Commissioner
of Income-Tax (Central-II), Calcutta Vs.
M/S. Duncan Brothers & Co. Ltd., Calcutta [1996] INSC 248 (13
February 1996)
Manohar
Sujata V. (J) Manohar Sujata V. (J) Verma, Jagdish Saran (J) Bharucha S.P. (J) Mrs.Sujata
V.Manohar.J.
CITATION:
JT 1996 (2) 316 1996 SCALE (2)132
ACT:
HEAD NOTE:
This
is an appeal from a decision of the Calcutta High Court in a Reference made to
it under Section 256(1) of the Income-tax Act, 1961.
The assessee
is a company and the accounting years involved are the years ending on
31.12.1962 and 31.12.1963 relevant to the assessment years 1963-64 and 1964-65
respectively.
For
the assessment year 1963-64, the assessee claimed that for the purposes of
Super Profits Tax Act, 1963, in the computation of its capital, a provision for
taxation made by it to the tune of Rs.16,48,888/- should be treated either as a
part of its capital under Rule 1 of the Second Schedule to the Super Profits
Act, l963 or in the alternative 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 l963-64,
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 Act, 1963 and it should be deducted from the cost
of investments in computing the capital base of the assessee-company under the
Super Profits Tax, 1963.
For
the assessment year 1964-65, the Appellate Assistant Commissioner similarly
held that the provision for taxation cannot be considered as a reserve but it
was to be deducted from the cost of investments under Rule 2(ii) of the Second
Schedule to the Companies (Profits) Surtax Act, 1964.
The
matter was taken in appeal before the Tribunal which came to the conclusion
that the provision for taxation made in the two assessment years was not a
reserve which would form a part of the capital of the company. It further held
that the provision for taxation was also neither a fund nor a surplus. It was a
provision against a "perfected debt" and as such it would not qualify
for a deduction as claimed by the assessee company.
The
Tribunal made a Reference to the High Court under section 256(1) of the Income
Tax Act 1961. The questions of law which arose for determination were as follows
:
For
the Assessment Year 1963-64 "(1) Whether, on the facts and in the
circumstances of the case, the Appellate Tribunal was right in holding that
`provision for Taxation' is not a reserve as to form part of the capital under
Rule - 1 of the Second Schedule to the Super Profits Tax Act, 1963? (2) If the
answer to the above question is in the affirmative, whether on the facts and in
the circumstances of the case, the Appellate Tribunal was right in holding that
in the computation of capital the company was not entitled to the benefit of
deduction of the amount of `Provision for Taxation' from its cost of
investments in terms of clause (ii) of Rule - 1 of the Second Schedule to the
Super Profits Tax Act, 1963?" For the Assessment Year 1964-65
"Whether, on the facts and in the circumstances of the case, the Tribunal
was right in holding that in the computation of capital the company was not
entitled to the benefit of deduction of `Provision for Taxation' from its cost
of investments in terms of Clause (ii) of Rule -2 of the Second Schedule of the
Companies (Profits) Surtax Act, 1964?" The Calcutta High Court has
answered Question No.1 for the assessment year 1963-64 in the affirmative in favour
of the revenue. It has answered Question No.2 for the assessment year 1963-64
and the question for the assessment year 1964-65 in the negative and in favour
of the assessee.
The
revenue has come in appeal before us from the 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 the 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 capital
of a company for the purposes of Super Profits Tax:
"Rule
1: Subject to the other provisions contained in this Schedule, the capital of a
company shall be the sum of the amounts, as on the first day of the previous
year relevant to the assessment year, of its paid-up share capital and of its
reserve, .................and of its other reserves ................ diminished
by the amount by which the cost to it of the assets the income from which in
accordance with clause (iii) or clause (vi) or clause (viii) of rule 1 of the
First Schedule is not includible in its chargeable profits, exceeds the
aggregate of - (i) any money borrowed 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.
......................"
The Companies (Profits) Surtax Act. 1964 The Second Schedule "Rules for
computing the capital of __ company for the purposes of surtax:
1.
Subject to the other provisions contained in this Schedule, the capital of a
company shall be the aggregate of the amounts, as on the first day of the
previous year relevant to the assessment year, of - (i) its paid-up share
capital;
(ii) its
reserves............
2.
Where a company owns any assets the income from which in accordance with clause
(iii) or clause (vi) or clause (viii) of rule 1 of the First Schedule is
required to be excluded from its total income in computing its chargeable
profits, the amount of its capital as computed under rule 1 of this Schedule
shall be diminished by the cost to it of the said assets as on the first day of
the previous year relevant to the assessment year in so far as such cost
exceeds the aggregate of - (i) any moneys borrowed...........
