TMI Blog1980 (5) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax Officer's not including the undermentioned reserves in the computation of the capital basis for working out the standard deduction for these three assessments Reserve 1964-65 1965-66 1966-67 Rs. Rs. Rs. For depreciation 3,00,000 3,00,000 3,00,000 on investments For doubtful debts - 2,67,813 1,95,127 Special Reserve under proviso (ii) to rule 1, clause II of the First Schedule to the Super Profits Tax Act, 1963 3,50,000 The reserve for depreciation on investments was not included in the computation of the capital base on the ground that it represented a kind of a provision and did not constitute a reserve. The word 'reserve' has been interpreted to mean 'something specifically kept apart for future use or for specific action'. The word 'reserve' thus invariably bears the sense of a reservation of finance for long term use when employed in the context of accounting. If the reserve for depreciation is judged by this important criterion, it has to be accepted to be a reserve even if it is created with the object of preserving a company's position against future losses occurring as a result of depreciation in the value of the investment it owns. However, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,304 Under loans and advances (unsecured) Advances to sundry parties considered doubtful 2,14,052 9,73,229 'The difference between the two amounts of the reserve and the provision as on June 30, 1964, was Rs. 1,95,127 and this was the amount which, the assessee contended, should be included in the computation of the capital base as on June 30, 1964. The difference between the reserve (Rs. 11,27,516) as on June 30, 1963, and provision on that date (Rs. 8,59,703) was Rs. 2,67,813. These two amounts thus represented, according to the assessee, the excess of the reserves over the provision and since the reserves were created on an ad hoc basis, that excess partook of the nature of the reserves. The AAC accepted the contention of the assessee and held that the Surtax Officer was not justified in not including in the assessment years 1965-66 and 1966-67 the reserves for doubtful debts amounting to Rs. 2,67,813 and Rs. 1,95,127, respectively. He, therefore, directed inclusion of these reserves in the capital base and to modify the assessments accordingly. With the other contentions raised before the Appellate Tribunal, we are not concerned with in the instant reference. When the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Bombay High Court that the Tribunal found as a fact that the said amount stood in the company's books for several years and was meant to be utilised for writing off bad or doubtful debts and that such debts were invariably debited to the profit and loss account and not to the reserve account and the Tribunal, therefore, concluded that the account was not maintained to meet any specific liability for bad or doubtful debts. As the question was decided by the Tribunal on a consideration of the factual position and as it had followed the principles laid down by the Supreme Court, no question of law arose out of the Tribunal's order according to the Bombay High Court. So far as provisions for bad and doubtful debts are concerned, the facts in the instant case are more or less identical with the facts before the Division Bench of the Bombay High Court. In the instant case, it was found that the provision for doubtful debts is provided for in the balance-sheet as we have indicated hereinbefore. In the case of Parke Davis (India) Ltd. v. CIT [1981] 130 ITR 813, the Division Bench of the Bombay High Court had again dealt with this question. There, for the assessment year 1963-64, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight or might not arise in future and not in respect of any known liability, it was to be treated as a " reserve " and was includible in the computation of capital. It was further held that the amounts appropriated to the reserve for bad and doubtful debts were appropriated entirely on an ad hoc basis. That amount did not have any relation whatsoever to any amount of debt which could actually be said to be bad or doubtful. There was no existing liability, nor was there any known liability, because it was never ascertained as to which debt was likely to become a bad debt and the practice of the assessee-company was to debit bad and doubtful debt to the profit and loss account and not to the reserve in question. The amount of reserve for bad and doubtful debt was, therefore, a " reserve " and includible in the computation of capital. The other questions with which the Division Bench of the Bombay High Court dealt with are not relevant for our present purpose. This question has been examined by this court in several decisions and it would be relevant in view of some of the arguments canvassed before us to refer to some of those decisions. But before we do so, we may first refer