{"id":20039,"date":"1993-02-25T00:00:00","date_gmt":"1993-02-24T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/karamchand-premchand-pvt-ltd-vs-commissioner-of-income-tax-on-25-february-1993"},"modified":"2019-04-10T04:19:33","modified_gmt":"2019-04-09T22:49:33","slug":"karamchand-premchand-pvt-ltd-vs-commissioner-of-income-tax-on-25-february-1993","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/karamchand-premchand-pvt-ltd-vs-commissioner-of-income-tax-on-25-february-1993","title":{"rendered":"Karamchand Premchand Pvt. Ltd vs Commissioner Of Income Tax, &#8230; on 25 February, 1993"},"content":{"rendered":"<div class=\"docsource_main\">Supreme Court of India<\/div>\n<div class=\"doc_title\">Karamchand Premchand Pvt. Ltd vs Commissioner Of Income Tax, &#8230; on 25 February, 1993<\/div>\n<div class=\"doc_citations\">Equivalent citations: 1993 SCR  (2) 109, \t  1993 SCC  Supl.  (2) 487<\/div>\n<div class=\"doc_author\">Author: B Jeevan Reddy<\/div>\n<div class=\"doc_bench\">Bench: Jeevan Reddy, B.P. (J)<\/div>\n<pre>           PETITIONER:\nKARAMCHAND PREMCHAND PVT.  LTD.\n\n\tVs.\n\nRESPONDENT:\nCOMMISSIONER OF INCOME TAX, GUJARAT\n\nDATE OF JUDGMENT25\/02\/1993\n\nBENCH:\nJEEVAN REDDY, B.P. (J)\nBENCH:\nJEEVAN REDDY, B.P. (J)\nVENKATACHALA N. (J)\n\nCITATION:\n 1993 SCR  (2) 109\t  1993 SCC  Supl.  (2) 487\n JT 1993  Supl.\t    56\t  1993 SCALE  (1)690\n\n\nACT:\nSuper Profits Tax Act, 1963\nSecond\tSchedule-Rule  1-Amount\t set  apart  for  contingent\nliability  (Income-tax-Whether\ta reserve  or  a  provision-\nWhether to be included in the Computation of Capital of\t the\nassessee.\n\n\n\nHEADNOTE:\nThe appellant-assessee was issued a notice under Section 23A\nof  the\t Income-tax Act, 1922.\tThe assessee  contested\t the\nsame.  At the same time, it set apart a sum of Rs.  6,52,000\nin  its books for the year ending 31st March 1956,  to\tmeet\nthe  contingency that may arise if his plea failed.   During\nthe  year 1958-59 an amount of Rs. 2,02,000 out of the\tsaid\namount\twas transferred to the profit &amp; loss  account.\t 'Me\nbalance\t amount of Rs. 4,50,000 continued to remain and\t was\nshown  as  a  provision\t set apart  to\tmeet  the  aforesaid\ncontingent liability.  The assessee has been contesting\t the\nsaid  proceedings.  Ultimately it succeeded before the\tHigh\nCourt  which held that no action could be taken against\t the\nassessee under Section 23A.\nFor  the  assessment year 1963-64 in proceedings  under\t the\nSuper  Profits Tax Act, the assessee claimed that  the\tsaid\nsum of Rs. 4,50,000 was a reserve and should be included  in\nits  capital.\tThe  Income  tax  Officer  did\tnot   agree.\nUltimately the matter reached the Tribunal which agreed with\nthe assessee.  At the instance of Revenue the question as to\nwhether\t the  sum of Rs. 4,50,000 set apart  for  contingent\nliability  (taxation) was to be included in the\t computation\nof  capital  of\t the assessee-company under Rule  1  of\t the\nSecond\tSchedule  of  the Super Profits Tax  Act,  1963\t was\nreferred to the High Court.\nThe  High  Court having answered the  question\tagainst\t the\nassessee,  the,\t assessee has preferred the  present  appeal\ncontending that inasmuch as no order levying additional\t tax\nunder Sec. 23A was made the amount could not be treated as a\nprovision.\n109\n110\nDismissing the appeals, this Court,\nHELD  : 1.1. Provisions made against anticipated losses\t and\ncontingencies are charges against profits and, therefore, to\nbe  taken into account against gross receipts in  the  P.&amp;L.\naccounts and the balance-sheet.