ORDER
G.E. Veerabhadrappa, Vice President
1. This Special Bench has been constituted to consider the following question:
Whether in determining the profits and gains of business or profession for purposes of Section 32AB, ‘any amount’ withdrawn from reserves or provisions and credited to the profit and loss account is to be reduced from the profit computed in accordance with requirements of Parts II & III of Schedule-VI to the Companies Act (1) 1956 and whether ascertained liabilities referred to in Clause (v) of Section 32AB is relevant only for addition in the profits and not for reduction ?
2. The assessee in this case is a limited company engaged in the manufacture of plywood and particle boards, having factories at various places. The assessee was manufacturing concrete shuttering plywood with the help of specially treated chemical to make it extremely strong, durable and insect resistant. The plywood was specifically designed for use in construction work and the Central Excise department has treated the concrete shuttering plywood on par with structural plywood and demanded the differential duty on account of short levy in the assessment of several years in the past. The liability on such excise duty for shuttering plywood at Dandeli and Taluppa factory which were still outstanding was as under as at the end of the relevant accounting year:
Dandeli Rs. 1,03,96,726
Taluppa Rs. 13,12,597
_______________
Rs. 1,17,09,323
_______________
This liability was also disputed before the High Court of Karnataka. The provision made in respect of the above liability became no longer necessary as a result of retrospective amendment brought about in the Central Excise duty and rules. Therefore, the assessee has written back the aforesaid amount to the profit and loss account. Similarly, the Government of Karnataka demanded differential royalty in respect of the forest produce used by the assessee. The provisions were made from year to year in respect of such differential liabilities to the Government of Karnataka. It appears, ultimately the Government modified its own notification and a sum of Rs. 38,21,392, representing outstanding liabilities earlier provided, was no longer required to be paid to the Government. Therefore, the assessee has written back the following two amounts:
(a) Provision for excise duty on concrete
shuttering plywood Rs. 1,17,09,323
(b) Provision for differential Royalty payable
to Karnataka State Rs. 38,21,392
_______________
Rs. 1,55,30,714
_______________
These write backs were duly reflected in the accounts of the assessee for the assessment year under consideration as credit to the profit and loss account under the head “Excess provision for earlier year no longer required”. The assessee has treated this write back to the profit and loss account as a part of its profit for the year under consideration and went on to claim the relief under Section 32AB of the Act. The Assessing Officer brought the same to tax as part of total income of the assessee. But, when it came to working out the allowable deduction under Section 32AB of the Act, he calculated the same by excluding the above written back amount. In other words, while taxing the same as income of the year, the Assessing Officer applied the provisions of Section 32AB(3)(a) to reduce the profit to arrive at a lower profit for the purposes of granting relief under Section 32AB of the Act. It was contended on behalf of the assessee before the CIT(A) that what is to be reduced from the profits is any amount withdrawn from reserves or provision if such amounts are credited to the profit and loss account. In the present case, the provisions were made in the earlier years for ascertained liabilities and do not represent any ad hoc provision which is the nature of a free reserve. Thus, according to the assessee, there was no withdrawal from reserves or provision. The amount has been written back to the profit and loss account as the provision for the ascertained liability was no longer required. The contention of the assessee was not accepted by the CIT(A) and the assessee is in appeal before the Tribunal.
3. When the matter has come up for hearing before the Division Bench a decision of the Tribunal in the case of Pfizer Ltd. in ITA Nos. 7071/Bom./91 and 7078/Bom./91 dated 28-12-1998 was relied upon by the assessee. The Division Bench, after extracting paragraph 6 of the said order, which is reproduced below, went on to give its reasons to say that they were unable to persuade themselves to subscribe to the said view:
In this connection after hearing the parties we are inclined to agree with the view taken by the CIT(A). A provision which was not allowed to be adjusted against profits in the earlier years should now be allowed to be added when the same is written back. A harmonious reading of Clause (v) of Sub-section (c) of Section 32AB with the portion appearing after Clause (viii) shows that profit is not allowed to be increased by provision for ascertained liabilities. In other words, profits remain reduced by provision for ascertained liabilities. Therefore, when such a liability is written back, it should go to enhance the profits. Hence, we agree with the CIT(A) and do not disturb his order on the issue.
