set apart for specific purposes already known. He, therefore, held that each of the above items were meant to be used for a specific contingency already foreseen, though not yet quantified, otherwise, those would have all been put in the general reserve account already maintained by the assessee. As these amounts had been specifically set apart and earmarked to meet particular liabilities and nothing else, none of these could be called a reserve within the meaning of the Second Schedule of the. Super Profits Tax Act, 1963. He also considered the other four items and was of the opinion that those were also of the same nature as the earlier five items, though these had been designated as "reserve" instead of as "provision". He observed that when one looks to the substance and nature of these funds it became clear that each of them was designated to meet a liability, contingency, commitment or diminution in the value of the assets known to exist as at the time of the balance-sheet. The Super Profits Tax Officer, therefore, came to the conclusion, that these could not be called "reserve" within the meaning of the Second Schedule of the Act in question. Thus, he did not include these items as part of the capital of the company. There was an appeal to the Appellate Assistant Commissioner who held that items 6, 8 and 9 mentioned above satisfied the conditions of "reserve" and directed the Super Profits Tax Officer to include these in the computation of capital. The Appellate Assistant Commissioner, however, held that the three items should be "reserves" and the other items would be "provisions". Being aggrieved by this decision of the Appellate Assistant Commissioner both the revenue and the assessee appealed to the Tribunal.
(3.) The Tribunal dismissed the appeal of the revenue but allowed the appeal of the assessee in part. Except the items named as provision for gratuity, provision for interest on sales tax and provision for taxation, being items Nos. 3, 4 and 5 mentioned above, the others were held by the Tribunal to be "reserves" and therefore, were directed to be taken into consideration in computing the capital base of the company. During the course of the arguments a statement that had been filed before the Appellate Assistant Commissioner explaining the aforesaid items was referred to on behalf of the assessee. The Tribunal referred to the observations of the Supreme Court in the case of Commissioner of Income-tax v. Century Spg. & Mfg. Co. Ltd. 1953 24 ITR 499 and observed that the expression "reserve" in the sense in which it has been used could only mean profit earned by a company and not distributed as dividend to the shareholders but kept back by the directors for any purposes to which it might be put in future. Any amount set apart for any purpose other than declaration of dividend to shareholders could be treated as a reserve. "Provision", according to the Tribunal, in contradistinctive terms meant appropriation of an amount against an ascertained or anticipated liability. Except the items styled as provision for gratuity, provision for interest on sales tax and provision for taxation, the Tribunal did not find any evidence to impeach the other items. These last-mentioned items, according to the Tribunal, made provisions for ascertained or anticipated liabilities. Therefore, these were provisions and not reserves. The other items, according to the Tribunal, represented appropriation of the surplus and, though specific in purpose, these were against liabilities not quantified or ascertained and, hence, these constituted reserves within the meaning of the provisions of the Second Schedule of the Super Profits Tax Act, 1963. The Tribunal, therefore, allowed the assessee's appeal in part and dismissed the revenue's appeal. On an application being made to the Tribunal under Section 256(1) of the Income-tax Act, 1961, read with Section 19 of the Super Profits Tax Act, 1963, the Tribunal has referred the following question to this court : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the items styled as provision for P.I. bonus, provision for bonus and taxation contingency reserve should be treated as 'reserves' for computing the capital of the assessee-company for the purposes of super profits tax under the Super Profits Tax Act, 1963 ?" It may be mentioned that a statement had been filed before the Appellate Assistant Commissioner explaining the several items and, in respect of the three items with which we are concerned in this reference, it was stated as follows: "(1) Provision for provident institution long service bonus : Rs. 1,02,200. This is a reserve to cover payments to those employees Who joined the provident fund before 1925, as and when they retire, based on the last basic salary drawn. Each year, therefore, the company makes provision for the difference in salaries after adjusting any payment made. N.B.--For I.T. assessment purpose the provision is added back and the actual payments are claimed. (2) Provision for Bonus: Rs. 39,40,000. Bonus is payable after the annual general meeting of the company and also after a settlement has been arrived at between the company and the unions. The amount charged in the accounts is only an estimated figure. N.B.--I. T. assessment is made on actual payment basis. (7) Taxation Contingency Reserve : Rs. 35,00,000. Following prudent financial- policy of the company, estimated tax saving for claiming the initial and double depreciation have been set aside in this reserve. N.B.--The reserve has been disallowed in the income-tax assessment." Before we deal with the question involved in this reference it may be relevant to refer to the Super Profits Tax Act, 1963. Under the Act, tax was imposed in respect of certain profits made by the companies which were called super profits. For the said purpose, the "chargeable profits" under Sub-section (5) of Section 2 of the Act meant the total income of an assessee computed under the Income-tax Act, 1961, for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule to the Super Profits Tax Act, 1963. Standard deduction under Sub-section (9) of Section 2 meant an amount equal to 6% of the capital of the company as computed in accordance with the provisions of the Second Schedule of the said Act, or an amount of Rs. 50,000, whichever was greater. Section 4, which is the charging section, provided that subject to the provisions contained in that Act, a tax would be charged on every company for every assessment year commencing on and from the 1st April, 1963, referred to in the Act as super profits tax, in respect of so much of its chargeable profits of the previous year or previous years, as the case might be, as exceeded the standard deduction, at the rate or rates specified in the Third Schedule to the said Act. The First Schedule to the Act laid down rules for computation of chargeable profits. The Second Schedule laid down the rules for computing the capital of a company for the purposes of super profits tax. We have noticed that under Sub-section (9) of Section 2, standard deduction for computation of the profit for super-tax was 6% of the capital of the company. The rules in the Second Schedule were meant to compute the capital of the company for the purpose of making the standard deduction. Rule 1, with which we are concerned in this reference, so far as is material for our present purpose, was as follows : "1. Subject to the other provisions contained in this Schedule, the capital of a company shall be the sum of the amounts, as on the first day of the previous year relevant to the assessment year, of its paid up share capital and of its reserve, if any, created under the proviso (b) to Clause (vib) of Sub-section (2) of Section 10 of the Indian Income-tax Act, 1922(11 of 1922), or under Sub-section (3) of Section 34 of the Income-tax Act, 1961 (43 of 1961), and of its other reserves in so far as the amounts credited to such other reserves have not been allowed in computing its profits for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or the Income-tax Act, 1961 (43 of 1961), diminished by the amount by which the cost to it of the assets the income from which in accordance with Clause (iii) or Clause (vi) or Clause (vii) of Rule 1 of the First Schedule is not Includible in its chargeable profits, exceeds the aggregate of- (i) any money borrowed by it which remains outstanding ; ( ii) the amount of any fund, any surplus and any such reserve as is not to be taken into account in computing the capital under this rule.";