\t On the other hand, reserves\nare appropriations of profits, the assets by which they\t are\nrepresented  being  retained  to form part  of\tthe  capital\nemployed in the business. [112G]\n1.2. In the instant case, the provision made by the assessee\nin  its Books for meeting the anticipated liability  of\t tax\n(under Section 23A of the Income Tax Act, 1922) was indeed a\nprovision and not a reserve.  The assessee Itself called  it\na  provision.\tIt  did not call it a reserve  nor  was\t the\namount set apart or appropriated as a reserve.\tIt is not to\nsuggest that the description given or the Book entries\tmade\nby  the\t assessee are conclusive, but to emphazise  how\t the\nassessee   understood\tthe   said  item   itself   In\t the\ncircumstances  of  the\tcase the High  Court  was  right  in\nholding\t it to be a provision and not a reserve, and so\t the\namount\tof  Rs.\t 4,50,000  was not to  be  included  in\t the\ncomputation of Capital of the assessee Company. [113E]\n<a href=\"\/doc\/756197\/\">Metal  Box  Company of India Limited v.\t Their\tWorkmen,<\/a>  73\nI.T.R.\t53  and Vazir Sultan Tobacco Co.Ltd.  etc.  etc.  v.\nCommissioner  of Income Tax, Andhra Pradesh etc.  etc.,\t 132\nI.T.R. 559, relied on.\n\n\n\nJUDGMENT:\n<\/pre>\n<p>CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2230 (NT)  of<br \/>\n1977.\n<\/p>\n<p>From  the Judgment and Order dated 13.12.76 of\tthe  Gujarat<br \/>\nHigh Court in Income Tax Reference No. 36 of 1972.<br \/>\nMrs. A.K. Verma, for JBD &amp; Co. for the Appellant.<br \/>\nG.C. Sharma, E.U.Eradi and T.R. Talwar for the Respondent.<br \/>\nThe Judgment of the Court was delivered by<br \/>\nB.P.  JEEVAN  REDDY,  J. This appeal  is  preferred  by\t the<br \/>\nassessee  against  the judgment of the\tGujarat\t High  Court<br \/>\nanswering the question, referred at the instance of Revenue,<br \/>\nagainst\t the assessee.\tThe following question was  referred<br \/>\nunder  Section 256(1) of the Income Tax Act for the  opinion<br \/>\nof the High Court:\n<\/p>\n<p><span class=\"hidden_text\"> 111<\/span><\/p>\n<p>&#8220;Whether on the facts and in the circumstances of the  case,<br \/>\nthe following amounts are to be included in the\t computation<br \/>\nof  capital  of the assessee Company under Rule\t 1.  of\t the<br \/>\nSecond Schedule of the Super Profits Tax Act, 1963:-\n<\/p>\n<p>(i)  Amount set apart for contingent\t  Rs. 4,50,000<br \/>\n     liability (taxation)\n<\/p>\n<p>(ii) Amount set apart for proposed divi\t  Rs. 19,90,000<br \/>\n     dend\n<\/p>\n<p>(iii) Reserve for Depreciation fund in ex- Rs. 6,77,122<br \/>\ncess of the amount allowed as depreciated in income-tax\n<\/p>\n<p>(iv) Excess provision in Revenue Acco-\t   Rs. 3,61,876<br \/>\nunts disallowed in income-tax assess-\n<\/p>\n<p>ment for the assessment years.&#8221;\n<\/p>\n<p>Though\tthe question refers to four items, we are  concerned<br \/>\nin  this  appeal  only\twith  the  first  item.\t  We  shall,<br \/>\ntherefore,  state  the\tfacts only in so  far  as  they\t are<br \/>\nrelevant to the said item.\n<\/p>\n<p>The  assessee is a Private Limited Company.  The  assessment<br \/>\nyear  concerned is 1963-64.  Sometime in 1955-56,  a  notice<br \/>\nwas  issued to the assessee under Section 23A of the  Income<br \/>\nTax  Act, 1922.\t Apprehending that it may become  liable  to<br \/>\npay  additional tax under the said provision,  the  assessee<br \/>\nset  apart a sum of Rs. 6,52,000 in its Books for  the\tyear<br \/>\nending March 31, 1956.\tOut of this amount an amount of\t Rs.