TMI Blog1973 (9) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... he present reference, we must hold for reasons stated in our judgment in the said reference that the Tribunal was not right in allowing the claim for deduction of the annual sum of Rs. 4 lakhs only to the extent allowed by it in the corresponding income-tax appeal and the said question is accordingly answered in the negative, against the department and in favour of the assessee. In view of our decision in the said reference, the first question has not been any further argued in the instant reference. The facts of the case relating to the question No. 2, with which we are now concerned in the present reference, have been set out in the statement of the case and the same may be briefly indicated. The statement of the case relates to the assessment year 1963-64 for which the previous year concerned is the calendar year 1962. For the purpose of computing the chargeable profits of the assessee-company, the Super Profits Tax Officer adopted as a starting point the total income as computed for the income-tax assessment, namely, Rs. 1,25,90,785, and computed the chargeable profits at Rs. 42,59,972 under section 4 of the Super Profits Tax Act. Super profits tax is leviable in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on for gratuity, held that the balance in this account of Rs. 5 lakhs as on 1st January, 1961, should be treated as part of the reserves. The Tribunal in its order observed : "The balance-sheet for the year 1962 was drawn up in May, 1963. So we have to go back to the accounts of the calendar year 1961 and see what are the reserves to be considered as on Ist January, 1962. The balance-sheet for that year was drawn up in March, 1962, and considered by the directors in the general meeting thereafter. Therefore, the appropriations out of profits being after 1st January, 1962, have not to be taken into account." The Tribunal held : " The Income-tax Officer has taken into account, apart from share capital, general reserves of Rs. 63,50,000 and development rebate reserve of Rs. 10,34,450 only. The provision for taxation is not really a reserve and it has rightly been treated as having been set aside to meet a definite liability. It is now well settled that liability to tax arises on the last date of the previous year ; consequently the provision for taxation has rightly been treated as not a reserve. There was an item of proposed dividend of Rs. 14,14,948 in the balance-sheet as o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Supreme Court is : " (1) To keep for future use or enjoyment ; to store up for some time or occasion; to refrain from using or enjoying at once. (2) To keep back or hold over to a later time or place or for further treatment. (3) To set apart for some purpose or with some end in view ; to keep for some use. (4) To retain or preserve for certain purposes." It is the contention of Mr. Bajoria that on the basis of the aforesaid meaning of the word reserve, the amounts in question clearly come within the meaning of the word "reserve" as these are amounts set apart for future use or enjoyment and these are also amounts set apart for some purpose or with some end in view to keep for some use. Mr. Bajoria has contended that the same meaning has been given to the word " reserve " by the Supreme Court in the case of Commissioner of Income-tax v. Standard Vacuum Oil Co. [1966] 59 ITR 685. Mr. Bajoria has also relied on the decision of this court in the case of Indian Steel and Wire Products Ltd. v. Commissioner of Income-tax [1958] 33 ITR 579 (Cal). Relying on the aforesaid decisions Mr. Bajoria contends that in construing the word "reserve" the ordinary dictionary meaning sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court on the ground that the same Bench of the Allahabad High Court took a different view in this case on the identical question without referring to its earlier decision. (5) Commissioner of Income-tax v. Vasantha Mills Ltd. [1957] 32 ITR 237 (Mad).--Mr. Bajoria has referred to Schedule VI to the Companies Act, 1956, and has drawn our attention to the form of the balance-sheet particularly to the item under the head " Reserve and Surplus ". Mr. Bajoria has, however, argued that in view of the decisions of the Supreme Court in the case of Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499 and also in the case of Standard Vacuum Oil Co. [1966] 59 ITR 685, this court, in construing the word " reserve ", in so far as this Act is concerned should give the said word its ordinary dictionary meaning, and by giving to the word the ordinary dictionary meaning, this court should hold that these items claimed constitute reserves and should be considered to be reserves for the purpose of computation of the capital of the company under this particular Act. Mr. Bajoria has fairly pointed out that these items are to be treated as provisions and are not to be considered as reserves ei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 73 ITR 53 really concludes tile question. It is the argument of Mr. Sen that though in the said else the Supreme Court was considering the provisions of the Payment of Bonus Act, 1965, but while considering the said Act the Supreme Court had occasion to consider the content and import of the word " reserve " and the sense in which the same should be understood and the