Commissioner of Income-Tax, U.P. Vs.
Laxmi Sugar & Oil Mills Ltd. [1986] INSC 141 (16 July 1986)
PATHAK, R.S. PATHAK, R.S. MUKHARJI,
SABYASACHI (J)
CITATION: 1986 AIR 1746 1986 SCR (3) 214 1986
SCC (3) 528 JT 1986 239 1986 SCALE (2)33
ACT:
Super Profits Tax Act, 1963, ss. 2(9), 4 and
Rule 1 of Second Schedule-Standard deduction-What is-Assessee setting apart
amounts for additional cane price payable to cane- growers-Amounts-Whether a
"provision" or a "reserve"- Distinction between-Description
in the Balance-Sheet not conclusive of its true nature.
HEADNOTE:
For the assessment years 1961-62 and 1962-63,
the respondent assessee had debited an amount of Rs.5,40,000 and an amount of
Rs.2,76,000 to its profit and loss account of the relevant previous years
respectively. The amounts were debited on the ground that they represented the
assessee's liability of the relevant years for the additional cane price
payable to cane-growers under the Sugarcane Price Control Order, 1955 and were
shown in the balance-sheet under the head "Current liabilities and
provisions".
However, in the subsequent accounting year
ending September 1963, the assessee had credited its profits by the said
amounts by reversing the entries, and had not made any such provision in the
subsequent years.
In assessment proceedings under the Super
Profits Tax Act, 1963 for the assessment year 1963-64, the Income-tax Officer
did not include both the aforesaid amounts in the capital computation of the
assessee. The Appellate Assistant Commissioner affirmed the view taken by the
Income-tax Officer. But, on second appeal, the Appellate Tribunal held that the
amount represented a "reserved" and should have been included in the
capital computation of the assessee.
The High Court also agreed with the Tribunal.
Dismissing the appeal by the Revenue, ^
HELD: 1. The Rules made under the Super
Profits Tax Act, 1963 provide for computing the capital of a company for the
purpose of super 215 profits tax. A perusal of Rule 1 of the Second Schedule
will show that for the purposes of that rule the capital of a company includes
the reserve created under some of the provisions of the Indian Income-tax Act
and its other reserves in so far as the amount credited to such other reserves
has not been allowed in computing its profits for the purposes of the
Income-tax Act. [217D-E]
2. In determining whether an item is a
"provision" or a "reserve" the true nature and character of
the sum so retained or appropriated must be determined and its mere description
by the assessee in its Balance-Sheet is not conclusive of its true nature. A
provision is a charge against the profits, being made against anticipated
losses and contingencies. A "reserve", on the contrary, is an
appropriation of profits, the assets by which it is represented being retained
to form part of the capital employed in the business. Unlike a
"provision" which is a present charge against the profits, the
assessee continues to enjoy a proprietor's interest in the "reserve"
[218C-E] In the instant case, the evidence clearly disclosed that there was no
liability at all on the assessee requiring it to set apart a sum as a charge
against its profits and there was never any intention to make payments to the
cane- growers nor was payment ever made but, on the contrary, the assessee
reversed the entries in a subsequent year in its books. It is apparent that the
amount cannot be described as a "provision". It can only be described
as a "reserve". It was part of the capital which fell for computation
under Rule 1 of the Second Schedule. [218E-F] Vazir Sultan Tobacco Co. Ltd. v.
Commissioner of Income-tax, A.P., [1981] 132 ITR 559; and Metal Box Co. of
India Ltd. v. Their Workmen, [1969] 73 ITR 53 relied upon.
CIVIL APPELLATE JURISDICTION: Civil Appeal No.
1613 (NT) of 1974 From the Judgment and Order dated 26th April, 1973 of the
Allahabad High Court in Misc. Case No. 202 of 1971.
B.B. Ahuja and Miss A. Subhashini for the Appellant.
P.K. Mukharjee and A.K. Sengupta for the
Respondent.
The Judgment of the Court was delivered by
216 PATHAK J. This appeal by special leave is directed against the judgment of
the High Court of Allahabad pronouncing on the meaning of the expression
'reserves' in the Second Schedule to the Super Profits Tax Act, 1963.
For the assessment years 1961-62 and 1962-63
the assessee had debited an amount of Rs.5,40,000 and an amount of Rs.2,76,000
to its profit and loss accounts of the relevant previous years respectively.
The amounts were debited on the ground that they represented the assessee's
liability of the relevant years for the additional cane price payable to cane
growers in terms of a price linking formula to be fixed by the Competent
Authority under the Sugarcane Price Control Order 1955. Accordingly an item of
Rs.8,16,000 being the sum of the two amounts, was shown in the Balance Sheet of
the assessee as on September 30, 1962.
The item was shown under the head
"Current liabilities and provisions".
