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TMI Blog1996 (2) TMI 129X X X X Extracts X X X X X X X X Extracts X X X X ..... ative as a deduction from the cost of investment under clause (ii) of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963. For the assessment year 1964-65, the assessee made a similar claim in respect of a provision for taxation made by it to the tune of Rs. 17,52,920. For this assessment year, the relevant provisions which were applicable were under the Companies (Profits) Surtax Act, 1964. The claim of the assessee was disallowed by the Income-tax Officer. In appeal before the Appellate Assistant Commissioner for the assessment year 1963-64, the Appellate Assistant Commissioner held that as the provision for taxation was only an amount set apart to meet the liability for taxation which would accrue on the last day of the accounting year, it could not be treated as a reserve and be included in the capital of the assessee under the Super Profits Tax Act, 1963. He, however, accepted the alternative contention of the assessee that the provision for taxation fell within clause (ii) of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, and it should be deducted from the cost of investments in computing the capital base of the assessee-company under the Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above decision of the Calcutta High Court. The assessee has not filed an appeal before us in respect of the decision of the Calcutta High Court on question No. 1 for the assessment year 1963-64. The only issue before us is whether the provision for taxation can be deducted from the cost of excluded investments and would, therefore, augment the capital base of the company for purposes of the Super Profits Tax Act, 1963, and the Companies (Profits) Surtax Act, 1964. Under both the Acts, the tax is levied on the chargeable profits of the company as exceed the standard deduction or the statutory deduction. Such deduction has to be worked out at the prescribed percentage of the capital of the assessee-company. The computation of capital for the purposes of these two Acts has to be made in accordance with the provisions of the Second Schedule in both these Acts. The Second Schedule to the Super Profits Tax Act, 1963, consists of three rules while the Second Schedule to the Companies (Profits) Surtax Act, 1964, consists of four rules. The relevant rules under both these Acts for our purposes are as follows : THE SUPER PROFITS TAX ACT, 1963 THE SECOND SCHEDULE "Rules for computing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ond Schedule to the Companies (Profits) Surtax Act, 1964. It is contended that the provision made for taxation should be regarded as a reserve and should thus be included straightaway in the computation of capital or otherwise, it should be deducted from the cost of investment in the shares which is deducted from the computation of capital. In view of the decision of this court in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] B 132 ITR 559 at 572, a provision made to meet the tax liability of the current accounting year cannot be considered as representing a reserve. We, however, have to consider the alternative submission that it should be treated as a fund, and, therefore should be deducted from the cost of the assets required to be excluded from the capital of the company. Since the Second Schedule to both these Acts pertains to computing the capital of a company for purposes of tax under these Acts, the terms used in the Second Schedule need to be interpreted in the context of the balance-sheet of a company and its profit and loss account which will necessarily have to be looked at to ascertain the company's capital and its profits. The terms used must, therefore, be read in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of assets, liabilities, reserves and surplus applicable to each fund within the group. The revenues and expenditures of each fund must likewise be kept independent, and the revenues of one fund should not be used to meet the expenditures of another without legal authority or opinion behind the action." In the present case there is no systematic accumulation of cash or any separation of assets to meet future tax liabilities. There is only an accounting entry of an exact sum being earmarked for payment of tax liability arising at the end of the current accounting year. Such a provision cannot be considered as a fund. The assessee has relied upon Circular No. 1. P. (XV-5) of 1968 dated January 23, 1968, issued by the Central Board of Revenue. The circular deals with the treatment of an amount standing to the credit of "reserve for unexpired risks" held by the General Insurance Companies. The circular, inter alia, states as follows : " The Board are advised that, while the 'reserve for unexpired risks' cannot be regarded as a 'reserve' or 'surplus', it would qualify for being considered as a 'fund' within the meaning of rule 2(ii) of the said Second Schedule. The term 'fund', it w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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