1983 (1) TMI 129 - AT - Income Tax

Summary

Issues Involved:
1. Classification of Rs. 52,44,822 as "reserve" or "provision" for purposes of statutory deduction under the Companies (Profits) Surtax Act, 1964.
2. Deduction of Rs. 29,885 from the total income for working out the chargeable profits.
3. Rejection of the claim of Rs. 40,000 as a reserve for pension.

Issue-wise Detailed Analysis:

1. Classification of Rs. 52,44,822 as "Reserve" or "Provision":
The core issue was whether Rs. 52,44,822 should be classified as a "reserve" or a "provision" for the purpose of statutory deduction under the Second Schedule to the Companies (Profits) Surtax Act, 1964. The Income Tax Officer (ITO) initially held that these amounts were provisions and not reserves, thus not eligible for statutory deduction. However, the CIT(A) accepted the assessee's claim, following the Tribunal's earlier judgment in a similar case involving the assessee.

The Tribunal reiterated that under the Banking Regulation Act, 1949, banks must identify doubtful debts and make provisions accordingly. The Reserve Bank of India had issued guidelines for making such provisions, which the assessee followed. The Tribunal emphasized that the classification depends on the true nature and character of the sums appropriated, considering the surrounding circumstances and the intention behind the appropriation.

The Tribunal found that the amounts were set apart to comply with statutory requirements and Reserve Bank of India directions, indicating these were reserves. The negligible payment of Rs. 819.45 in 1975 further supported this classification. The Tribunal held that Rs. 52,44,822 was rightly considered a reserve by the CIT(A) for statutory deduction purposes, drawing support from the judgments in Hindustan Lever Ltd. and Glaxo Laboratories.

2. Deduction of Rs. 29,885:
The second issue was the deduction of Rs. 29,885 from the total income for working out chargeable profits. The ITO had restricted this deduction to Rs. 11,951. The CIT(A) decided in favor of the assessee, allowing the full deduction of Rs. 29,885. The Tribunal upheld this decision, noting that the issue was covered by the judgment of the Punjab and Haryana High Court in Patiala Flour Mills vs. CIT. The Tribunal found no reason to deviate from this precedent and dismissed the revenue's appeal on this ground.

3. Rejection of Rs. 40,000 as a Reserve for Pension:
The final issue was the rejection of the assessee's claim of Rs. 40,000 as a reserve for pension. The CIT(A) had decided against the assessee on this matter. The assessee, in its cross-objection, relied on the judgment of the Madras High Court in Addl. CIT vs. Craigmore Land & Produce Company Ltd. The Tribunal, considering the entirety of the facts and the cited judgment, found merit in the assessee's claim and allowed the cross-objection.

Conclusion:
The Tribunal dismissed the revenue's appeal and allowed the assessee's cross-objection. The sum of Rs. 52,44,822 was correctly classified as a reserve for statutory deduction purposes, the full deduction of Rs. 29,885 was upheld, and the claim of Rs. 40,000 as a reserve for pension was accepted.