(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 rule 1.........." In the present
case, the assessee has earned income from dividends as envisaged in clause
(iii) of Rule 1 of the Second Schedule. The assessee contends that while the
capital involved in the investment in shares has been deducted in the
computation of its capital the amount of such capital deducted should reduced
by the amount of "any fund, any surplus and any reserve" in terms of
Clause (ii) of Rule 1 of the Second Schedule of the Super Profits Tax Act, 1963
and the corresponding clause of Rule 2(ii) of the Second Schedule of 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 are deducted from the computation of capital. In view of the decision of
this Court in Vazir Sultan Tobacco Co.Ltd. v. Commissioner of Income Tax (l32
ITR 559 at 577), 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 the 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 light of the provisions of the Companies Act
and how these terms are understood in accounting parlance. The form of the balance
sheet of a company prescribed under Schedule VI tc the Companies Act, 1956,
under the column "reserves and surplus" contains a note to the
following effect:
"The
word 'fund' in relation to any 'Reserve' should be used only where such Reserve
is specifically represented by earmarked investments." The juxtaposition
of funds with surplus and reserves clearly refers to accounting language and
the manner in which these three terms are understood in accounting practice.
Our attention is also drawn to the term "found" as described in the
Dictionary for Accountants, 4th Edition by Eric L.Kohler, pages 204 to 208 as
set out in the judgment of the Calcutta High Court in Duncan Brothers & Co.Ltd.
v. Commissioner of Income- Tax, Central, Calcutta, (128 ITR 302 at 311) which
is as follows :
"Fund.
1. An asset or group of assets within any organization, separated physically or
in the accounts or both from other assets and limited to specific uses.
Examples:
a petty-cash or working fund; a replacement-and-renewal fund; an accident fund;
a contingent fund; pension fund.
2.
Cash, securities, or other assets placed in the hands of a trustee, principal
or income or both being expended in accordance with the terms of a formal
agreement. Examples: a trust fund created by a will; an endowment found; a
sinking fund.
3.
(government accounting) A self- balancing group of accounts -- asset,
liability, revenue and expense -- relating to specified sources and uses of
capital and revenue.
4. pl.
Current assets less current liabilities (on an accrual basis): working capital;
a term used in flow statements.
5. pl.
= cash. v.t. 1. To convert currently maturing liabilities into a long- term
loan.
2. To
provide for the ultimate payment of a liability by the systematic accumulation
of cash or other assets in a separate account or trust.
A
special revenue fund is created for taxes and other revenues levied or set
aside for specified purposes. For example, if a separate tax is authorized for
schools, a special revenue fund is set up to account for its disposition. The
accounting principles, procedures, and financial statements of a special-
revenue fund resemble those of the general fund.......
Other
Funds.
------------
A balance-sheet combining a group of related funds should indicate the amount 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 a Circular No.I.P.(XV-5) of 1968 dated 23rd of January, 1968,
issued be the Central Board of Revenue. The circular deals of "reserve for
unexpired risks" held by 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 will be observed, has not been defined in the Companies
(Profits) Surtax Act, 1964. As such, it is to be given its ordinary meaning as
understood in common parlance.
Etymologically,
'fund' means aum of money available for the payment or discharge of
liabilities. As the 'reserve for unexpired risks' clearly represents a sum of
money available to the company for payment or discharge of unexpected claims
that may arise in respect of policies which extend beyond the relevant
accounting year, the amount standing to the credit of this account can be
regarded as a fund............" This circular, however, is of no
assistance in the present case. In the first place. the provision for taxation
made in the present case is very different in nature from the reserve for
unexpired risks referred to in the circular.
The
reserve in that case represented a sum of money which would be available to the
insurance company for payment or discharge of unexpected claims that may arise
in respect of policies which extend beyond the accounting year. The provision
for taxation in the present case, however, is set apart to meet a specific
liability which would arise at the end of the current accounting year. It
cannot, in any manner, be compared to a fund of the kind referred to in the
circular of the Board.
The assessee,
however, has submitted that the circular of the Board has taken the meaning of
the term "fund" in its literal or etymological sense. Hence it must
be applied to any sum of money available to the company including a provision
for taxation. The argument has no merit. The Board has considered the
etymological meaning of "fund" in considering a reserve to meet future
unexpired risks. A sum of money set apart to meet such unforeseen risks was
considered as a fund. We fail to see how the circular helps the assessee in the
case before us. A provision for taxation of the kind in question is not a fund
either etymologically or in accounting parlance. The more relevant meaning of
the term "fund" in the context of the two Acts is what that term is
commonly considered to connote when used in a balance sheet or profit and loss
account of a company. A specific provision for an ascertained liability is not
a fund within the meaning of that term in the rules in question.
In the
premises, Question No.2 for the assessment year 1963-64 and the question for
the assessment year 1964-65 has to be answered in the affirmative and in favour
of the revenue. The appeal is accordingly allowed. In the circumstances,
however, there will be no order as to costs.
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