TMI Blog1977 (3) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... housand six hundred and forty-seven only) do not rank in for consideration as reserve on proper interpretation of Part I of Schedule VI to the Companies Act, 1956 ? (3) On the facts and circumstances of the case, whether the Tribunal is justified in law in holding that the reserve for taxation for Rs. 8,46,948 (rupees eight lakhs forty-six thousand nine hundred and forty-eight only) and dividend reserve for Rs. 17,47,647 (rupees seventeen lakhs forty-seven thousand six hundred and forty-seven only) was set apart for any specific liability and as such not eligible for consideration as reserve for the purposes of computation of capital base under the Companies (Profits) Surtax Act, 1964 ? " The assessee is a company. The assessment year is 1965-66. The relevant previous year ended on March 31, 1965. For the purposes of that Companies (Profits) Surtax Act, 1964 (hereinafter stated as " the Act "), the relevant date is April 1, 1964. After providing for depreciation and development rebate, the assessee suffered losses in the earlier year and this year as well and transferred certain amounts from its reserves for the purposes of appropriations and proposed dividends. On April 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d proposed to declare Rs. 17,42,353.20 as dividend for that year. This amount was also included in the " profit and loss appropriation account " and was shown as " dividend reserve " in the balance-sheet under the head " Reserves and Surplus ". The assessee also suffered loss in the accounting year 1963-64 and transferred from its earlier reserves certain sums for appropriation and proposed dividend. In the annual report for that year the directors proposed to transfer Rs. 17,40,000 to " Dividend Reserve Account " and proposed to declare Rs. 17,42,353.20 as dividend. In the balance-sheet for that year Rs. 17,40,000 was shown as added to the " dividend reserve ". It was also shown that Rs. 17,42,353.20 being the dividend for the earlier year was paid by the assessee in the accounting year ended on 31st March, 1964, and Rs. 17,47,647.80 remained as " dividend reserve". The Tribunal found that Rs. 17,47,647 and Rs. 8,46,948 were set aside by the assessee to meet specific liabilities and, therefore, it held that these two amounts were not eligible for consideration as reserves for the purposes of computation of the capital base of the assessee under the Act. Hence, we are concern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxation " on March 31, 1964. The Tribunal has ignored this sum of Rs. 48,75,000 in reaching the conclusion that Rs. 8,46,948 was set aside to meet the liability for sales tax to the States of Madras and Kerala. The question on perversity was not raised expressly or impliedly before the Tribunal by the assessee in its application for reference under section 256(1) of the Income-tax Act nor any such question was raised in the aforesaid four cases cited on its behalf. Accordingly, in those cases, the Supreme Court had no occasion to go into the question as to whether an aggrieved party is entitled to argue before the High Court that the decision of the Tribunal is perverse without raising that question in his application for reference before the Tribunal. Therefore, reliance on these cases was misplaced on behalf of the assessee. Further, in view of the decisions of the Supreme Court in the case of Karnani Properties Ltd. v. Commissioner of Income-tax [1971] 82 ITR 547 and in the case of Commissioner of Income-tax v. S. P. Jain [1973] 87 ITR 370, it must be held that the assessee is not entitled to urge before us that the conclusion reached by the Tribunal is perverse. Assumin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It, inter alia, reads as follows: "................additions to reserves out of the profits of a particular ' previous year ' proposed by the directors of a company would, on being approved in the annual general meeting, shed their character as proposed additions to reserves and will become part of the reserves of the company with effect from the first day of the immediately following 'previous year '. Accordingly, these will have to be treated as ' reserves ' as on such first day in computing the capital of the company for the purposes of the Companies (Profits) Surtax Act, 1964." The words underlined by me conclusively show that this circular will apply only where the directors of a company have proposed to make additions to reserves out of the profits of a particular previous year. Since the assessee had suffered losses in the consecutive years as aforesaid and the directors proposed to make additions to reserve out of the earlier years' reserves as already stated, this circular cannot apply to the facts and circumstances of this case. Now, briefly speaking, chargeable profit for the purposes of surtax is to be computed by applying the rules contained in the First and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by William Pickles in the second edition of his book titled " Accountancy ", at page 192, are " amounts set aside out of the profits and other surpluses which are not designed to meet any liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance-sheet". The case law on reserves and provisions has been exhaustively discussed by a Division Bench of this court presided over by me in the case of Braithwaite Co. (India) Ltd. v. Commissioner of Income-tax, reported in [1978] 111 ITR 825 (Cal). Since the learned counsel for the assessee has accepted the correctness of that decision, it is unnecessary for us to discuss it here. Now, the Explanation contained in the Second Schedule to the Act expressly provides that the amounts standing to the credit of any account in the books of the company which is of the nature of, inter alia, item No. 6 under the head " Reserves and Surplus " or in the nature of the item under the head " Current Liabilities and Provisions " in the " form of balance-sheet " given in Schedule VI to the Companies Act, 1956, shall not be regarded as reserve for the purposes of computation of the capital of the com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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