The Division Bench went on to give the reasons for their view as under:
7. Section 32AB Sub-section (3) of the Act defines the profits and gains of business or profession for the purposes of Sub-section (1) of Section 32AB. The provisions of Section 32AB of Sub-section (3) reads as under:
(3) The profits of business or profession of an assessee for the purposes of Sub-section (1) shall be an amount arrived after deducting an amount equal to the depreciation computed in accordance with the provisions of Sub-section (1) of Section 32 from the amount of profits computed in accordance with the requirements of Parts II and III of the Schedule VI to the Companies Act, 1956 (1 of 1956) as increased by the aggregate of–
(i) the amount of depreciation;
(ii) the amount of income-tax paid or payable, and provisions therefor;
(iii) the amount of sur-tax paid or payable under the Companies (Profits) Sur-tax Act, 1964 (7 of 1964);
(iv) the amounts carried to any reserves, by whatever name called;
(v) the amounts or amounts set aside to provisions made for meeting liabilities other than ascertained liabilities;
(vi) the amounts by way of provision for losses of subsidiary companies; and
(vii) the amount or amounts of dividends paid or proposed;
If any debited to the profit and loss account; and as reduced by any amount or amounts withdrawn from reserves or provisions, if such amounts are credited to the profit and loss account.
The profits computed in accordance with the requirement of Parts II & III of the Sixth Schedule is to be increased by various items mentioned in Clauses (i) to (vii) if they are debited to the Profit £ Loss Account. Clause (v) refers to the provisions made for meeting the liabilities other than ascertained liabilities. The eligible profits are to be reduced by any amount or amounts withdrawn from reserves or provisions if such amounts are credited to the profits and loss accounts.
8. It is pertinent to note that the Legislature has consciously used the term ‘ascertained liabilities’ in Clause (v) when it dealt with the amounts to be added for determination of eligible profits and excluded the term ‘ascertained liabilities’ when it dealt with the provisions to be reduced for determining eligible profits. Therefore, it follows that if unascertained liabilities were debited to the Profit & Loss account then they had to be added for the purposes of computation of eligible profits because they are not an allowable deduction under the Income-tax Act, whereas the ascertained liabilities are allowable deduction under the Income-tax Act. From this, it follows that the pith and substance of section is the determination of current year’s profits on which deduction under Section 32AB can be allowed. Keeping in view this object, the Legislature has consciously not used the term ‘ascertained or unascertained liabilities’ while incorporating the provisions relating to reduction of amounts withdrawn from reserves or provisions credited to Profit & Loss Account because they do not represent the net result of the working of current year. Since, the language of the section is unambiguous, therefore, in our opinion, nothing can be read into the section, the relevant part of which reads as under:
…and as reduced by any amount, or amounts withdrawn from reserves or provisions if such amounts are credited to the Profit & Loss Account.
9. The above aspect of the matter has escaped the attention of the learned Bench of the Tribunal. Since, in our view, another view is also possible, which may be more appropriate, we recommend constitution of the Special Bench for deciding this appeal.
It is for these reasons that the Division Bench thought it more appropriate that the issue in question be decided by a Special Bench. Accordingly, the matter is before us.
4. The learned Counsel for the assessee took us in greater details with the facts of the case as discussed in the two orders of the revenue authorities and fairly admitted that they are not at all in dispute. The learned Counsel has also filed a paper-book containing all the details concerning the disputed issue. Our attention was drawn to the following decisions:
(i) Dy. CIT v. Mahavir Spg. Mills Ltd. [2004] 87 TTJ (Chd.) 400
(ii) Highway Cycle Industries Ltd. v. Asstt. CIT [2002] 74 TTJ (Chd.) (SB) 171
(iii) Mumbai Bench ‘C’ decision in the case of Pfizer Ltd, in ITA Nos. 7071 & 7078/Bom./91 for assessment years 1987-88 & 1988-89.
