TMI Blog1975 (12) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... of clause (ii) of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963. This claim was disallowed by the Income-tax Officer. On appeal, the Appellate Assistant Commissioner held that the said provision was only an amount set apart to meet the liability for taxation, considered as accruing on the last date of the accounting year, and could not be treated as a reserve. But the alternative contention that such a provision fell under clause (ii) of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, was accepted and it was held that the said sum of Rs. 16,48,888 on account of this provision for taxation had to be reduced from the cost of investments in computing the capital base. In respect of the assessment year 1964-65 a sum of Rs. 17,52,920 had been laid out by the assessee as a provision for taxation and the assessee claimed that the said amount should either be treated as a reserve or as a deduction in arriving at the net cost of investments under the provisions of the Companies (Profits) Surtax Act, 1964, for the purpose of computation of the assessee's capital. The Income-tax Officer again disallowed the claim of the assessee but on appeal the Appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le profits over statutory deductions. The Second Schedule to the Super Profits Tax Act, 1963, contains rules for computing the capital of a company for the purposes of super profits tax. Rule 1 is as follows : " 1. Subject to the other provisions contained in this Schedule, the capital of a company shall be the sum of the amounts, as on the first day of the previous year relevant to the assessment year, of its paid up share capital and of its reserve, if any, created under the proviso (b) to clause (vib) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (11 of 1922), or under sub-section (3) of section 34 of the Income-tax Act, 1961 (43 of 1961), and of its other reserves in so far as the amounts credited to such other reserves have not been allowed in computing its profits for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or the Income-tax Act, 1961 (43 of 1961), diminished by the amount by which the cost to it of the assets the income from which in accordance with clause (iii) or clause (vi) or clause (vii) of rule 1 of the First Schedule is not includible in its chargeable profits, exceeds the aggregate of -- (i) any money borrowed by it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es for the repayment thereof during a period of not less than seven years. Explanation -- For the removal of doubts it is hereby declared that any amount standing to the credit of any account in the books of a company as on the first day of the previous year relevant to the assessment year which is of the nature of item (5) or item (6) or item (7) under the heading 'RESERVES AND SURPLUS' or of any item under the heading 'CURRENT LIABILITIES AND PROVISIONS' in the column relating to 'LIABILITIES" in the "FORM OF BALANCE-SHEET given in Part I of Schedule VI to the Companies Act, 1956 (1 of 1956), shall not be regarded as a reserve for the purposes of computation of the capital of a company under the provisions of this Schedule. 2. Where a company owns any assets the income from which in accordance with clause (iii) or clause (vi) or clause (viii) of rule 1 of the First Schedule is required to be excluded from its total income in computing its chargeable profits, the amount of its capital as computed under rule 1 of this Schedule shall be diminished by the cost to it of the said assets as on the first day of the previous year relevant to the assessment )'ear in so far as such cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 513). In Webster's New International Dictionary, second edition, page 2118, 'reserve' is defined as follows : 11. 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 preserve." The Supreme Court found in the facts of that case that originally the directors of the company had earmarked a sum for distribution of dividend and in subsequent meetings of the company it was not decided to make it a " reserve ". It was held that the said sum constituted a mass of undistributed profits and did not constitute a reserve. Mr. Roy next cited the decision in the case of Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax [1966] 59 ITR 767 (SC), for the definition of the expression " debt owed ". The Supreme Court held in that case that the liability to pay income-tax was a debt within the meaning of section 2(m) of the Wealth-tax Act and such debt arose on the valuation date during the accounting year. Two other cases, namely, Commissioner of Income-tax and Business Profits Tax v. Vasantha Mills Ltd. [1957] 32 ITR 237 (Mad) and the Indian S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of the company by way of a provision against future contingencies and a reserve is thus created, although after being carried to the reserve, the amount in question may be invested or re-employed in the business, if the articles so permit." On the above authorities, Mr. Roy contended that the provision for taxation in the instant case came squarely within the definition of the word : "reserve" as explained by the Supreme Court and the other courts. The Super Profits Tax Act, 1963, did not mention any special categories under the head "provisions" and the concept of provisions should be included in the broader conception of a "reserve". He contended that in fact in the context of this Act the expressions "provisions" and "reserve" were inter-changeable terms. Only in the subsequent Act, i.e. the Companies (Profits) Surtax Act, 1964, in the Explnation to rule 1 of the Second Schedule a distinction was sought to be made between