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TMI Blog1986 (7) TMI 87X X X X Extracts X X X X X X X X Extracts X X X X ..... 40,00,000 (c) Forfeited dividend reserve 96,374 The Income-tax Officer did not include any of the said " reserves " in the capital of the assessee-company on the basis that these did not represent reserves in the real sense. On appeal, the Appellate Assistant Commissioner held that the rehabilitation reserve and forfeited dividends reserve represented reserves but the investment reserve account did not constitute a real reserve. Both the assessee as well as the Revenue went up in appeal before the Tribunal. The Tribunal disposed of these appeals by a similar order along with two similar appeals relating to the assessment year 1963-64 which arose out of proceedings under the Super Profits Tax Act, 1963. The Tribunal held that all the three accounts represented reserves for the purposes of assessment under the Super Profits Tax Act, 1963. The Tribunal was further of the view that all the three represented reserves for the purposes of assessment under the Super Profits Tax Act, 1963, and as the principle involved was the same as under the Companies Profits (Surtax) Act, 1964, the Tribunal held that the accounts in question represented reserves under the latter Act also. At the ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect : " 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. " This Explanation, the High Court noted, merely clarified what was implicit in the Super Profits Tax Act, 1963. Item No. 5 in the prescribed balance-sheet under the Companies Act is "surplus, i.e., balance in Profit and Loss account after providing for proposed allocations, namely: Dividend, Bonus, or Reserves. " Item No. (6) was " Proposed additions to Reserves " and Item No. (7) was " Sinking Funds ". The accounts mentioned in the Explanation would not form a reserve for the purposes of computation of the capital of a company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 196 of 1971 had to deal with investment reserve account, rehabilitation reserve account, capital reserve account and depreciation reserve account and held that these were reserves but the account maintained as dividend account did not represent reserve. The High Court in its judgment noted that on July 19, 1973, relying on another judgment in Income-tax Reference No. 200 of 1971 in CIT v. Saran Engineering Co. Ltd. had answered the question by saying that the aforesaid items were reserves. This is the subject-matter of Civil Appeal No. 1599 of 1974 which will also be disposed of by another judgment of this court. Civil Appeal No. 1665 of 1974 and Civil Appeal No. 145 of 1976 which arose out of the Income-tax Reference No. 196 of 1971 have been heard together and are being disposed of by this judgment. In this connection, it would be desirable to dispose of Civil Appeal No. 145 of 1976 separately first. It was submitted that the assessee had shown a capital of Rs. 2,63,79,218 which included the aforesaid reserves including investment reserve, rehabilitation reserve, capital reserve, depreciation reserve and forfeited dividends. The submission on behalf of the Revenue by Sree D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en [1969] 73 ITR 53. According to the Revenue, the nature and object of the subsidiary companies have to be kept in view and the practical result, the Revenue contended before us, was that the shareholders of the holding company whose share capital had been employed for the floatation of the subsidiary companies had not only no power to control the dealings of the subsidiary companies but in fact had no knowledge of, nor any right to the knowledge of or dealings of the subsidiary companies. The expressions " provision " and " reserve " are defined in Schedule VI, Part III to the Companies Act, 1956. In the decision of this court in Vazir Sultan's case [1981] 132 ITR 559, it has been held that provision was meant to provide for any known liability and the substance of the matter had to be kept in view. It was further submitted by Sree Singh that the depreciation reserve could not be considered to be a reserve in real sense at all. Forfeited dividends reserve of Rs. 1,08,771 had to be provision. On the other hand, on behalf of the Revenue, it was submitted that in order to constitute reserve, there must be an appropriation of profits current or accumulated and not a charge against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions made against anticipated losses and contingencies are charges against profits and, therefore, to be taken into account against gross receipts in the P & L account and the balance-sheet. On the other hand, reserves are appropriations of profits, the assets by which they are represented being retained to form part of the capital employed in the business. 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 the 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, p. 192 ; Part III, clause 7, Schedule VI to the Companies Act, 1956, which defines provision and reserve)." This ..... X X X X Extracts X X X X X X X X Extracts X X X X
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