TMI Blog1980 (12) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... the rate of 15 per cent. on the plant and machinery, 25 per cent. on motor vehicles and 5 per cent. on buildings from year to year. The assets were re-valued by the assessee in 1962 as it thought it was desirable to provide for additional depreciation reserve over and above the normal depreciation. The additional depreciation reserve was worked out by adopting a certain percentage of the basic depreciation with reference to the year of purchase of those assets. The additional depreciation reserve was in a way provided for to meet the replacement cost which might be found necessary for the machinery and plant becoming too old and being rendered useless. In other words, the additional reserve was more or less like development rebate reserve intended to be utilised by the replacement of the machinery either by way of modernisation or by way of rehabilitation. At the beginning of the previous year relevant to the assessment year 1964-65, the additional depreciation reserve thus came to Rs. 8,30,716. The first part of the question relates to the decision of the Tribunal holding that the amount of Rs. 8,30,716 should be regarded as reserve for the purpose of computation of the capital of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... low was not annexed to the statement of case but learned advocate for the revenue drew our attention to the actual report and this was not objected to by the learned advocate for the assessee to treat it as a part of the report before us. The directors finally recommended the payment " towards reserve for additional taxation to cover super profits tax " a sum of Rs. 13 lakhs. Though we have not got the actual date of holding of the annual general meeting and the passing of the accounts, as recommended by the directors to the shareholders, yet in accordance with the provisions of the Companies Act it could not have been earlier than the expiry of three weeks from 30th April, 1963. In this connection, it is important to bear in mind the date, as we have mentioned before, that the S.P.T. Act with which we are concerned, received the assent of the President on the 4th May, 1963. To continue with the narration of events it must be stated that the ultimate liability for the super profits tax turned out to be Rs. 5,75,493. The company wrote off Rs. 2,24,000 out of Rs. 13 lakhs kept reserved for the relevant year. Thus, out of Rs. 13 lakhs, Rs. 5,24,000 was transferred to the general reser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h. VI of the Companies Act, 1956, which enjoins to go by the definition of the provision and reserve as given in Sch. VI to the Companies Act, 1956. It was pointed out that Pt. III of Sch. VI to the Companies Act, 1956, strengthened this position. On behalf of the revenue, however, it was urged that the S.P.T. Act, 1963, had received the assent of the President in the first week of May, 1963, while the directors' report to the shareholders for the year under appeal was signed on 30th April, 1963, by which time the Bill had already been passed by Parliament. It was, not, therefore, true, according to the learned advocate for the revenue, to contend that there was no existing liability as on the 30th April, 1963. It was, further, urged that at any rate the provision was made for a definitely known liability though the exact quantum was ascertainable only at a future date. It was, therefore, urged that the entire amount of Rs. 13 lakhs should be treated as provision and not as reserve and was rightly excluded from the capital base. It was secondly argued that even if for the sake of argument it was held that the excess payment of Rs. 7,24,507 was a reserve and not a provision. This wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn liability should properly be regarded as a reserve. Though the question of reserve and provision and the effect of the decision of the Supreme Court in the case of Metal Box Co. of India Ltd. [1969] 73 ITR 53; 39 Comp Cas 410 have been analysed in several decisions of the several High Courts including the numerous decisions of this court, we are of the opinion that it is indisputable that an excess provision even for a known liability should be treated as a reserve and not merely as provision. Certain basic facts will have to be borne in mind in this case and; we must consider the position prevailing as on I st January, 1963. The directors of the company recommended in their report to the shareholders that Rs. 13 lakhs should be treated as reserve for taxation. That recommendation was made on the 30th April, 1963, and by that time the S.P.T. Act had been passed by Parliament. It received the assent of the President on the 4th May, 1963. The directors' recommendation or the report could not have been accepted by the shareholders for at least three weeks after 30th April, 1963. Upon these basis, we have to decide whether this was a provision or a reserve. Reliance was placed on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the revenue that the Bill should be treated as (creating) a contingent liability. And as in this case when the amount was earmarked on 3-4-63, there was no liability at all, learned advocate for the revenue sought to urge before us that though the recommendation was made on the 3rd April, 1963, actually, the recommendations were accepted some time in June of that year after the passing of the Act. Therefore, learned advocate for the revenue ought to urge that the basic assumption made by the learned judge delivering the judgment in the said Division Bench was not correct. We are, however, not concerned in this case With this controversy. Here the facts are quite clear. The Act of Parliament has been passed by the 30th April, 1963, and that had been found by the Tribunal. So the contingency or the situation, which Mr. Justice Basak spoke of, that the Bill might or might not be passed into an Act by Parliament, arising before passing it, no longer was open in practical possibility, as the bill was passed by Parliament in the instant case. Furthermore, under the provisions of the I.T. Act, the directors' recommendations could not have become the decision of the company until it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before , the assessee also admitted the position that it was only the excess provision that has to be considered. Now, in considering the excess provision, we must take the reality of the situation. After the Act of Parliament had been passed it was not in the realm of a mere possibility even if it had not received the assent of the President. Furthermore, the directors in their recommendations had not finally decided the matter on the 30th April, 1963, but they had expressed that they had calculated that the tax liability under the Super Profits Tax Act would be Rs. 81 lakhs, but they recommended the provision for Rs. 13 lakhs. Therefore, the reasonable estimate of a reasonable liability was Rs. 81 lakhs and, in matters of this nature, as we have observed in the case of Bridge Roof Co. (India) Ltd. v. CIT [1981] 132 ITR 279 (Cal), the reality of the nature of the passing of the accounts of a company should be considered in considering a question of this nature, and this aspect should be viewed in a pragmatic business-like manner. In this case, as the estimated provision of a liability, which was no longer a mere possibility, though it had not become an actual legal liability bef ..... X X X X Extracts X X X X X X X X Extracts X X X X
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