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TMI Blog1976 (7) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the circumstances of the case, the excess reserve though forming part of the development rebate in the balance-sheet could not be said to have been allowed as development rebate and, therefore, the entire excess reserves without being reduced by any amount would form part of the reserves and thus would be entitled to be aggregated with capital for surtax purposes ? " The facts pertaining to each one of these questions are different, but all these questions relate to the assessment year 1964-65, the relevant previous year being year ended 30th September, 1963. The assessee in this case is a public limited company and in connection with its assessment under the Companies (Profits) Surtax Act, 1964, for the said assessment year certain items were claimed by the assessee as forming part of the reserve being includible in the capital computation of the company for the purpose of that Act and we shall deal with each of these items forming the subject-matter of the above three questions separately. As stated earlier, the relevant previous year corresponding to the assessment year 1963-64 was the year which ended on 30th September, 1963. The directors appropriated out of the profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng for the revenue has invited our attention to the form of balance-sheet in Schedule VI of the Companies Act, 1956, and has particularly relied upon item No. (6) which appears under the heading reserves and surplus in the column of liabilities in that form, which item runs thus : " Proposed additions to reserve ". What was urged by Mr. Joshi was that as on September 30, 1962, this amount of Rs. 2,10,000 had been proposed as additions to the reserve and as such that would not come within the concept of " reserve " within the meaning of rule 1 of the Second Schedule. What we are really concerned with is not the last date of the accounting period, i.e., September 30, 1962, but the first date of the previous year, viz., October 1, 1962, and it is quite clear that as on that date the amount will have to be regarded as actual reserve and not as " proposed addition ". As on October 1, 1962, in our view, the amount formed part of the actual reserve and is outside the mischief of the Explanation to rule 1 and it is not possible to accept Mr. Joshi's contention in that behalf. Besides, we would like to refer to a decision of the Supreme Court in the case of Commissioner of Income-tax v. Mys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sum which was subsequently transferred to the gratuity reserve became a provision for gratuity payment. The Appellate Assistant Commissioner also held that the amount appeared to him to be a provision against gratuity liability and, therefore, excluded from the capital computation. This item was the subject-matter of cross-objection which the assessee had filed in the department's appeal and in support of the cross objection it was urged on behalf of the assessee-company that as on October 1, 1962, being the relevant date, this item was only a reserve and the mere fact that subsequently there was transfer of this amount to a reserve for gratuity could not take away the character of the item as a reserve as on the material date. It was also pointed out that this amount had been set apart only out of abundant caution than out of necessity and in fact no amount of this reserve had been touched during the relevant period. It was, therefore, urged that this item should be regarded as a reserve and should be included in the capital computation for surtax purpose. On behalf of the revenue the orders passed by the lower taxing authorities were sought to be supported by placing reliance upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngencies, Item No. (13) : Other provisions " and what was urged by him was that since this appropriation of Rs. 53,330.55, though styled as appropriation as a reserve for employees' indemnities, in substance it will have to be regarded as a provision for contingency or other provisions falling within item No. (10) or item No. (13) under the heading " Current liabilities and provisions ", for, according to him, after all it was an admitted position that this so-called reserve was created in order to pay retrenchment compensation arising out of retrenchment of any member of the staff which was the object with which this reserve was created ; he urged that this must be regarded as contingent liability, a liability to pay compensation arising out of the contingency, viz., retrenchment of any member of the staff. In support of his aforesaid argument reliance was placed by him upon the definition of the expressions it provision " and " reserve " given in clause 7(1)(a) and (b) of Part III of Schedule VI to the Companies Act, particularly the latter part of the definition. Under clause 7(1)(a) of Part III of Schedule VI the expression " provision " has been defined in a particular manner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n should apply, it must be shown that in the balance-sheet of the company for the relevant period certain items falling under the heading " Current liabilities and provisions " must have been shown in the column relating to " Liabilities " in the " Form of balance-sheet " or the item must be of a nature of item (5), or item (6) or item (7) falling under the heading " Reserves and surplus ", while in the instant case the item of Rs. 53,330.55 does not appear in the column of liabilities at all in the balance-sheet for the relevant year but it occurs under the heading " Reserves and surplus " and as such the question of applying the Explanation to the facts of the present case would not arise. It may be stated at this stage that it was nobody's case that the balance-sheet of the assessee-company for the relevant period in the instant case has not been properly prepared in accordance with the provisions of the Companies Act or that the same is in derogation or contrary to the provisions of the Companies Act. That being not the case of either party, the question will have to be considered as to whether this particular item which has been shown under the heading " Reserves and surplus " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Part III Which defines the expressions " provision " and " reserve " is, in our opinion, misplaced as even that part does not assist him to derive any support to his contention. It is true that under the latter part of sub-clause (1) of clause 7 the definition of the expression " liability " has been an inclusive definition and that expression is said to include contingent " liability " but such inclusive definition has been given for purposes of sub-clause (1) of clause 7 where while defining the expressions " provision " and " reserve " the expression " liability " is preceded by the word " known ". Therefore, even if the expression " liability " as occurring in sub-clauses (a) and (b) of clause 7(1) shall include a contingent liability, such contingent liability must be a " known contingent liability ". The expression " provision " is defined in sub-clause (a) of clause 7(1) thus : " The expression ' provision ' shall, subject to sub-clause (2) of this clause, mean any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of an action pending, forward contracts, guarantees for third parties, and speculative transactions on the stock exchange still undecided." It would thus appear that the contingent liabilities spoken of by clause 7(1) of Part III of Schedule VI to the Companies Act, 1956, would be of the type described in the above passage from Spicer Pegler's Practical Auditing. Having regard to the above discussion, we are clearly of the view that the Tribunal was right in taking the view that the item which had been set apart under the heading " Reserve for Employees' Indemnities " had not been set apart by way of providing for known liability and as such was a reserve includible in the capital computation. The question is, therefore, answered in the affirmative, in favour of the assessee. Turning to the last question, the question relates to the excess development rebate reserve provided in the accounts over and above the statutory reserves required under section 34(3)(a) of the Income-tax Act, 1961. The material facts dealing with this aspect are that the balance-sheet as on 30th September, 1962, disclosed a development rebate of Rs. 1,66,077.25 while the statutory reserves ..... X X X X Extracts X X X X X X X X Extracts X X X X
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