TMI Blog1979 (1) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... the C.(P.)S.T. Act, 1964. Certain amounts were being shown in the balance-sheets of the assessee under the head " Earned Surplus ". The assessee's contention was that these amounts shown in its balance-sheets as on January 1, 1962, as on January 1, 1963, and as on January 1, 1964, were eligible for being included as a " reserve " in computing the capital of the assessee-company for the purpose of super profits tax and surtax under the respective statutory provisions for the assessment year 1963-64 (for super profits tax) and for the assessment years 1964-65 and 1965-66 (for surtax). Before the ITO, Companies Circle, reliance was placed on behalf of the assessee on two decisions of the Supreme Court, viz., (1) First National City Bank v. CIT [1961] 42 ITR 17, and (2) CIT v. Standard Vacuum Oil Co. [1966] 59 ITR 685. The ITO held that these decisions were of no assistance to the assessee inasmuch as the assessee had led no evidence with regard to the accounting practice followed by it. Accordingly, he applied the ratio of the decision of the Supreme Court in the case of CIT v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499, and excluded these balances under the headi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d surtax. As already noted, this conclusion had been reached by the AAC without the application of mind to the question whether the provisions of the enactments were similar or not. The Tribunal found that the provisions of the Business Profits Tax Act were in pari materia with the provisions of the S.P.T. Act, 1963. In para. 5 of its judgment the relevant rule has been extracted and it was observed that both the enactments simply referred to the term " reserve " or " reserves ". Thus, the view of the Tribunal was and it appears to us to be the correct view-that if the term " reserves " has been interpreted by the Supreme Court in any particular manner in a case arising under the Business Profits Tax Act, the decision would be binding and will be required to be applied if a similar question arose under the S.P.T. Act, 1963, A similar approach was required to be followed for the two later assessment years, viz., assessment years 1964-65 and 1965-66, where the rule under Sch. II to the C.(P.)S.T. Act, 1964, was required to be considered. The rule also talks about reserves and was similar to the rule under the S.P.T. Act but for the addition of the Explanation. The Tribunal further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on behalf of the assessee before it that the system of accounting which had been indicated in the two decisions was the generally prevalent system of accounting. In its opinion, it was not proper for the ITO to throw out the contentions of the assessee on the plea that the practice was not specifically proved before him. Accordingly, the Tribunal held that considering the generality of the observations made by the Supreme Court in regard to the practice prevalent in the United States they must be accepted as sufficient for the purpose of holding that the " Earned Surplus " shown in the balance-sheets of the assessee-company was similar in character to the " Earned Surplus " in the balance-sheets of the Standard Vacuum Oil Company which was considered by the Supreme Court in [1966] 59 ITR 685, and, accordingly, it held that the amounts must be regarded as reserves both under the S.P.T. Act and under the C. (P.) S. T. Act. For all the three years, therefore, the assessee's contentions were accepted. For the two later years, however, the Tribunal decided against the assessee on a limited point by applying the Explanation to r. 1 of the Second Schedule to the C. (P.) S. T. Act, 1964. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said decision, the decision of the Supreme Court in CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566 was applied. It was held in the said Bombay decision that the proposed additions made during the year were required to be related back to the first day of the previous year despite the Explanation. In this view of the question, Mr. Joshi stated that if the amount was considered to be a reserve, then, the principle enunciated in Otis Elevator Co.'s case [1977] 107 ITR 241 (Bom) was required to be applied and the answer to question No. 2 for the assessment years 1964-65 and 1965-66 is required to be given in favour of the assessee. Mr. Joshi, however, very strenuously Urged that on the other questions the Tribunal had erred and had misapplied the decisions in First National City Bank's case [1961] 42 ITR 17 (SC) and Standard Vacuum Oil Co.'s case [1966] 59 ITR 685 (SC). According to his submission, the Bombay High Court had occasion to consider these decisions in Shree Ram Mills Ltd. v. CIT [1977] 108 ITR 27, where these decisions were read in a qualified manner. Before referring to the last mentioned decision, we may briefly advert to the two Supreme Court decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Controller of Currency, Washington, extracting from such letter the relevant portion (at pp. 21 and 22 of the report-42 ITR). It was, inter alia, observed in this letter : "......The term 'undivided profits' simply follows a bank accounting nomenclature used in the United States to designate profits set aside, after provisions for expenses and taxes, dividends and reserves, for continuous future use in the business of the bank and it bears a close, if not identical, relationship to the Earned Surplus Account of an industrial corporation." (p. 22). The Supreme Court then observed that thus there was a clear difference between the system of accounting of banking companies in India and the United States, and it commented that the failure to appreciate this difference had led the Income-tax Appellate Tribunal in the first place and the High Court subsequently to arrive at an erroneous conclusion. According to the Supreme Court (p. 23 of 42 ITR): " In India at the end of an year of account the unallocated profit or loss is carried forward to the account of the next year, and such unallocated amount gets merged in the account of that year. In the system of accounting in the U.S.A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eserves but there was no allocation to a head called " General Reserve ". It was further pointed out as having been well settled that the accounts of the companies maintained under the American system are self-contained for each year. Under that system whatever remains on hand at the end of the year is entered on the liabilities, capital stock and surplus side as earned surplus. After extracting passage from the decision in First National City Bank's case [1961] 42 ITR 17 (SC), it was observed that the characteristics noted in the said case were not peculiar to the accounts of a banking company and were applicable with appropriate variations to the accounts of all companies in which different nomenclature was used, and the different nomenclatures used for non-banking companies were indicated as " surplus ", " undivided profits " or " earned surplus ". The view expressed was that as far as the American companies were concerned, under their practice of accounting, the balances shown under these several heads would be required to be considered as reserves. The revenue had very strongly relied upon the earlier observations of the Supreme Court in Century Spg. Mfg. Co. Ltd.'s case [19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of it and the balance was regarded as " earned surplus " at the end of the year. It upheld the decision of the High Court in this view of the matter that the " earned surplus " represented reserves. It is true that to a certain extent details as to the accounting practice have not been brought on record by the assessee before us. But the approach of the Tribunal as indicated earlier, viz., that the Supreme Court has in First National City Bank's case [1961] 42 ITR 17 (SC) laid down general principles as to the accounting practice almost universally followed in the United States, appearing to be proper. Further, we find enclosed to the statement of case the balance-sheets of the assessee-company for the several years under consideration, and they would appear to us to be in total conformity with the balance-sheets and the position noted therefrom in Standard Vacuum Oil Company's case [1966] 59 ITR 685 (SC). If that be so, it would appear to us that the matter is totally concluded in favour of the assessee by the aforesaid two decisions of the Supreme Court and the amount under the head " Earned Surplus " would be required to be considered as a reserve. It now becomes necessary to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the heads " Undistributed Profits " for the banking company and " Earned Surplus " for the non-banking company, were required to be treated as " reserves " and the reasons for such conclusion have been earlier indicated. The principles enunciated in the said two decisions were not available to Shree Ram Mills Ltd. [1977] 108 ITR 27 (Bom) and the ratio in Century Mills' case [1953] 24 ITR 499 (SC), therefore, was required to be applied fully and was applied fully to that assessee which was an Indian company which was mandatorily required to keep its balance-sheets in accordance with the provisions of the Indian Companies Act, 1913, and the Companies Act, 1956. We find nothing in the observations to be found in the second para. onwards at p. 42 of Shree Ram Mills Ltd.'s case [1977] 108 ITR 27 (Bom) as modifying, restricting or departing from the clear ratio laid down by the Supreme Court in First National City Bank's case [1961] 42 ITR 17 and Standard Vacuum Oil Co.'s case [1966] 59 ITR 685. These two decisions are clearly available to the assessee and have been properly applied by the Income-tax Appellate Tribunal. If that be our view, to the question referred to us for the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
