TMI Blog1977 (11) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... surplus" in its balance-sheet as at the 30th September, 1962. Rs. Reserve for taxation--As per last balance-sheet 15,48,450 Less : Surplus due to decrease of anticipated profits on contracts-in-progress written back 4,22,850 In the same balance-sheet under the heading "Provision", there was an item as follows : Rs. Provision for taxation 35,44,546 Less: Advance payments 21,94,331 In the assessment for super profits tax the assessee contended that the said sum of Rs. 15,48,500 under the heading "Reserve for taxation" was a reserve and ought to be taken into account in the computation of capital under the Second Schedule to the Super Profits Tax Act, 1963. The Super Profits Tax Officer held that this item could not be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tention of the revenue and held that it was clear from the description in the account that the amount in question was not intended to meet any known liability for tax. It was just a reserve and had been kept separately, so that whenever it was necessary any extra amount needed for taxation could be transferred from it and it was only a special head under the head "General reserve". The Tribunal upheld the order of the Appellate Assistant Commissioner. From this order of the Tribunal the following question has been referred for determination : "Whether, on the facts and in the circumstances of the case, the sum of Rs. 15,48,450 appearing as a reserve for taxation was a 'reserve' within the meaning of rule 1 of the Second Schedule to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found that 9/10ths of a contract had been performed in the accounting year in question and it was held that section 13 was applicable and the profits for that accounting year should be determined by the Income-tax Officer. The facts of that case and the point decided are not of much relevance in the instant case. (b) Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53 ; 39 Comp Cas 410 (SC) was cited for the following oft-quoted passage at pages 67-68 of the report. "The distinction between a provision and a reserve is in commercial accountancy fairly well known. Provisions made against anticipated losses and contingencies are charges against profits and, therefore, to be taken into account against gross receipts in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing payment of bonus for earlier years, namely, 1958 to 1961. The dispute was settled in October, 1962, as a result whereof the assessee had to pay a sum of Rs. 77,00,425. Under the heading "Current Liabilities and Provisions" in its balance-sheet the assessee had set apart a sum of Rs. 40,00,000 describing the same as provision for contingencies. The said sum of Rs. 40,00,000 was adjusted in making payment of the bonus as settled. On these facts, the Bombay High Court held that in view of the dispute pending before the statutory adjudicating machinery giving rise to a contingent liability, a provision had been made by setting apart this amount and it could not be included in the capital computation for the purpose of the Super Profits Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... real (ordinarily, a current liability), and recognition in the accounts as required, notwithstanding that its amount must be estimated in whole or in part. The possibility of a future loss, as from fire, not linked with a past event does not give rise to a contingent liability. Following are the common sources of contingent liabilities....... " Dr. D. Pal, learned counsel for the assessee, has contended, on the other hand, that the matter is concluded by the decision of the Supreme Court in Metal Box Company of India Ltd. [1969] 73 ITR 53 ; 39 Comp Cas 410 (SC) and that of the Bombay High Court in the case of Century Spinning Mfg. Co. Ltd. [1977] 108 ITR 431. He submitted that it has been found both by the Appellate Assistant Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntingent liability quoted in Century Spg. Mfg. Co. Ltd. [1977] 108 ITR 431 (Bom) are also illuminating. In the definition from Spicer Pegler many items of contingent liability are given by way of example, viz., discounted bills, forward contracts, guarantees for third parties and speculative transactions, but there is no mention of future taxation. The Dictionary for Accountants states that only an obligation relating to a past transaction might result in a contingent liability. A future assessment as provided for in the instant case is not a past transaction in that sense. The facts in the case of the Century Spg. Mfg. Co. [1977] 108 ITR 431 (Bom) are also clearly distinguishable from the facts in the instant case. In that case, th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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