The learned Counsel for the assessee has also filed a copy of order of the Tribunal (Bombay Bench ‘A’) in the assessee’s own case in ITA Nos. 3219 & 2844/Bom./1989 (Cross Appeals) for assessment year 1983-84, wherein the provision made in respect of the liability towards excise duty was the subject-matter. The Tribunal has confirmed the order of the CIT(A), who has come to the conclusion that the assessee had written back these amounts in the year ended on 30-6-1986 and those amounts were already assessed by the Assessing Officer on 15-1-1990. This order, in the opinion of the department, was for bringing the cessation of the liability to tax in the assessment year 1983-84. Similar findings are given in relation to the liability in respect of the royalty payable to the Government of Karnataka.
5. It was argued by the learned Counsel for the assessee that the department is not justified in reducing the write back of the provision from the profits computed for the purposes of Section 32AB of the Act in respect of what is known as ascertained liability. Our attention was also invited to the decision of the Apex Court in the case of Apollo Tyres Ltd, v. CIT and also the decision of the Madras High Court in the case of CIT v. Tamil Nadu Mercantile Bank Ltd. . Reference was also made to the decision of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT wherein the distinction between reserves and pro visions have been discussed, which may be relevant for deciding the issue in hand.
6. The learned Departmental Representative, on the other hand, strongly relied on the decision of Bombay High Court in Alfa Laval India Ltd. v. Dy. CIT . According to him, for working out the relief under Section 32AB(3) of the Act, the profits of the business are required to be reduced by the amount or amounts withdrawn from the reserves or provisions, if such amounts are credited to the profit and loss account. There being no dispute that the amounts are credited to profit and loss account, the sum in question shall go to reduce the profit as required by Section 32AB(3) of the Act. The provision in this regard as mentioned in the relevant clause, is clear and unambiguous. Nothing should be read into it to bring the view of the assessee possible.
7. We have carefully considered the rival contentions and gone through the record as also the case laws relied upon by both the parties. The provisions of Section 32AB(3) have already been reproduced in para 3 above. These provisions have been inserted by the Finance Act, 1986 with effect from 1-4-1987 for and from the assessment year 1987-88. On fulfilment of the requisite condition as provided in the section, the eligible assessee is entitled to obtain a deduction of the lower of the following:
(a) A sum equal to the amount or the aggregate of the amounts deposited under Section 32AB(1)(a) and any amount utilized for the purposes mentioned in Section 32AB(1)(b),
OR
(b) A sum equal to the 20 per cent of the profit of eligible business or profession.
The profits of business or profession of an assessee for above purposes shall be determined in accordance with the requirements of Part II and Part III of Schedule VI to the Companies Act, 1956 (1 of 1956). Such profits shall be reduced by the admissible depreciation under Section 32(1) of the Act. Thereafter, it should be increased by the amount on the items specified in Clauses (z) to (vii) of Sub-section (3) of Section 32AB. Further it should be reduced by the amount or amounts withdrawn from the reserves and provision if such amounts are credited to the profit and loss account. In other words, from out of the debits to the profit and loss account, increase in respect of the items (i) to (ii) shall be made and reduction shall be made in respect of the credit to the profit and loss account relating to reserves and provisions written back. The words “provisions and reserves” are the terms of accountancy, defined in Part III of the Sixth Schedule of the Companies Act as under:
(i) The term “provision” means any amount written off or retained by way of providing for depreciation, renewals or diminution in value of asset or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy.
(ii) The expression “reserve” shall not include any amount written off or retained by way of providing for depreciation, renewal or diminution in value of the assets or retained by way of providing for any known liability.
(iii) The expression “capital reserve” shall not include any amount regarded as free for distribution through the profit and loss account.
(iv) The expression “revenue reserve ” shall mean any reserve other than the capital reserve.
(v) The expression “liability” shall include all liabilities in respect of expenditure contracted for and all disputed or contingent liabilities.