In assessment proceedings under the Super
Profits Tax Act, 1963 for the assessment year 1963-64, the Income-tax Officer
did not include the amount of Rs.8,16,000 in the capital computation of the
assessee. Dismissing the assessee's appeal, the Appellate Assistant
Commissioner affirmed the view taken by the Income-tax Officer. The Appellate
Assistant Commissioner held that the amount did not qualify as a 'reserve'
inasmuch as the assessee had itself shown it as a 'provision' in its Balance
Sheet. On second appeal, the Appellate Tribunal noted that the liability had
not been allowed as a deduction on revenue account by the Income-tax
authorities and that the decision was accepted by the assessee. It also
observed that in the subsequent accounting year ending September 1963, the
assessee had credited its profits by the said amount by reversing the entries,
and further that the assessee had not made any such provision in the subsequent
years. It was also not disputed that no such payment was ever actually made by
the assessee. In the circumstances, the Appellate Tribunal held that the
liability for which the 'provision' was made was at the best unreal and
imagined or the mere possibility of a liability. The Appellate Tribunal was
unimpressed by the description of the item as a 'provision' by the assessee in
its Balance Sheet. The Appellate Tribunal held that the amount represented a
'reserve' and should have been included in the capital computation of the
assessee.
At the instance of the Revenue the Appellate
Tribunal referred the case to the High Court of Allahabad for its opinion on
the following question:
217 "Whether on the facts and in the
circumstances of the case the provision for additional cane price amounting to
Rs.8,16,000 was rightly treated as a 'reserve' forming part of the assessee's capital
for the purposes of assessment to Super Profits Tax for the year under
consideration?" The High Court answered the question in the affirmative by
its judgment dated April 26, 1973.
We are of opinion that the High Court is
right. Section 4 of the Super Profits Tax Act 1963 levies super profits tax on
every company in respect of so much of its chargeable profits of the previous
year as exceed the standard deduction. The expression 'standard deduction' is
defined by sub-s. (9) of s. 2 of the Act to mean an amount equal to six per
cent of the capital of the company as computed in accordance with the
provisions of the Second Schedule, or an amount of fifty thousand rupees,
whichever is greater. The Rules provide for computing the capital of a company
for the purposes of super profits tax. A perusal of rule 1 of the Second
Schedule will show that for the purposes of that rule the capital of a company
includes the reserve created under some of the provisions of the Indian
Income-tax Act and "its other reserves in so far as the amounts credited
to such other reserves have not been allowed in conputing its profits" for
the purposes of the Income-tax Act. The concept embodied in the word "reserves"
used in that rule has been examined by this Court in the context of the Super
Profits Tax Act, 1963 and the analogous enactment, the Companies (Profits)
Super Tax Act, 1964. In a recent decision, Vazir Sultan Tobacco Co. Ltd. v.
Commissioner of Income-tax, A.P.,[1981] 132 ITR 559, this Court had occasion to
examine the significance and scope of the concept. In doing so it referred to
the earlier pronouncement of the Court in Metal Box Co. of India Ltd. v. Their
Workmen, [1969] 73 ITR 53.
"The distinction between a provision and
a reserve is in commercial accountancy fairly well known.
Provisions made against anticipated losses
and contingencies are charges against profits and, therefore, to be taken into
account against gross receipts in the Profit and Loss 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 218 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
Edn., p.
42)".
Regard was had by the court to the relevant
provisions of the Companies Act, 1956 including the form set out in Part I,
Schedule VI thereof where both expressions "Reserves and Surpluses"
and "Current Liabilities and Provisions" have been used. It is not
necessary, we think, to embark upon a detailed discussion of the distinction
between a 'provision' and a 'reserve'. It is sufficient for us to point out
that in determining whether an item is a 'provision' or a 'reserve' the true
nature and character of the sum so retained or appropriated must be determined
and its mere description by the assessee in its Balance Sheet is not conclusive
of its true nature. It is now settled that a 'provision' is a charge against
the profits, being made against anticipated losses and contingencies. A
'reserve', on the contrary, is an appropriation of profits, the assets by which
it is represented being retained to form part of the capital employed in the
business. Unlike a 'provision' which is a present charge against the profits,
the assessee continues to enjoy a proprietor's interest in the 'reserve'.
In the present case, when the evidence
clearly discloses that there was no liability at all on the assessee requiring
it to set apart a sum as a charge against its profits and there was never any
intention to make payments to the cane-growers nor was payment ever made but,
on the contrary, the assessee reversed the entries in a subsequent year in its
books, it is apparent that the amount can not be described as a 'provision'. It
can only be described as a 'reserve'. It was part of the capital which fell for
computation under rule 1 of the Second Schedule.
The appeal fails and is dismissed with costs.
M.L.A. Appeal dismissed.
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