<br \/>\n2,02,000  was  transferred to the profit  and  loss  account<br \/>\nduring\tthe year 1958-59, with the result that a sum of\t Rs.<br \/>\n4,50,000  continued to remain and was shown as\ta  provision<br \/>\nset apart to meet the taxation liability which the  assessee<br \/>\ncalled\ta  contingent  liability.   At\tthe  same  time\t the<br \/>\nassessee  had been contesting the proceedings taken  against<br \/>\nit  under  Section  23A.  Though it failed  at\tthe  earlier<br \/>\nstages, it succeeded ultimately in the Letters Patent Appeal<br \/>\nfiled  by  it in the East Punjab High Court.   In  the\tsaid<br \/>\nappeal\tdecided on May 24, 1965, it was held that no  action<br \/>\ncan  be taken against the assessee under Section 23A.\tWith<br \/>\nthis  order, all the orders passed and notices issued  under<br \/>\nthe  said provision prior to the date of the  said  judgment<br \/>\nstood vacated.\n<\/p>\n<p>In  its assessment relating to the assessment  year  1963-64<br \/>\nunder the<br \/>\n<span class=\"hidden_text\">112<\/span><br \/>\nSuper Profits Tax Act, the assessee contended that the\tsaid<br \/>\nsum  of Rs. 4,50,000 is a reserve and should be included  in<br \/>\nits  capital  for the purposes of the Act.  The\t Income\t Tax<br \/>\nOfficer did not agree and the matter was ultimately taken to<br \/>\nthe Income Tax Appellate Tribunal.  By the date this  appeal<br \/>\nwas  taken up for hearing, another appeal preferred  by\t the<br \/>\nassessee  relating to the subsequent assessment year  (1964-\n<\/p>\n<p>65)  was also before the Tribunal.  That appeal arose  under<br \/>\nthe  provisions of the Companies Sur-tax Profits  Act,\t1964<br \/>\nwhich  replaced\t the Super Profits Tax\tAct.   The  Tribunal<br \/>\nfirst disposed of the appeal relating to the-assessment year<br \/>\n1964-65.  In so far as the item in question is concerned  it<br \/>\nheld  that it was a reserve.  Following the  said  judgment,<br \/>\nthe  appeal  pertaining to the assessment year\t1963-64\t was<br \/>\nalso  allowed.\t(It  may be stated that\t the  order  of\t the<br \/>\nTribunal   relating   to   assessment\tyear   1964-65\t was<br \/>\nsubsequently  rectified by an order dated February 15,\t1972<br \/>\nand  the said item was held to be a provision.\tBut no\tsuch<br \/>\norder  was passed with respect to the assessment year  1963-\n<\/p>\n<p>64).\n<\/p>\n<p>Aggrieved  by  the  judgment of\t the  Tribunal\tthe  Revenue<br \/>\nobtained  the aforesaid reference.  The High Court  answered<br \/>\nthe  same.  in favour of Revenue and  against  the  assessee<br \/>\nfollowing the decision of this Court in <a href=\"\/doc\/756197\/\">Metal Box Company of<br \/>\nIndia Limited v. Their Workmen,<\/a> 73 I.T.R. 53.  It held\tthat<br \/>\nthe  said amount being a provision made towards a  liability<br \/>\nwhich  had attached on account of the issuance of  a  notice<br \/>\nwas  a\tprovision  and not a reserve.  In  this\t appeal\t the<br \/>\ncorrectness  of\t the said view is questioned.\tThe  learned<br \/>\ncounsel\t for the appellant-assessee submitted that  inasmuch<br \/>\nas  no\torder levying additional tax under Section  23A\t was<br \/>\nmade  on or before the date relevant to the assessment\tyear<br \/>\n1963-64\t the said amount cannot be treated as  a  provision.<br \/>\nWe find it difficult to agree.\tIn Metal Box, which has been<br \/>\nfollowed  in  Vazir  Sultan Tobacco Co.\t Ltd  etc.  etc.  v.<br \/>\nCommissioner  of Income Tax, Andhra Pradesh etc.  etc.,\t 132<br \/>\nI.T.R. 559, the distinction between provision and reserve is<br \/>\nstated in the following words:\n<\/p>\n<blockquote><p>\t      &#8220;The  distinction\t between a provision  and  a<br \/>\n\t      reserve  is in commercial\t accountancy  fairly<br \/>\n\t      well    known.