In terms of requirement of Sub-clauses (viii) and (ix) of Clause 3 of Part II of Schedule-VI to the Companies Act, the amounts set aside or proposed to be set aside to reserves and provisions and the amount withdrawn from such reserves and provisions are to be set out in the profit and loss account under the most convenient heads. Clause (vii) dealing with the disclosure of reserves read as under-
(a) The aggregate, if material, of any amounts set aside or proposed to be set aside, to reserves, but not including provisions made to meet any specific liability, contingency or commitment known to exist at the date as at which the balance sheet is made up.
(b) The aggregate, if material, of any amounts withdrawn from such reserves. Clause (ix) dealing with the disclosure of provisions reads as under:
(a) The aggregate, if material, of the amounts to set aside to provisions made for meeting specified liabilities, contingencies or commitments.
(b) The aggregate, if material, of the amounts withdrawn from such provisions, as not longer required.
8. It has been held in Tamil Nadu Mercantile Bank Ltd,’s case (supra), that it is the computation made in accordance with Section 32AB(3), which is to be the basis for determining 20 per cent of the profits of the business for the purposes of Section 32AB(1)(ii). The computation of income under the provisions of the Income-tax Act is of no relevance for the purpose of determining the extent of benefit under Section 32AB(1) of the Act. Reference may also be made to the decision of the Madras High Court in the case of Carborundum Universal Ltd. v. CIT wherein it has been held that the determination of the profit is required to be made in accordance with Parts n and III of the Sixth Schedule to the Companies Act, 1956 and the calculation shall be made in accordance with the Companies Act and the requirements more specifically required of Parts II and III of the Sixth Schedule thereof. There is no scope at all for invoking the concept of different kinds of income found in the Income-tax Act into the calculation of profit required to be made in terms of Section 32AB(3) of the Act.
9. In Alfa Laval India Ltd. ‘s case (supra), the issue related to the amounts credited to the profit and loss account on account of reworking of the depreciation on the basis of the circular issued by the Company Law Board. The Bombay High Court held that it is not open for the department to reduce such write back from the profit eligible for relief under Section 32AB of the Act. Almost an identical issue came up for consideration before the Chandigarh Bench of the Tribunal in Mahavir Spg, Mills Ltd.’s case (supra). In that case the assessee made provisions for various expenses and claimed them as deduction in the earlier years. When these provisions made in the earlier years were no longer required, the said amounts were written back to the profit & loss account, which was treated as an income relating to the business and also treated as part of the book profit for the purposes of relief under Section 32AB of the Act. The Division Bench, after appreciating the various clauses of Section 32AB(3) of the Act, felt it appropriate and directed the Assessing Officer to re-consider the provisions written back to be part of the profits of the assessee. In taking this view, the Tribunal has followed its Special Bench decision in the case of Highway Cycle Industries Ltd. (supra), for the proposition that the profits from the eligible business for the purposes of Section 32 AB are not to be computed under the Income-tax Act, but as would be required to be computed under Schedule VI to the Companies Act, 1956. It is the commercial profit of an undertaking as understood by the people conversant with the Companies Act, that is to be computed by applying the well-settled principles of accounting. This proposition has since been approved by the Hon’ble Supreme Court in the case of Apollo Tyres Ltd. (supra).
10. The sum and substance of the computation is that the book profit after depreciation under the Income-tax Act and before income-tax and sur-tax shall be considered as profit of the year. The provision for meeting ascertained liability is always treated as charged to the profit and loss account, as any other expenditure. That is why if any amount is set aside as provision for meeting liability other than an ascertained liability, the amount is required to be increased if it is debited to the profit and loss account. It will have the same character as “Reserve”. Simply put, both provision and reserves as understood under Company Law are required to be added back if they relate to unknown or unascertained liability. A provision or a reserve for known or ascertained liability is to be treated as an expenditure. A provision and a reserve for unknown or unascertained liability is not so and, therefore, requires to be added if it is debited to the profit and loss account. Payment of dividend if debited to the profit and loss account, is again an appropriation of the profit. This shall go to increase the profits of the business for the purpose of computation of profit under Section 32AB of the Act. The loss of the subsidiary company is an adjustment due to corporate relationship between the two companies and has nothing to do with the determination of the profit under Section 32AB of the Act. All the increases that are spelt out in Sub-section (3) of Section 32AB are mainly as part of appropriation to the profit and loss account. That also requires the adjustment of depreciation only to enable the reduction of depreciation in accordance with the Income-tax Act as against the depreciation debited to the profit and loss account prepared under the Companies Act.
