TMI Blog1973 (5) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... r to development rebate reserve : 55,000 Proposed dividend : Preference 35,746 Ordinary 4,87,858 ________ 5,78,604 ------------------ This left a balance of Rs. 9,760. The provisions made towards tax liability and actual payments of tax were as under : Rs. Provision as on 1-4-1961 4,00,000 Provision made during the year, 4,30,000 ---------------- 8,30,000 ----------------- Less : Advance tax for 1962-63 1,08,507 Provisional tax paid for 1961-62 3,93,851 ----------------- 5,02,358 ------------------ The provision for taxation as on March 31, 1961, was Rs. 2,91,493 as against the actual tax liability for 1961-62 of Rs. 2,85,343 leaving a surplus of Rs. 6,150. The appropriations towards gratuity were as under : Rs. Provision for gratuity as on 1-4-1961 2,20,181 Addition during the year 22,178 ------------------- 2,42,359 Less : Payments during the year 9,765 ------------------ 2,32,594 -------------------- In working out the capital base for the purpose of ascertaining the amount of standard deduction under the Super Profits Tax Act, 1963, the assessee included the following sums apart from the capital of Rs. 53,82,682 : Rs. De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the capital of the company as computed in accordance with the provisions of the Second Schedule or an amount of Rs. 50,000, whichever is greater. Schedule 1 sets out the rules for computing the chargeable profits. Rule 1 provides that the income, profits and gains under certain heads shall be excluded from the total income computed under the Income-tax Act for the year while computing the chargeable profits of a previous year. The Second Schedule sets out the rules for computing the capital of a company for the purpose of super profits tax. Rule 1 of that Schedule which comes up for consideration in this case is as follows: " 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 allowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rves " occurring in rule 1 of the Second Schedule has to be understood in a restrictive sense and as distinguished from a provision or liability, and that only amounts set apart as reserve for use in the business would come under the word " reserve " occurring in the said rule. What in effect the revenue contends is that it is only capitalised or tied up reserves that are contemplated by the rule and not all the amounts shown as reserves in the profit and loss account, irrespective of their nature. But, according to the assessee, the expression " other reserves " occurring in rule 1 will include any reserve not allowed in the computation of profits under the Income-tax Act, apart from the development reserve which is an allowable item under the Income-tax Act, and, therefore, the reserve need not be a tied up reserve, and a mere reserve or a provision will come under the word " reserve ". The Supreme Court in Commissioner of Income-tax v. Century Spinning and Manufacturing Co. considered a somewhat similar provision in rule 2(1) of Schedule 2 to the Business Profits Tax Act, 1947, which read : " Where the company is one to which clause (a) of rule 3 of Schedule I applies, its c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g sentence is quoted : ' It is a maxim in business that a man . . .. should have a hoard or reserve from which he can draw, when the times are untoward. ' Apart from the dictionary meaning of the word 'reserve', I think it can hardly be disputed that nothing can be reserved unless it has been reserved or laid by or stored for use or application in a future contingency which is anticipated as certain or likely. In the actual administration of companies also a part of the surplus profits is removed from the immediate business of the company by way of a provision against future contingencies and a reserve is thus created, although after being carried to the reserve, the amount in question may be invested or re-employed in the business, if the articles so permit. " In Aluminium Industries Ltd v. Commissioner of Income-tax the Kerala High Court came to consider the meaning of the expression " reserve " in rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, with which we are concerned. The court applied the test propounded by the Supreme Court in Century Spinning and Manufacturing Cos. case holding that the considerations governing the question under the Super Profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hand and reserves and surplus on the other, and that, therefore, the assessee itself should be taken to have treated this sum as a current liability or a provision. But we do not think that the manner in which the balance-sheet has been prepared will decide the question as to whether the amount is really a reserve or not for the pur- pose of the Super Profits Tax Act. In Standard Mills Co. Ltd. v. Commissioner of Wealth-tax the Supreme Court considered the question as to whether the liability for gratuity to employees under industrial awards is deductible as a debt owed on the valuation date under the Wealth-tax Act, 1957, and it held that the liability of the assessee to pay gratuity to its employees on determination of employment was a mere contingent liability which arose only when the employment of the employee was determined by death, incapacity, retirement or resignation, that such a liability did not exist in praesenti and, therefore, could not be deducted as a debt in computing the net wealth of the assessee, nor can such a contingent and future liability be taken into account for computing the assets of the assessee under section 7(2)(a) of the Wealth-tax Act, 1957. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh not to meet liabilities which have already arisen but as a prudent provision for a future liability which may arise are not reserves but are only provisions to meet liabilities. It is not disputed that the reservation in the present case is not for any commitment which has already arisen or payment of which has fallen due but is only a provision in regard to gratuity which may have to be paid to the employees as and when the liability may arise in future. " Next we come to the excess provision made for taxes. According to the assessee an excess or overshot provision is to be treated necessarily as a reserve, for the sum set apart is used for the business of the assessee and reference is also invited to the Circular No. 2-P(XV-6) dated 5th February, 1968, of the Central Board of Revenue which treats an excess provision as a reserve. That circular directs that an excess provision in the development rebate reserve account over and above the minimum statutory percentage should be taken to come under the words " other reserves " occurring in rule 1 of Schedule 2. In Commissioner of Income-tax v. Security Printers of India (P.) Ltd. , the term " reserve " in rule 1 of the Second Sch ..... X X X X Extracts X X X X X X X X Extracts X X X X
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