PETITIONER:
COMMISSIONER OF INCOME-TAX, U.P.
Vs.
RESPONDENT:
LAXMI SUGAR & OIL MILLS LTD.
DATE OF JUDGMENT16/07/1986
BENCH:
PATHAK, R.S.
BENCH:
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.
JUDGMENT:
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
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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.
219