TMI Blog1986 (7) TMI 87X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in respect of " Forfeited Dividend reserve " in CIT v. British India Corporation [1972 (7) TMI 22 - ALLAHABAD High Court]. The appeal, therefore, fails except on the point of " Forfeited Dividend reserve. " - - - - - Dated:- 31-7-1986 - Judge(s) : SABYASACHI MUKHERJEE., K. N. SINGH., R. S. PATHAK JUDGMENT The judgment of the court was delivered by SABYASACHI MUKHARJI J.-These two appeals were heard together, Civil Appeal No. 1665 of 1974 arises from the decision of the High Court of Allahabad in Income-tax Reference No. 195 of 1971. The assessee, Elgin Mills Ltd., at the relevant time, was a public limited company engaged in the business of manufacture of textile goods. The assessment year involved is the year 1964-65, of which the relevant previous year ended on September 30, 1963. For the purposes of assessment under the provisions of the Companies Profits (Surtax) Act, 1964, dispute arose between the assessee and the Revenue with regard to the computation of " standard deduction ". The company claimed that the following amounts should be treated as reserves for the purposes of computation of its capital: Rs. (a) Investment reserve 85,00,000 (b) Rehabilitat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in determining the standard deduction under section 2(9) of the Super Profits Tax Act, 1963. It was not disputed before the High Court that if the present reference had been one under the Super Profits Tax Act, 1963, the accounts in question would have to be held as reserves by the High Court in view of its previous judgment. But it was contended that the provisions of the Companies Profits (Surtax) Act, 1964, were different from the provisions of the Super Profits Tax Act, 1963. The High Court did not accept this contention. The High Court was of the view that under both the Acts, the charging sections (section 4) were identically worded except that the expression " standard deduction " in the Super Profits Tax Act, 1963, had been replaced by the expression " statutory deduction " in the Companies Profits (Surtax) Act, 1964. Under both the Acts, these deductions had to be computed with reference to the capital employed in the assessee-company. Under both the Acts, reserves of the company were to be treated as its capital and the only difference was in the Second Schedule to the Companies (Profits) Surtax Act, 1964, where an Explanation had been added. The said Explanation was to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... affirmative and in favour of the assessee. This appeal arises out of the said decision of the High Court. In CIT v. British India Corporation P. Ltd. [1973] 92 ITR 38 (All), the High Court noted the distinction between " provisions " and " reserves " and observed that when an amount was set apart for a future liability, it was called reserve and when it was set apart to meet an existing liability, it was called a provision. The High Court was of the view that the Tribunal in that case was right in holding that capital reserves, stocks and stores reserves, bad and doubtful debts reserves, obsolescence reserves, loans and insurance reserves and investment reserves were to be included in the computation of capital. The Tribunal was not right in including, according to the High Court, forfeited money reserve as the assessee had been transferring to this account dividends which had not been collected by the shareholders after they had been declared, and as and when the shareholders made claim, made payments and debited the same to this account. The High Court, therefore, was of the view that this account represented a provision in respect of an existing liability. The High Court in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it had again gone back and formed part of the undistributed mass of profits and thereby assumed its original character. It was submitted that the reserve, in order that it might be so called in the real sense of the term, must come out of the profits of the company. But if reserves were constituted out of the assets which were sold or by any other means, it would be difficult to term the amounts shown as reserve. It was submitted that the investments by the assessee-company in the Bombay subsidiaries were in the nature of bad and doubtful debts. Therefore, these were dead losses of the assessee-company as the holding company, and these amounts were ultimately bound to be written off and according to the Revenue's submission, the substance of the matter clearly was that the amount of Rs. 85 lakhs, though shown as reserve, was, in fact, a provision to meet the anticipated losses or bad and doubtful debts in the shape of investments in the two subsidiaries aforesaid which were shown at the date of the balance-sheet. For the assessee, Sree Salve drew our attention to the distinction between "reserve" and "Provision" which has been discussed in the decision of this court in Metal Box ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 ITR 857 noted the characteristics of " provisions " as well as " reserves ". It held, inter alia, that provisions were made against anticipated losses and contingencies, and it held further that an amount set aside out of the profits, designed to meet a contingency or liability or commitment or diminution in the value of assets known to exist would be a reserve, and an amount set aside to provide for a known liability of which the amount cannot be determined with substantial accuracy would be a provision. The said High Court differed from the decision of the Allahabad High Court in British India Corporation P. Ltd. [1973] 92 ITR 38 (All) in respect of " bad and doubtful debts ". Whether in respect of bad and doubtful debts, the account could be treated as reserve or provision would depend upon the facts and circumstances of the case. The distinction between " provision " and " reserve " has been clarified by this court in Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 at pages 67-68 which states as follows: " The next question is whether the amount so provided is a provision or a reserve. The distinction between a provision and a reserve is in commercial accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " is a charge on profits which are taken into account in the gross receipts of the profit and loss account, If reserve " is an appropriation of profit to provide for the asset which it represented. Keeping these tests and the facts of these appeals in mind, we must hold that the conclusion of the High Court in Civil Appeal No. 1665 of 1974 holding that the investment reserve and rehabilitation reserve were reserves and were entitled to be treated as such under the relevant Act is right. But on the facts of the case, the High Court was not right in holding that the forfeited dividend reserve was a reserve and question No. 2 is also answered in the affirmative. It should have followed in this respect its previous decision in respect of " Forfeited Dividend reserve " in CIT v. British India Corporation [1973] 92 ITR 38 (All). The appeal, therefore, fails except on the point of " Forfeited Dividend reserve. " In Civil Appeal No. 145 of 1976, we are concerned with five items as mentioned, i.e., investment reserve, rehabilitation reserve, capital reserve, depreciation reserve and forfeited dividends, and in view of the facts found, we are of the opinion that the first four items con ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
