9911796707
TMI Blog1963 (8) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... which shall, in respect of any chargeable account period ending on or before the 31st day of March, 1947, be equal to sixteen and two-thirds per cent of the taxable profits, and in respect of any chargeable accounting period beginning after that date, be equal to such percentage of the taxable profits as may be fixed by the annual Finance Act. By Finance Acts of 1948 and of 1949, the amount of taxable profits was reduced from sixteen and two-thirds per cent of the taxable profits to ten per cent Section 2(17) defines "taxable profits" as meaning the amount by which the profits during a chargeable accounting period exceed the abatement in respect of that period. "Abatement" has been defined in clause (1) of section 2 and, so far as is relevant for the purposes of this reference, means, in respect of any chargeable accounting period, ending on or before the 31st day of March, 1947, a sum which bears to a sum equal to - (a) in the case of a company, not being a company deemed for the purposes of section 9 to be a firm, six per cent of the capital of the company on the first day of the said period computed in accordance with Schedule II, or one lakh of rupees, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s investments so far as that cost exceeds any debt for money borrowed by it. 4. The assessee-company used to maintain what it called "Income Tax, super-tax, excess profits tax and deposit fund", and also the "taxation reserve account", which admittedly was build out of the profit appropriations from time to time. The company used to pay taxes under an account called the "taxes paid account" in which the amounts paid during the current year by way of advance, provisional and other taxes during the current year from the company's funds were debited. The system of accounting followed by the company was that after the assessments were finalised and the amounts of taxes were crystallised, the amounts of such taxes were transferred from the "taxes paid account" to the "taxation reserve account" and debited in that account, thus reducing the balance in that account and a corresponding credit entry used to be made in the second account, i.e., the "taxes paid account" and that account was the enclosed so far as that assessment so finalised was concerned. If on such finalisation of assessment, any refund was payable to the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... periods, and included only the net figure, i.e., positive in the case of the first chargeable accounting period and negative in the case of the second chargeable accounting period, in the capital computation for the purposes of abatement. Aggrieved by this decision, the assessee-company filed an appeal before the Appellate Assistant Commissioner who dismissed the appeal in respect of the chargeable accounting period January 1, 1948, to December 31, 1948, by observing as follow : "Now to my mind it is necessary to determine whether the taxation reserve of ₹ 11,65,524 is a real reserve set apart for meeting some future liability. This is a specified reserve and to the extent to which the same specific liability has already been met, the effect will be that the reserve will be depleted to the extent of the liability already discharged. It is necessary to took to the substance of the matter and not to the form in which the assessee chooses to make entries in the books of accounts. The assessee could have reduced the tad payments on the assets side from the taxation reserve and shown only a net reserve. In any case it is only the net figure which can really be termed as a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into the capital computation by the aforesaid rule of thumb method. If it is debited to the profit and loss account this account will be either depleted or go into debit to be shown on the assets side of the balance-sheet. In either case, such a balance, either credit or debit, would be outside the scope of capital computation. 9. The learned Advocate-General, on behalf of the Commissioner of Income Tax, has disputed the correctness of these conclusions of the Tribunal and submitted (1) that the reserves within the meaning of rule 2, Schedule II of the Act, must in substance and reality be reserves and not merely in name, (2) then in the instant case, the system of accounting adopted by the company showed that the taxes were paid first from the unappropriated available funds and debited as advances, that they were transferred at some subsequent date to the reserve account and debited in that account after making a corresponding credit entry in the "taxes paid account", thus showing that the payments of taxes were made in effect and substance from the reserve account, (3) that the fact that the refund of taxes, though small amounts, were credited to the "taxation re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rule. After examining the dictionary earning of the word "reserve" in Webster's and Oxford Dictionaries, the Supreme Court stated that the true nature and character of the disputed sum must be determined with reference to the substance of the matter and when this was borne in mind, it followed that on the 1st of April, 1946, which was the crucial date, the sum of rupees five lakhs and odd could not be called a "reserve" for nobody possessed of the requisite authority had indicated on that date the manner of its disposal or destination. On the other hand, on the 28th February, 1946, the directors clearly reserve. Nor did the company in its meeting on the 3rd April, 1946, decide that it was a reserve. It remained on the 1st of April, as a mass of undistributed profits which were available for distribution and not earmarked as "reserve". On the 1st January, 1946, the amount was simply brought from the profit and loss account to the next year and nobody with any authority on that date made or declared a reserve. The reserve maybe indication to show whether it was a reserve either of the one or the other kind. The fact that it constituted a mass of undi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny, in the words of the Supreme Court, from funds which were a mass of undistributed profits, and not from funds earmarked as reserve funds. To deduct this amount paid from such undistributed funds in the curse of the computation of capital from the amounts standing to the credit of the "taxation reserve account". would in fact amount to treating such amounts as reserves though the payments were made, not from the fund earmarked as such reserves, but from funds which were undistributed profits. 11. Now it cannot be disputed, and in fact the learned Advocate-General conceded, that an assessee is entitled, unless there is anything contrary in the taxing statute, to maintain his own system of accounting. The system of accounting adopted by the assessee-company in the instant case was to treat all payments of advance and other taxes during the relevant assessment years, as advances until the assessments were finalised. The system so adopted by the assessee-company has, to a certain extent, justification inasmuch as an assessee is not likely to anticipate with full certainly as to what precise amount he would be assessed finally, as there are likely to be some items in his re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts into a suspense account, and that the fact that the assessee claimed that as the mortgage litigation in that case had not ended, the amounts were not assessable, was wholly immaterial. The assessee there was carrying on money-lending business and had purchased the interest of a mortgage in 1922, in execution of a decree obtained against him by the assessee's father. In 1922, he instituted a suit or the mortgage. Prior to 1930, the assessee received several sums as interest which were not included by him in his returns of income on the ground that they were not yet taxable as the litigation had not concluded. The Income Tax authorities were also of the opinion that the assessee had treated all payments as being made into a suspense account. In 1943, the Income Tax authorities sought to reassess under section 34 of the Income Tax Act the payments as income of the year 1939-40 on the ground that this income was not received or did not become taxable until the mortgage transaction had been completed by the acceptance of a property by the assessee in 1939 in full discharge of all outstanding obligations. The High Court there observed the since the assessee had accepted the payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be treated as part of the reserves for the purposes of the Business Profits Tax Act unless credit in respect of them is actually given in the regular assessment. Advance payments of tax made under section 18A are payments on account, made under the compulsion of a statute, towards the discharge of an instant liability for liquidating a charge, the precise measure of which is to be determined at a later date. In respect of the payments made by an assessee as and by way of such advance payment under section 18A of the Income Tax Act, the disposing power of such an assessee over the moneys paid as advance taxes is completely and irretrievably lost and, therefore, it would not be possibly to say that moneys are still lying as part of his reserve. It is clear, therefore, that payments made by the assessee-company towards its liability of advance payments under section 18A of the Income Tax Act, cannot be said that the assessee-company, at the time when such payments were made, looked to the "taxation reserve account' for its payments. In our view, the "taxation reserve account" in the instant case was constituted to meet the liability of taxation on assessments when f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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