a provision and a "reserve" but this distinction was not made in the earlier Act of 1963. Mr. Roy further sought to distinguish a decision of the Supreme Court in the case of Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53. In this case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eserve but an amount set aside out of profits and other surpluses to provide for any known liability of which the amount cannot be determinied 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)." Mr. Roy contended that in this case the Supreme Court only decided whether a particular provision was deductible from profit and loss account or not. The Supreme Court was not really concerned whether a provision for the purpose of other statutes was a concept categorically different from the concept of a reserve. He submitted that in the instant case the provision for taxation had not been deducted from the profit and loss account but had been set aside from the profits worked out in the profit and loss account. He contended that the particular distinction made by the Supreme Court in Metal Box's case [1969] 73 ITR 53 was not applicable in the facts of the instant case. In support of his contention Mr. Roy relied on several passages from authorities on accountancy. He cited a passage from the well-known treatise on 'Book-keeping and Acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch narrower than that usually attributed to it in framing accounts. For the purposes of the Companies Act, the word 'provision' must not be used, as it is commonly used in practice, to describe amounts set aside to provide for prospective or even potential losses or liabilities ; it must only be employed to indicate known depreciation or diminution in the value of assets, and known liabilities, the amount of which, however, cannot be estimated with reasonable accuracy. If the amount of a known liability can be estimated with substantial precision, it must be classified as a liability, and not as a provision. The sum which it is customary and prudent to set aside for the purpose of meeting United Kingdom income-tax based on the current year's profits must not be called a provision since it is not a liability at the date of the balance-sheet but is an amount set aside to provide for a liability which will arise in the following year. The practice has, therefore, arisen and has been subject of recommendations by the Institute of Chartered Accountants to base the charge for income-tax made in the accounts on the profits earned during the period covered by those accounts, even though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion is clearly indicated by the decision of the Supreme Court in the case of Commissioner of Income-tax v. Century Spinning and manafacturing Co. Ltd. [1953] 24 ITR 499. Relying on the said decision Mr. Bajoria contends that the ordinary meaning of the word 'reserve' as given in the dictionary and as noted by the Supreme Court is '(1) To keep for future use or enjoyment; to store tip 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 ire also amounts set apart for some pur- pose or with some end in view to keep for some use. Mr. Bajoria has con- tended 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning of that Act the amount must be specifically kept apart for future use or contingency. This court followed the Allahabad High Court and also held that an amount provided for meeting an accrued existing liability cannot be said to have been set apart for meeting a contingency which may arise in future and cannot, therefore, constitute a "reserve". The prior decision of the Division Bench of this court is binding on us and we follow the same and we answer question No. 1 in respect of the assessment year 1963-64 in the affirmative and in favour of the revenue. Question No. 2 for the assessment year 1963-64 and the only question in respect of the assessment year 1964-65 are substantially the same. The language of clause (ii) of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, and the language of clause (ii) of rule 2 of the Second Schedule of the Companies (Profits) Surtax Act, 1964, are more or less identical. The point in dispute is whether the provision for taxation in the said assessment year constitutes a fund within the meaning of the said rules so that in the computation of capital of a company the company can have the benefit by reduction of capital : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn on the company's banking account, the money in which may have been derived from a number of sources. The phrase 'reserve fund' only has a meaning as indicating the item in the company's accounts to which it decides to debit the payment. It will be seen, therefore, that to speak of an actual payment being made out of a fund in the second sense is really a misuse of language. A fund in the second sense is merely an accountancy category ; it has a real existence in that sense, but not in the sense that a real payment can be made out of it as distinct from being debited to it. Unless these two meanings of the phrase 'payment out of a fund' are kept distinct, much confusion of thought must ensue. A real payment cannot be made out of an imaginary fund--per Lord Macmillan in the Central London Railway case [1936] 20 TC 102, 146 (HL)." It does not appear to us that this English decision helps the contentions of the revenue. It was accepted in this decision that the expression "fund" could be an expression of accountancy, viz., a particular category of entry which a person uses in making up accounts. Lord Greene also noted that a "fund" could actually mean actual cash resources. It doe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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