observations of the Supreme Court in the said case are of general nature and are not restricted to the provisions of the Payment of Bonus Act. Mr. Sen argues that a provision for payment of any existing liability cannot be considered to be a " reserve " as that is indeed the making of a provision for a liability which has already accrued. It is the argument of Mr. Sen that there must at least be a clear indication of the intention on the part of the company to create a reserve and unless the said intention is clearly expressed by the authority competent and a " reserve " as such is created, there cannot be any "reserve" within the meaning of this particular Act. Mr. Sen argues that while making provisions for payment of any existing or accrued liability, the directors of the company do not intend to create a reserve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the capital of the company and the assessee had claimed that the amount recommended by the board of directors and earmarked for payment of dividend to the shareholders should be treated as " reserve " and should be taken into consideration as such in computing the capital of the assessee. The Supreme Court observed at page 503 : " The term 'reserve' is not defined in the Act and we must resort to the ordinary natural meaning as understood in common parlance. The dictionary meaning of the word 'reserve ' is : ' I (a) To keep for future use or enjoyment; to store up for some time or occasion ; to refrain from using or enjoying at once. (b) To keep back or hold over to a later time or place or for further treatment. 6. To set apart for some purpose or with some end in view ; to keep for some use. 11. To retain or preserve for certain purposes (Oxford Dictionary), vol. VIII, p. 513. ' In Webster's New International Dictionary, second edition, page 2118, 'reserve' is defined as follows : ' 1. To keep in store for future or special use ; to keep in reserve ; to retain, to keep, as for oneself. 2. To keep back ; to retain or hold over to a future time or place. 3. To pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company which is to be made as a reserve or reserves must be set aside before the directors recommend any dividend. In this case the directors while recommending dividend took no action to set aside any portion of this sum as a reserve or reserves. Indeed, they never applied their mind to this aspect of the matter. The balance-sheet drawn up by the assessee as showing the profits was prepared in accordance with the provisions of the Indian Companies Act. These provisions also support the conclusion as to what is the true nature of a reserve shown in a balance-sheet. " In the case of Indian Steel and Wire Products Ltd. v. Commissioner of Income-tax [1958] 33 ITR 579 (Cal), this court had occasion to consider whether an advance payment made by a company under section 18A of the Income-tax Act, could be treated as part of its " reserves " for the purpose of computing the capital of the company under Schedule II of the Business Profits Tax Act, 1947, and in dealing with the question this court had occasion to consider the meaning and import of the word " reserve ". This court has held that the reserve is by its very nature a fund which is created and maintained for the purpose o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in question may be invested or re-employed in the business, if the articles so permit." The learned Chief justice has further observed at page 588 : " The next consideration which appears to me to be relevant is also fundamental. A reserve as I have endeavoured to explain is by its very nature a fund which is created and maintained for the purpose of being drawn upon in future. If certain payments are to be made in discharge of a present liability in the course of the year to which the balance-sheet and the profit and loss account relate, I am unable to see how such payments ,can be said to be made by way of creating a reserve. They are clearly of the nature of expenditure, although it may not be expenditure in the income-tax sense allowable in an assessment, but none the less they are expenses incurred and met by the company in the course of its business existence during the year when liabilities requiring an instant discharge arise. A reserve is created only out of the whole or a part of the surplus profits as they are found to be in the hands of the company at the end of the year and it is a reserve against a contingency which still lies in the future. Payments under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes of abatement under rule 2(1) of Schedule II to the Business Profits Tax Act, these two sums should be included in the reserves. The Madras High Court, in the facts and circumstances of the case, held that there was a valid and effective allocation of the two sums to the reserves before the material date, namely, 1st April, 1946, and the allocation of the sum of Rs. 9 lakhs to be set apart for utilisation towards the payment of tax was a " reserve " within the meaning of rule 2(1). The Madras High Court at pages 251-252 observed : " As pointed out by the Supreme Court in Commissioner of Income-tax v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499, at page 503, 'the term " reserve " is not defined in the Act and we must resort to the ordinary natural meaning as understood in common