TMI Blog1980 (5) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer had wrongly included the above two items for computing the capital under the C. (P.) S.T. Act, 1964. As the Commissioner was of the view that the order of the Surtax Officer was erroneous in law and prejudicial to the interests of the revenue, he sought to revise the same under s. 16 of the C. (P.) S.T. Act, 1964. So, he issued a notice to the assessee to show cause why the order of the Surtax Officer should not be revised. The assessee submitted its explanation before the Commissioner. The Commissioner was of the view that the amounts in dispute represented amounts set apart for meeting the liabilities of the assessee-company. Thus, the Commissioner held that the Surtax Officer erred in treating the above two amounts as reserves. Hence, he set aside the order of the Surtax Officer and directed him to make a fresh assessment. The assessee preferred appeal before the Tribunal. It was urged before the Tribunal that the disputed amounts were reserves and the Commissioner was not justified in setting aside the order of the Surtax Officer. On behalf of the revenue, it was urged that the disputed amounts were " provisions " and not " reserves ". The Tribunal considered the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d these amounts were not " provisions " but only " reserves. It was, therefore, held that the Surtax Officer had rightly included these amounts in the computation of the capital. The Tribunal, accordingly, set aside the order of the Commissioner and allowed the appeal. As the Tribunal appears to have referred to the decisions of the Supreme Court in the cases of CIT v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499, CIT v. Standard Vacuum Oil Co. [1966] 59 ITR 685 and Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 ; 39 Comp Cas 410, in support of its reasonings to reverse the findings of the Commissioner, it would be better to find out what are the actual decisions of the Supreme Court in these cases. In CIT v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499 (SC), it was held that " reserves " normally means profit earned by a company and not distributed as dividends to the shareholders but kept apart by the directors for any purpose or use in the future. In the case of CIT v. Standard Vacuum Oil Co. [1966] 59 ITR 685, the Supreme Court, on the other hand, held that reserves built up from sources other than profits may be admissible f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) it should be apparent from the surrounding circumstances that the amount so set apart is in fact a reserve to be utilised in future for specific purpose on a specific occasion; (iii) clear conduct on the part of the directors in setting apart a sum from out of the mass of undistributed profits avowedly for the purpose of distribution as dividend would be destructive of making that amount reserve; and (iv) having regard to the purpose of the Rules framed for the purpose of computing the capital of the company for the purpose of the Super Profits Tax Act, the amount so set apart should be available to the assessee for the purpose of its business. " Mr. Bagchi contends that in order to set apart an amount as reserve there must be an indication to do so by the persons possessing the requisite authority, i.e., the directors. In this case, the company itself having shown the amount in the balance-sheet as " provisions " cannot be subsequently allowed to treat the amount as a " reserve ". The intention of the company, according to him, was apparent as not to treat the amount as " reserve ". Reliance is placed on the Full Bench decision of the Andhra Pradesh High Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herwise the amount set apart must be taken to be a provision. Next, Mr. Bagchi for the purpose of explaining the import of contingent liabilities draws our attention to the decision in the case of CIT v. Century Spg. Mfg. Co. Ltd. [1977] 108 ITR 431 (Bom). In this case, in the balance-sheet of the assessee-company as at December 31, 1961, a sum of Rs. 40 lakhs was shown as " provision for contingencies " and in the profit and loss account for the year ended December 31, 1961, also the said sum of Rs. 40 lakhs was debited as " provision for contingencies ". Therefore, on January 1, 1962 (the material date for computing the capital base under the S.P.T. Act, 1963, for assessment year 1963-64), the said sum of Rs. 40 lakhs stood appropriated as provision for contingencies. In the directors' report for the year ended December 31, 1962, it was stated that out of the gross profit of Rs. 3,77,93,273, a sum of Rs. 77,00,425 had been set apart towards payment of bonus to the employees of the textile section for the years 1958 to 1961 and the directors' report further stated that for the purpose of making this payment the amount of Rs. 40 lakhs, which had been set apart as provision for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in an industrial adjudication which was pending under a statute will have to be regarded as a provision made for a known contingent liability, the quantification whereof was to depend upon either the actual award that would be made by the adjudicating machinery or as result of settlement that may be arrived at by the parties. Therefore, the setting apart of the sum of Rs. 40 lakhs being in the nature of a provision would not be includible in the capital computation of the assessee-company for the purpose of the S.P.T. Act, 1963. To show us the characteristics of " provision " and " reserve Mr. Bagchi takes us to the decision of this court in the case of CIT and SPT v. Eyre Smelting Pvt. Ltd. [1979] 118 ITR 857. The characteristics of provision and revision are mentioned therein as follows (headnote): " The characteristics of a 'provision' are (a) provisions are made against anticipated losses and contingencies; (b) provisions are charges against profits ; (c) provisions are taken into account in the profit and loss account against gross receipts; (d) an amount set aside out of profits designed to meet a liability or contingency or commitment or diminution in the value of asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following year, that is, for 31st June, 1962, it is again described as a reserve for pension fund. But all the time in the balance-sheet it was shown as " reserve " under the head " Reserve and Surplus ". Thus, in refuting Mr. Bagchi's arguments it is contended that it would not be right to say that the company itself had shown the amount in the balance-sheet as " provisions ". In support of his argument that the amount in question may be treated as reserve he relies on the decision of the Karnataka High Court in Addl. CIT v. Indian Telephone Industries [1979] 118 ITR 291. In this case, the subsidy received by the assessee had to be utilised for the construction of houses of workers and on such utilisation it would become part of the assets of the assessee. The question of repayment would arise only when the assessee went into liquidation or where the condition of grant was violated. There were unknown factors on the date of preparation of the balance-sheet. The subsidies could not, therefore, partake of the character of provision. The surplus referred to in item 5 of Sch. VI to the Companies Act, 1956, is the surplus which remains over after allocation of reserves. As the subsidi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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