11. Now coming to the reduction of the amounts, first of all, they should be credited to the profit and loss account and they should be basically in the nature of reserves or provisions, which are akin to reserves as discussed above. The provisions, which are in respect of known or ascertained liabilities, are part of charge to the profit and loss account as they are expenditure and, therefore, require no adjustment. When such provisions are written back on account of cessor of liability, they are part of profits. Their character, in the above sense, is basically different from provisions or reserves and, therefore, the question of reduction for write back of such amounts is not implied in the scheme of provisions of Section 32AB of the Act. What is to be reduced for is basically the provisions and reserves and not which arc in the nature of expenditure or known ascertained liabilities. Any amounts set apart will become reserve only when they are not in respect of ascertained liabilities. Although the terminology ‘ascertained liability’ is not added in the clause, just like as in Clause (v) of Sub-section (3) of Section 32AB, but it is more than clear if one were to consider the context requiring the increase or decrease to be made. They are mainly in respect of reserves or provisions representing unascertained or unknown liabilities. In our view, any provision made for ascertained liability cannot be treated as a reserve or provision to be reduced as envisaged in Sub-section (3) of Section 32AB of the Income-tax Act within the meaning of the expression “reserve” as defined in part III of the Sixth Schedule to the Companies Act, extracted earlier in this order.
12. Now we will discuss the above in the light of the facts of the present case. In the earlier years, when the provisions were made on account of differential excise duty in respect of structural plywood as also royalty payable to the Government of Karnataka, these provisions were debited to the profit & loss account to the exact amount of liabilities demanded from to time by the respective authorities. These provisions were claimed as part of business expenses in the profit and loss account. In the nature of these liabilities, in our opinion, they are not in the nature of reserves or simplicitor provisions in the nature of reserves. If a provision is made in excess of what is ascertained, although it is mentioned as a provision, but it will assume the characteristic of the reserve. Any provision made for meeting known and ascertained liabilities is really debitable expenditure to the profit and loss account. The Tribunal has already directed to allow them as expenses when the liabilities were provided in the accounts from year to year basis and the aggregate of the precise amount was already claimed as revenue expenditure and deduction in the earlier years. As a result of certain developments in the previous year relevant to the assessment year under appeal they all became no longer required and, therefore, the assessee has credited the said amount to the profit and loss account. When the amounts were debited, the profit has already been reduced. When the amounts are credited the profits will have to naturally go up giving the same treatment to the like amount. When the amounts were so credited, they were essentially business profits that were clearly assessable under Section 41 of the Act as a part of its business profits. There is no doubt in our mind that such write back will not go to reduce the profits of the year for computing the eligible amount of profit for granting relief under Section 32AB of the Act. It is misnomer to call the amount so credited as reserves and provisions when they are, in fact, the actual and ascertained liabilities. The character of the sum while it was debited will naturally remain so when the like amounts are credited. The law is well clarified in Clause (v) of Sub-section (3) of Section 32AB of the Act where it wants to increase only the amount if such provisions are not provisions for meeting the ascertained liabilities. Any provision made for meeting unascertained liability is really in the nature of reserve, which is a fund set apart to take care of the possible losses or liabilities of the future. In the facts of this case, the liability had fallen upon the assessee as a result of the specific demand made by the Central Excise Authorities with regard to differential excise duty as also the Government of Karnataka in respect of royalty payment. The amounts were clearly for meeting ascertained liabilities. When such ascertained liabilities ceased to exist the department has rightly brought them to tax as a part of the assessee’s total income. It is strange for the department now to turn around and to say that such profits are not the profits for the purposes of computing relief under Section 32AB(3) of the Act. Although the term ‘ascertained liabilities’ is not specifically found a place in the clause, but having regard to the totality of the scheme of computation under Section 32AB(3), the answer is self-evident.