parlance'. Their Lordships then set out the dictionary meaning of the word 'reserve'. One such meaning was 'To set apart for some purpose or with some end in view, to keep for some use'. If that meaning were to prevail, it should be obvious that the sum of Rs. 9,00,000 was set apart for a specified purpose with a specified end in view, payment of taxes when they fell due. Reserva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Provisions are usually shown in the balance-sheet by way of deductions from the assets in respect of which they are made whereas general reserves and reserve funds are shown as part of the proprietor's interest (see Spicer and Pegler's Book Keeping and Accounts, 15th edition, page 42). An amount set aside out of profits and other surpluses, not designed to meet a liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance-sheet is a reserve but an amount set aside out of profits and other surpluses to provide for any known liability of which the amount cannot be determined with substantial accuracy is a provision : (See William Pickles' Accountancy, second edition, page 192 ; Part III, clause 7, Schedule VI to the Companies Act, 1956- --which defines provision and reserve)." In the case of Commissioner-of Income-tax v. Security Printers of India (P.) Ltd. [1972] 86 ITR 210, the Allahabad High Court had to consider a case very similar to the one before us. In that case, while considering the meaning of the word " reserve " in rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, the Allahabad High Court held that the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised as they were not raised before the Tribunal. There, is no dispute that the three items have actually been debited to the assessee's profit and loss account and that they have not been allowed as a deduction for the purposes of income-tax assessment." In the case of Commissioner of Income-tax v. Hind Lamps Ltd [1973] 90 ITR 487 (All), the same Bench of the Allahabad High Court had occasion to consider a more or less similar question under the same Act, namely, the Super Profits Tax Act, 1963, the Act with which we are concerned in the present reference. In this case, before the Allahabad High Court in the assessment proceedings under the Super Profits Tax Act, 1963, for the assessment year 1963-64, the assessee-company claimed the inclusion of the following four items in the computation of capital : (1) proposed dividends, Rs. 4,17,500 ; (2) provision for taxation, Rs. 19,15,028 ; (3) credit balance of profit and loss account, Rs. 12,679 ; and (4) depreciation reserve being excess of book depreciation over income-tax allowed depreciation, Rs. 2,23,185. The Allahabad High Court held that the said four items did not represent "reserves" and could not be included in the compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed when the income was earned and awaited merely quantification by assessment. It was not a reserve because it was designed to meet a liability known to exist on the date of the balance-sheet. Consequently, in our opinion, the item representing provision for taxation cannot also be treated as a reserve for the purpose of the Super Profits Tax Act." The Bench further observed at pages 493-494 : " It is urged on behalf of the assessee that case law relating to the Business Profits Tax Act is not relevant for the purpose of deciding the question under the Super Profits Tax Act. The Business Profits Tax Act, it is pointed out, was passed when the Indian Companies Act, 1913, was still in force, and the position has since changed by the enactment of the Companies Act, 1956. It is urged that, therefore, the law laid down by the Supreme Court in Century Spinning Manufacturing Co. Ltd.'s case [1953] 24 ITR 499 cannot be applied. We are unable to see how the position has changed. In Century Spinning Manufacturing Co. Ltd's case [1953] 24 ITR 499, the Supreme Court relied upon regulation 99 of Table A of the First Schedule of the Indian Companies Act, 1913, which provided that before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liability.' Applying this interpretation clause, it is evident that the provision for taxation before us must be excluded from the expression 'reserve'." In the instant case, the proposed dividend cannot be treated as a reserve as the amount remains a mass of undistributed profits of the company and, therefore, cannot be considered to constitute any reserve. This aspect, in our opinion, is clearly covered by the decision of the Supreme Court in the case of Commissioner of Income-tax v. Century Spinning Manufacturing Co. Ltd. [1953] 24 ITR 499. So far as the other two items are concerned, namely, provision for taxation and provision for bonus, in our view the said items cannot also be considered to constitute reserves as the said items are really provisions for payment of an existing liability. On this aspect we are in agreement with the view expressed by the Allahabad High Court in Commissioner of Income-tax v. Hind Lamps Ltd. [1973] 90 ITR 487. We may also note that while this provision was made no action was taken to set apart these sums or any portion thereof as a "reserve" or "reserves". The balance-sheet drawn up by the assessee as showing the profits was prepared in ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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