COMMISSIONER OF INCOME TAX Vs. INDIAN SMELTING AND REFINING COMPANY LIMITED

JUDGEMENT

(1.) THE Tribunal in this case has taken the view that 'general reserve' should not be reduced by the amount of dividend declared while computing the capital under the Surtax Act, 1964, as it cannot be said to relate back to the first day of the accounting year. The question is raised with a view to challenge the correctness of this finding.

(2.) THERE is a well -recognised distinction between a reserve and a provision and it is apparent from the judgment of the Supreme court in the case of Metal Box Company of India Ltd., v. Their Workmen : (1969)ILLJ785SC 'Reserves are appropriations of profits, the assets by which they are represented being retained to form part of the capital employed in the business. Provisions are usually shown in the balance -sheet by way of deductions from the assets in respect of which they are made whereas general reserves and reserve funds are shown as part of the proprietor's interest (see Spicer and Pegler's Book Keeping and Accounts, 15th edition, page 42). An amount set aside out of profits and other surpluses, not designed to meet a liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance -sheet is a reserve but an amount set aside out of profits and other surpluses to provide for any known liability of which the amount cannot be determined with substantial accuracy is a provision (See William Pickles Accountancy, second edition, page 192; Part III, clause 7, Schedule VI to the Companies Act, 1956, which defines provision and reserve).'

(3.) RELIANCE was placed by Mr. Joshi upon the decision of the Supreme Court in Commissioner of Income -tax v. Mysore Electrical Industries Ltd., : [1971]80ITR566(SC) . This was a case where the question of dividend reserve as such did not arise but the question was considered in relation to the amount set apart for plant modernisation and rehabilitation reserve, loss repatriation reserve and development rebate reserve. In respect of these specific types of reserves the Supreme Court took the view that the determination of the directors to appropriate the amounts to the three items were reserve on August 8, 1963, had to be related to April 1, 1963, viz., the beginning of the accounts for the new year, and had to be treated as effective from that day. Such a thing does not arise at all in this case, because there was no question of known or anticipated liability whatsoever. The decision, therefore, does not assist us in determining the question with which we are concerned.