to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tingency. It is very important, in our opinion, to remember the facts with which the Division Bench of this court was concerned because we find that in some subsequent decisions some doubts have been expressed as to what this case had actually decided. This case, as we have understood, followed the ratio of the principles of the Supreme Court in the case of CIT v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499, in so far as it held that a sum set apart could not be treated as reserve if it remained as a mass of undistributed profits of the company without anything else. This case further decided that if there was a provision for an existing liability as such, the said provisions could not be treated as reserves. There are the two points which this case actually decided. This case, however, noted the contentions of learned advocates for different parties. At p. 736 (of 111 ITR) of the report, Mr. Justice A. N. Sen, as the learned Chief justice then was, observed, inter alia, as follows : " Mr. Bajoria has fairly stated that in view of the decision of the Supreme Court in the said decision of Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499, he cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in, the decision in the case of Braithwaite and Co. (India) Ltd. v. CIT [1978] 111 ITR 729 (Cal) and the decision in the case of CIT v. Burn and Co. Ltd. [1978] 114 ITR 565 (Cal), were in conflict. But, for our own purpose, we have set out the ratio, the facts and the actual decision in the case of Braithwaite and Co. (India) Ltd. v. CIT [1978] 111 ITR 729, in order to find out for ourselves whether there was any conflict between this decision and in the subsequent decision. The Division Bench in the case of A. P. V. Engineering Co. Ltd. v. CIT [1973] 119 ITR 937 (Cal) had also referred to a decision in the case of Duncan Brothers and Co. Ltd. v. CIT [1978] 111 ITR 885 (Cal), and indicated that there might be some difference of opinion between that case and in the decision of ours in the case of CIT v. Burn and Co. Ltd. [1978] 114 ITR 565 (Cal). It is, therefore, necessary to examine the decision in the case of Duncan Brothers and Co. Ltd. [1978] 111 ITR 885 (Cal). In the decision in the case of Duncan Brothers and Co. Ltd. v. CIT [1978] 111 ITR 885 (Cal), the Division Bench observed that the term " reserve " had not been defined in the Super Profits Tax Act. Having regard to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of the three disallowed items, viz., provision for gratuity, provision for interest on sales tax and provision for taxation, it was held by us that in the statement filed before the AAC, the explanation given by the assessee in respect of the three disallowed items were as follows : " (1) Provision for provident institution long service bonus: Rs. 1,02,200. This is a reserve to cover payments to those employees who joined the provident fund before 1925, as and when they retire, based on the last basic salary drawn. Each year, therefore, the company makes provision for the difference in salaries after adjusting any payment made. N.B.-For I.T. assessment purpose, the provision is added back and the actual payments are claimed. (2) Provision for bonus: Rs. 39,40,000. Bonus is payable after the annual general meeting of the company and also after a settlement has been arrived at between the company and the unions. The amount charged in the accounts is only an estimated, figure. N.B.-I.T. assessment is made on actual payment basis. (3) Taxation contingency reserve: Rs. 35,00,000. Following prudent financial policy of the company, estimated tax saving for claiming t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plain natural meaning it is clear that the sum of Rs. 5,08,637 was kept in reserve by the company and not distributed as profits and subjected to taxation. Therefore, it satisfied all the requirements of rule 2. The directors had no power to distribute the sum as dividend. They could only recommend, as indeed they did, and it was up to the shareholders of the company to accept that recommendation in which case alone the distribution could take place." It may be mentioned that the Supreme Court was dealing in the case of CIT v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499 with the Business Proffts Tax Act. That was a tax dealing with companies. The expression " reserve " was, therefore, understood in the context of companies. We are making this observation in order to meet the argument that in respect of these Acts the expression should be construed in the context of company law and not in the context of the general law. But in the context of company law the Supreme Court expressed that " reserve " should mean the profit earned by a company and not distributed as dividends to the shareholders but kept apart by the directors for any purpose to which it might be put ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um Oil Co. [1966] 59 ITR 685 (SC), understood these expressions in respect of either the Business Profits Tax Act or S.P.T. Act in the background of taxation of profits of the companies. Therefore, the notion of an ordinary meaning given was applied by the Supreme Court in understanding these expressions even in respect of taxation of companies. We also understood in the case of CIT v. Burn and Co. Ltd. [1978] 114 ITR 565 (Cal) that the decision in the case of Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC) though it made a clear distinction between " provision " and " reserve " in the context of provision yet was in the context of the Companies Act. But, we have been unable to discover any conflict between either in the case of Braithwaite and Co. (India) Ltd. v. CIT [1978] 111 ITR 729 (Cal) or in the case of Duccan Brothers and Co. v. CIT [1978] 111 ITR 885 (Cal) and the decision in the case of CIT v. Burn and Co. Ltd. [1978] 114 ITR 565 (Cal). We had, however, referred to the decision of the Bombay High Court in the case of Shree Ram Mills Ltd. v. CIT [1977] 108 ITR 27 and then we formulated the following tests: (i) A mass of undistributed profits could not au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Division Bench of this court in the case of A.P.V. Engineering Co. Ltd. v. CIT [1979] 119 ITR 937 observed that Parliament had the advantage of considering the interpretation of the Supreme Court when it introduced the Companies Act 1956. It was observed by the Division Bench at p. 943 of the report that in this context the Companies Act of 1956 was of great significance and reference was made to s. 217 of the Companies Act, 1956, and regln. 99. At page 951 of the report, the Division Bench had referred to the Indian Companies Act, 1913, and observed that no differentiation had been made between provision and reserve in the subsequent Act of 1956. This reference was made to the provisions of the balance-sheet. The reference to the balance-sheet as contained in the Companies Act of 1913 which is annexed to Table A of the Regulation indicated the form of the balance-sheet. Reserve fund under Part VI shows the amount set apart from profits to meet the contingencies. The amendment made in 1938 introduced s. 131A in the Companies Act of 1913 provided for the similar obligation though not in identical language as that of s. 217 of the Companies Act of 1956. Section 131A of the Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g any normal method of accountancy actuarial or otherwise, could not be considered to be a contingent liability which merited exclusion from being considered as " reserve " in the context of r. 1 of Sch. II to the Act. This aspect, we emphasised, was important even if one considered the expression " reserve " in contradistinction to provision on accountancy principle. Therefore, the Tribunal was right in holding that the sum of Rs. 20,60,869 shown by the assessee in its accounts as provision for " labour retiring gratuity " was a reserve so as to be eligible for inclusion in the capital computation under the Second Schedule to the C. (P.) S. T. Act, 1964. We noted that the Explanation had been introduced for the removal of certain doubts. The Division Bench of this court in the case of A. P. V. Engineering Co. Ltd. v. CIT [1979] 119 ITR 937 (Cal) has observed that it is not proper to consider a prior statute by the expression used in the later statute. We respectfully agree with that view so far as it goes. But if the Legislature says that for removal of doubts it has to be given some meaning, that intention of the Legislature has to be respected. This Act of 1964 was being passe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ltd. [1979] 116 ITR 539 (Cal) was perhaps too widely stated. Explanation is dealing with the nature of item (5) or item (6) or item (7) under the heading " Reserves and Surplus " or of any item, that is to say, all the items under the heading " Current Liabilities and Provisions ". Bat even apart from that explanation, we have held in that case that the items considered in the decision could not be considered to be anything but reserves. There is provision in the appendix to the Companies Act providing as to how the balance-sheet should be construed and it was contended that with the aid of interpretation, in any event, a provision for depreciation for investment allowances could not be considered to be reserve. It is true that the interpretation clause is an aid to the construction, but the provision for depreciation, that had been made, was in the context of the facts and circumstances of the case. Here, in this case, there was not any evidence of any depreciation in the value or of any liability on account of depreciation in the value of the investment. It was merely based on a hypothetical evaluation. Therefore, in either light, that is to say, in the light of commercial ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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