TMI Blog1984 (5) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... joint stock company under the name and style of Hindustan Insecticides Limited, the assessee herein. The plant and machinery received by the Government of India was allowed to be used by the assessee with a direction that the assessee will discharge the obligations of the Government of India under the agreement. The matter as to how the plant and machinery should be capitalised in the balance-sheet was raised by the assessee. By letter dated December 5, 1957, the assessee was informed of the Government decision in this regard. This was : " (1) The cost of free technical assistance by the UNT 44 in terms of the joint Plan of Operation need not be capitalised. (2) The plant and equipment supplied by the UNICEF should not be exhibited in the balance-sheet of the company as long as these are not actually transferred to the company. However, as the plant and equipment will be used by the company, an amount equal to the estimated depreciation may be charged to the cost of production in the form of rent by contra-credit to a suitable reserve. If and when the ownership of the plant and equipment is transferred to the company, the assets may be taken over in the books of the company a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction in the income-tax assessments for assessment years 1956-57 to 1960-61, it could not be allowed as deduction in terms of clause (iii) of rule I of the Second Schedule to the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as " the Act "). It is only to the extent of balance of Rs. 12,02,325 that we are concerned in the present reference. To complete the narration, it may be mentioned that a similar provision of Rs. 1,33,989 in the year ending March 31, 1965, raising the figure of total provision to Rs. 26,80,705 was made on November 30, 1965, on which date the Government intimated to the assessee that the value of the plant and equipment was Rs. 28,47,170 and asked the assessee to re-structure the capital as under and issue shares to the Government for the said sum : Rs. (a) Authorised capital 1,30,00,000 (b) Subscribed capital 1,25,47,000 The assessee issued shares in favour of the Government of the face value of Rs. 28,47,170 against the price of the plant and machinery supplied by the Government. In proceedings under the Surtax Act for the assessment year 1965-66, it was submitted before the Surtax Officer by the assessee that while computing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share capital; (ii) its reserves, if any, created under the proviso (b) of 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) ; (iii) its other reserves as reduced by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the Indian Income-tax Act, 1922 (11 of 1922) or the Income-tax Act, 1961 (43 of 1961) : ....... Explanation: For the removal of doubts it is hereby declared that any amount standing to the credit of any account in the books of a company as on the first day of the previous year relevant to the assessment year which is of the nature of item (5) or item (6) or item (7) under the heading 'Reserves and Surplus' or of any item under the heading 'Current liabilities and provisions' in the column relating to 'liabilities' in the `Form of Balance-sheet' given in Part I of Schedule VI to the Companies Act, 1956 (1 of 1956), shall not be regarded as a reserve for the purposes of computation of the capital of a company under the provisions of this Schedule. " The r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay 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 with substantial accuracy; (b) the expression 'reserve' shall not, subject as aforesaid, include 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 ....... and in this sub-clause the expression ' liability ' shall include all liabilities in respect of expenditure contracted for and all disputed or contingent liabilities. (2) Where (a) any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, not being an amount written off in relation to fixed assets before the commencement of this Act; or (b) any amount retained by way of providing for any known liability ; is in excess of the amount which in the opinion of the directors is reasonably necessary for the purpose, the excess shall be treated for the purposes of this Schedule as a reserve and not as a provision." The question in the present reference involves the interpret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls within the expression 'provision' and if it does, then clearly the concerned sum will have to be excluded from the computation of capital, but in case the retention or appropriation of the sum is not provision as defined, the question will have to be decided by reference to the true nature and character of the sum so retained or appropriated having regard to several factors as mentioned above and if the concerned sum is in fact a reserve then it will be taken into account for the computation of capital. " After setting out the proper approach to be adopted in such a case, as indicated by the Supreme Court, it will be proper now to examine the appropriation in the present case. It will be seen that till November, 1965, the Government of India did not make up its mind in regard to the mode or the terms of transfer to the assessee, and indeed it could not, as the Government itself did not know the terms under which the plant and machinery handed over to the Government would be formalised as that was a matter for bilateral discussions between the Government and the U.N. Organisation. At the same time, the assessee had to finalise its accounts for various years. The Government in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puted or contingent may or may not arise at some date in future. It was held that it was necessary in that context to restrict the operation of this definition only to cases where there is no liability, i.e., the liability referable to and outstanding transaction or an event that has taken place as a result of which it is probable that liability will be fastened on the company. It should be a known liability though it cannot be accurately determined. In another decision of this court in Addl. CIT v. Punjab National Bank [1983] 142 ITR 673, it was held that the question to be ascertained from the analysis of the balance-sheet is whether the same forms part of the capital of the company or whether they are just deferred liabilities. If they are deferred liabilities, then they are provisions. They are reserves if they are used in the capital of the company with a view to earn profits. The assessee, in the present case, made a provision in the balancesheet in respect of the amount debited to its account as lease rent money. The amounts of lease money claimed by the assessee amounting to Rs. 12,02,325 out of Rs. 25,46,717 were not allowed as deduction in the computation of the total i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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