13. The Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. (supra) observed as under:
The expression “reserve” has not been defined in the Super Profits Tax Act, 1963, or the C.(P) S.T. Act, 1964. The dictionaries do not make any distinction between the two concepts “reserve” and “provision” while giving their primary meanings, whereas in the context of those Acts a clear distinction between the two is implied. Though the expression “reserve” is not defined since it occurs in taxing statutes applicable to companies only and to no other assessable entities, the expression has to be understood in its popular sense, that is to say, the sense or meaning that is attributed to it by men of business, trade and commerce and by persons interested in or dealing with companies. Therefore, the meanings attached to the words “reserves” and “provisions” in the Companies Act, 1956, dealing with the preparation of the balance sheet and the profit and loss account would govern their construction for the purposes of the two enactments. The broad distinction between the two is that whereas a “provision” is a charge against the profits to be taken into account against gross receipts in the profit and loss account, a “reserve” is an appropriation of profits, the asset or assets by which it is represented being retained to form part of the capital employed in the business.
14. It further observed that the true nature and character of the appropriation must be determined with reference to the substance of the matter; this means that one must have regard to the intention with which and the purpose for which the appropriation has been made, such intention and purpose being gathered from the surrounding circumstances.
15. On a reading of the provisions of the Companies Act and the meaning of the terms it is clear that the nature of the statutory liabilities in the present case is neither the reserve nor a provision for an unascertained liability. Though provided and stated to be a provision in its books of account, it was, in fact, an ascertained liability of the assessee arisen on account of a statutory demand raised against the assessee. Therefore, it could neither be termed as ‘reserve’ within the meaning of Clause (iv) nor a ‘provision’ for meeting liabilities other than ascertained liabilities within the meaning of Clause (v) of Sub-section (3) of Section 32AB. The write off of such liability in the year under consideration, which has resulted in view of certain developments in the previous year relevant to the assessment year under consideration and crediting the same to the profit and loss account, would also not be an amount or amounts withdrawn from the reserve or profession.
16. Again, it may be emphasized that the term “any amount or amounts withdrawn from reserves or provisions” appearing in the latter part of Sub-section (3) has to be understood in the light of Clauses (iv) and (v) providing for increase in the aggregate amount of the profit by these two items. Unless the amount withdrawn are out of reserves or provisions in the nature of the items (iv) and (v) of Sub-section (3) of Section 32AB, the withdrawal or writing off the same in the profit and loss account would not be reduced to ascertain the amount of profits of the business or profession. It also synchronizes with the object of defining the term “profit of business or profession” for the purpose of granting deduction under Sub-section (1) of Section 32AB of the Act in the sense that the reserves and provisions which are not for meeting an ascertained liability would be an allocation of profits and, therefore, the profit of an assessee is increased by that amount in the year when they are debited and it is to be reduced from the profit and loss account on the withdrawal or writing off of the same if credited to the profit and loss account in the subsequent year when the provision is no longer required by the assessee.
17. The fact that the term “an amount or amounts withdrawn from reserves and provisions” are not qualified with the words “for meeting the liabilities other than ascertained liabilities” and, therefore, the reduction has to be irrespective of the fact whether they were for ascertained or unascertained liability, in our opinion, has no force, if seen in the context of the object of defining the profits of the business for the purposes of this section which is to ensure uniformity and to reduce uncertainty about the interpretation of this term. If this be so, there would result an anomalous situation. That is to say that in the year when this liability was debited, the profits of the company would not have to be increased because it was for an ascertained liability; on the contrary when that amount is written off in the subsequent year the profits are to be reduced even though the said liability has been allowed as a deduction, being in the nature of an ascertained liability.
18. In the light of our above discussions, we are of the view that the term “ascertained liabilities” referred to in Clause (v) of Sub-section (3) of Section 32AB is relevant not only for the addition in the profit but also for reduction of the profit. We are also of the view that the credit to the profit and loss account by way of write back should not be reduced under Section 32AB(3) of the Act if such reserve or provision is in respect of an ascertained liability.
19. Having answered the question referred to us, the matter will now go back to the Division Bench for disposal of the other grounds raised in this appeal.