TMI Blog1975 (4) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... mputed ? " The assessee is a private limited company. In assessment proceedings under the Super Profits Tax Act, 1963, for the assessment year 1963-64, (for which the relevant previous year commenced on August 1, 1961, and ended on July 31, 1962), the assessee claimed the following two items as reserves in the computation of its capital under rule 1 of the Second Schedule to the Act : Rs. P. 1. Provision for taxation as on the first day of the previous year, i.e., August 1, 1961 ... 2,98,035.00 2. Proposed dividends ... 70,000.00 The Income-tax Officer rejected the claim of the assessee. An appeal by the assessee before the Appellate Assistant Commissioner and a second appeal before the Income-tax Appellate Tribunal did no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost 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 which remains outstanding; and (ii) the amount of any fund, any surplus and any such reserve as is not to be taken into account in computing the capital under this rule." Broadly speaking, the capital of the company includes its paid up share capital and its reserves. One kind of reserve is specifically mentioned in rule 1, and that is the development rebate reserve created under proviso (b) to section 10(2)(vib) of the Indian Income-tax Act, 1922, or sub-section (3) of section 34 of the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the future : Indian Steel and Wire Products Ltd. v. Commissioner of Income-tax . It has been observed that 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, while an amount set aside from profits and other surpluses and not designed to meet a liability, contingency, commitment or diminution in the value of assets known to exist at the date of the balance-sheet is a reserve : Vazir, Sultan Tobacco Co. Ltd. v. Commissioner of Income-tax . It is also necessary, in order to constitute a reserve, that the amount should not remain a mere undistributed mass of profits but should be earmarked as a reserve. If it is not earm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the total amount of Rs. 2,98,035 includes an amount in excess of that contemplated for the discharge of a tax liability which has already arisen and the excess is intended for use in the future against a tax liability which has yet to arise, to the extent of the excess it may be said that a reserve has been created. The Tribunal has been unable to specifically state whether the provision of Rs. 2,98,035 for taxation has been earmarked for the discharge of a tax liability, which has already arisen on August 1, 1961, the relevant date under rule 1 of the Second Schedule, and a supplementary statement of the case submitted by it does not make the position clear. Apparently, when the appeal was heard before the Tribunal its attention was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur attention has been drawn to Commissioner of Income-tax v. Security Printers of India (P.) Ltd. , in which the Allahabad High Court appears to have held that certain sums representing provision for bonus, provision for taxation and provision for proposed dividends were reserves. It is necessary to point out, however, that in taking that view the court specifically observed that it was never the case of the revenue that the amounts represented liabilities which had already arisen and were not intended for future use in a future contingency. It is in that context that the decision in that case has to be appreciated. Subsequently, in Commissioner of Income-tax v. Hind Lamps Ltd., the same court held that sums representing proposed dividen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion " provision " has not been used in the Super Profits Tax Act, it should not be taken into account in disposing of this reference. The expression " provision " is a well-known expression in commercial accountancy, and may legitimately be employed in this case for the purpose of drawing a distinction from the expression " reserve ". In our opinion, the amount of Rs. 2,98,035 shown as provision for taxation can be treated as a reserve only to the extent that it exceeds the tax liability which had already arisen on August 1, 1961. It will be for the Appellate Tribunal to enquire into this aspect of the case when disposing it of conformably with this judgment. As regards the amount of Rs. 70,000 shown on account of proposed dividends, thi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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