\tProvisions   made    against<br \/>\n\t      anticipated   losses  and\t contingencies\t are<br \/>\n\t      charges against profits and, therefore, to  be<br \/>\n\t      taken  into account against gross receipts  in<br \/>\n\t      the  P. &amp; L. accounts and\t the  balance-sheet.<br \/>\n\t      On the other hand, reserves are appropriations<br \/>\n\t      of profits, the assets by which they are\trep-<br \/>\n\t      resented\tbeing retained to form part  of\t the<br \/>\n\t      capital<br \/>\n<span class=\"hidden_text\">\t       113<\/span><br \/>\n\t      employed\tin  the\t business.   Provisions\t are<br \/>\n\t      usually  shown in the balance-sheet by way  of<br \/>\n\t      deductions from the assets in respect of which<br \/>\n\t      they  are\t made whereas general  reserves\t and<br \/>\n\t      reserve  funds  are  shown  as  part  of\t the<br \/>\n\t      proprietor&#8217;s   interest.\t (See\tSpicer\t and<br \/>\n\t      Pegler&#8217;s Book keeping and Accounts, 15th\tEdn.<br \/>\n\t      p. 42).&#8221;\n<\/p><\/blockquote>\n<blockquote><p>\t      While  approving\tthe said  statement  it\t was<br \/>\n\t      stated in Vazir Sultan:\n<\/p><\/blockquote>\n<blockquote><p>\t      &#8220;In other words the broad distinction  between<br \/>\n\t      the  two\tis  that whereas a  provision  is  a<br \/>\n\t      charge  against the profits to be\t taken\tinto<br \/>\n\t      account  against gross receipts in the P.&amp;  L.<br \/>\n\t      account,\ta  reserve is  in  appropriation  of<br \/>\n\t      profits,\tthe asset or assets by which  it  is<br \/>\n\t      represented being retained to form part of the<br \/>\n\t      capital employed in the business.\t Bearing  in<br \/>\n\t      mind  the aforesaid broad distinction we\twill<br \/>\n\t      briefly  indicate\t how the  two  concepts\t are<br \/>\n\t      defined  and dealt with by the Companies\tAct,<br \/>\n\t      1956.&#8221;\n<\/p><\/blockquote>\n<p>Applying  the said test it must be held that  the  provision<br \/>\nmade   by  the\tassessee  in  its  Books  for  meeting\t the<br \/>\nanticipated liability of tax (under Section 23A) was  indeed<br \/>\na  provision and not a reserve.\t The assessee itself  called<br \/>\nit a provision.\t It did not call it a reserve nor was it set<br \/>\napart  or appropriated as a reserve.  We are not  suggesting<br \/>\nthat  the description given or the Book entries made by\t the<br \/>\nassessee  are conclusive.  We are only emphasizing  how\t the<br \/>\nassessee   understood\tthe  said  item\t itself.    In\t the<br \/>\ncircumstances  of the case we must hold that the High  Court<br \/>\nwas right in holding it to be a provision and not a reserve.<br \/>\nThe appeal accordingly fails and is dismissed.\tNo costs.\n<\/p>\n<pre>G.N.\t       Appeals dismissed.\n<span class=\"hidden_text\">114<\/span>\n\n\n\n<\/pre>\n","protected":false},"excerpt":{"rendered":"<p>Supreme Court of India Karamchand Premchand Pvt. Ltd vs Commissioner Of Income Tax, &#8230; on 25 February, 1993 Equivalent citations: 1993 SCR (2) 109, 1993 SCC Supl. (2) 487 Author: B Jeevan Reddy Bench: Jeevan Reddy, B.P. (J) PETITIONER: KARAMCHAND PREMCHAND PVT. LTD. Vs. RESPONDENT: COMMISSIONER OF INCOME TAX, GUJARAT DATE OF JUDGMENT25\/02\/1993 BENCH: JEEVAN [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-20039","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Karamchand Premchand Pvt. 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