9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
1986 (7) TMI 88 - SC - Income TaxWhether Capital reserve Stocks and Stores reserves Bad and Doubtful Debts reserves Obsolescence reserve Loans and Insurance reserve Investment reserve and Forfeited Moneys were to be included in the computation of capital according to the provisions in the Second Schedule to the Super Profits Tax Act 1963? Held that - It may be mentioned that where the liability has actually arisen or is anticipated legitimately by the assessee though the quantum of the liability has not been determined a fund to meet such present liability cannot be treated as It reserves . A fund however created for payment of a liability which had not already arisen or fallen due but is only a provision with regard to the sum that might become liable to be paid is other reserves within the meaning of rule I of the Second Schedule and should be taken into account in computing the capital of the company for the purpose of the Companies (Profits) Surtax Act 1964. In that view of the matter we are of the opinion that the decision of the High Court was right in treating it as reserve.
Issues Involved:
1. Inclusion of various reserves in the computation of capital under the Second Schedule to the Super Profits Tax Act, 1963. 2. Treatment of specific reserves such as Capital Reserve, Stocks and Stores Reserve, Bad and Doubtful Debts Reserve, Obsolescence Reserve, Loans and Insurance Reserve, Investment Reserve, and Forfeited Moneys. 3. Special Leave Petition concerning the treatment of Gratuity Reserve, Reserve for Special Survey, Reserve for Contingencies, Fleet Replacement Reserve, Reserve for Exempted Profits under section 84, Reserve for Investment Depreciation, and Dividend Equalisation Reserve. Detailed Analysis: 1. Inclusion of Various Reserves in the Computation of Capital: Under section 4 of the Super Profits Tax Act, 1963, every company is charged a super profits tax on its chargeable profits exceeding the standard deduction. The standard deduction is defined as an amount equal to six per cent of the capital of the company as computed in accordance with the Second Schedule, or Rs. 50,000, whichever is greater. The Second Schedule contains rules for computation of the capital of a company for the purpose of the Act. The main issue was whether the reserves claimed by the assessee should be included in the computation of capital. 2. Treatment of Specific Reserves: - Capital Reserve: The High Court found that the capital reserve represented a reserve and was not earmarked for any existing liability, thus it was held to be a reserve. The capital reserve consisted of Rs. 11,73,982, including an insurance claim of Rs. 12,212 and Rs. 11,61,770 transferred from the Profit and Loss account. This was rightly treated as a capital reserve. - Stocks and Stores Reserve: Created in 1950 by transfer from the Profit and Loss appropriation account, this reserve did not represent any existing provision for liability but was meant to safeguard against future diminution in value. The Tribunal rightly treated it as a reserve. - Bad and Doubtful Debts Reserve: Created in 1956 through the Profit and Loss Appropriation account with an amount of Rs. 5,00,000, this reserve was more than the amount reasonably necessary for bad and doubtful debts, thus constituting a reserve. - Obsolescence Reserve: Created in 1959 with Rs. 1,72,259, this reserve was meant to meet future liabilities and contingencies. However, due to insufficient facts and the item not being pressed, it was deleted from the reserve. - Loans and Insurance Reserve: Created prior to 1947 and transferred to the General Reserve account in 1963, this reserve was free from any burden and rightly treated as a reserve. - Investment Reserve: Created from surplus on the sale of investments, this reserve was not held as stock-in-trade and was treated as a reserve created out of capital profit. - Forfeited Moneys Reserve: The High Court did not treat this as a reserve, and this view was upheld. 3. Special Leave Petition: - Gratuity Reserve: Created for the first time during the preceding year and not claimed as revenue expenditure, it was to be included in the capital base as 'Other Reserves'. - Reserve for Special Survey: With a balance of Rs. 13,04,600 after expenses, this amount was to be included in the capital base. - Reserve for Contingencies: Amounting to Rs. 56,00,000, this reserve was meant for contingencies without specific liability and was includible in the capital base. - Fleet Replacement Reserve: Similar to the reserve for contingencies, this reserve of Rs. 54,35,250 was includible in the capital base. - Reserve for Exempted Profits under section 84: Amounting to Rs. 1,64,900, this was not meant for any liability and was to be included in the capital base. - Reserve for Investment Depreciation: Created to cushion the effect of fluctuations in foreign securities prices, this reserve of Rs. 7,09,144 was includible in the capital base. - Dividend Equalisation Reserve: Set apart to declare reasonable dividends, this reserve of Rs. 2,00,000 was includible in the capital base. The High Court's decision was upheld, affirming that funds created for liabilities not yet arisen are considered reserves and included in computing the capital of the company for tax purposes. The appeal and special leave petition were dismissed, with no order as to costs.
|
