Income Tax Appellate Tribunal - Hyderabad
State Bank Of Hyderabad vs Surtax Officer on 22 October, 1985
Equivalent citations: [1986]16ITD340(HYD)
ORDER
T.V.K. Natarajachandran, Accountant Member
1. This appeal is preferred by the assessee. At the time of hearing, the learned counsel for the assessee did not press ground Nos. 4 and 6 and rightly conceded ground No. 5 in view of the judgment of the Supreme Court in the case of Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308. Therefore, only ground Nos. 2 and 3 survive for consideration. This appeal is directed against the order of the Commissioner (Appeals) dated 16-4-1984 wherein following the reasons given in his order for the assessment years 1976-77 and 1979-80, he held that excess provision of Rs. 96,53,305 for income-tax could not be considered as the reserve, and, therefore, could not be deducted from chargeable profits under Rule 1(xi)(b) of the First Schedule to the Companies (Profits) Surtax Act, 1964 ('the Act'). Consistent with this view, he also held that the amount could not be considered as reserve for the purpose of computation of capital under Rule 1(ii) of the Second Schedule to the Act. In the grounds, the assessee claims that the excess amount of provision for income-tax over and above the actual liability is reserve in the light of ratio of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd, v. CIT [1981] 132 ITR 559 and that amount having not been allowed as deduction in income-tax assessment for the year 1979-80 should have been deducted from chargeable profits as well as included in the capital computation for the assessment year 1980-81.
2. In the assessment for the assessment year 1980-81, the assessee claimed, inter alia, in the revised return that the excess provision for income-tax of Rs. 96,53,305 should be deducted from chargeable profits. According to the ITO, the tax payable for the current year 1978 relevant for the assessment year 1979-80 as per modification order dated 4-1-1983 was Rs. 3,29,37,695 of which the assessee paid Rs. 2,33,00,051 and the balance of Rs. 96,37,644 was payable. Therefore, he concluded that the claim of excess provision for the calendar year 1978 could not be accepted. In this view of the matter, the ITO held that the amount could not be deducted from chargeable profits under rule 1(xi)(b) of the First Schedule. However, there was no adjudication of the claim of Rs. 96,37,644 being treated as capital as on 1-1-1979 for the purpose of Rule 1(ii) of the Second Schedule. In fact the ITO did not at all consider the same as the assessment order is quite silent on this matter. Aggrieved over the assessment the assessee preferred appeal before the Commissioner (Appeals).
3. Based on the reasons given by him in his orders dated 30-1-1984 for the assessment year 1979-80 and order dated 16-4-1984 for the assessment year 1976-77, the Commissioner (Appeals) held that the amount, of Rs. 1,21,27,000 being the amount transferred to the reserve for bad and doubtful debts' account should be deducted for the purpose of rule 1(xi) (b) of the First Schedule and this matter became final inasmuch as the revenue is not in appeal before us. However, for the reasons given by him in paragraph 4 of his appellate order dated 30-1-1984 for the assessment year 1979-80, he held that the excess provision for tax of Rs. 96,53,305 though was disallowed for the purpose of computation of total income nonetheless it could not be considered as reserve and, therefore, could not be deducted under Rule 1(xi)(b) of the First Schedule. At this juncture, it is essential to note the reasons given by the Commissioner (Appeals) for drawing this conclusion. It could appear from paragraph 4 of the Tribunal order for the assessment year 1979-80 dated 30-4-1985, the Commissioner (Appeals) stoutly mentioned that only in the context of an appropriation of a gratuity reserve, the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. (supra) held that if a sum so appropriated was shown to be excess of the sum required to meet the estimated gratuity liability, it was only the excess that would be regarded as reserve. Therefore, his thesis was that the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. (supra), nowhere extended the analogy to the case of an excess provision made towards income-tax but on the contrary it specifically held in the very case that an amount set apart by the board of directors of a company for liability to taxation in respect of profits which had been earned during the year would be regarded as a provision, for a known and existing liability the quantification whereof has to be done later on.
4. As a corollary to his decision, namely, the excess provision for tax was not a reserve for the purpose of rule 1(xi)(b) of the First Schedule, he consequently held that it could not be included for the purpose of computation of capital under Rule 1(ii) of the Second Schedule. Hence, the appeal by the assessee.
5. The learned representative of the assessee besides reiterating the grounds which survived for consideration maintained that rule 1(xi)(b) of the First Schedule permits deduction from chargeable profits any sum transferred to the reserve which sum is attributable to the income chargeable to tax but is not allowed as a deduction. According to him, the assessee made a provision of Rs. 4,25,91,000 for tax for 1979-80 but the actual was Rs. 3,29,37,695 resulting in excess, provision of Rs. 96,53,305 as on 1-1-1979 which is the first day of the accounting year relevant to the assessment year 1980-81. This excess, he maintained, of course, relying upon the decision of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. (supra) constituted 'reserve' and as such became eligible for deduction from chargeable profits under rule 1(xi)(b) of the First Schedule. For this proposition, he relied on the order of the Tribunal in the assessee's own case for the earlier assessment year 1979-80 in ST Appeal Nos. 12 and 13 (Hyd.) of 1984 dated 30-4-1985 a copy of which was filed for our reference. Drawing our attention to the relevant portion of the aforesaid order, he pointed out that the Tribunal specifically addressed itself to the question whether excess provision for tax of Rs. 96,53,305 constituted 'reserve' in the light of ratio laid down by the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. (supra) and after elaborate discussion came to the conclusion that it constituted a 'reserve' and he contended that the reading and understanding of the ratio of the Supreme Court on the part of the Commissioner (Appeals) was not correct. Further, he submitted that in view of the finding given by the Tribunal in the assessment year 1979-80 regarding application of the ratio of the Supreme Court to the issue in appeal, he contended that the issue was concluded by the order of the Tribunal and, consequently, such amount should be deducted from chargeable profits.
6. As regards the claim that the excess provision for tax should also be included in the capital computation in terms of rule 1(ii) of the Second Schedule, he submitted that the issue was consequential to the finding of fact given by the Tribunal regarding the issue whether the excess provision for tax was 'reserve' for the purpose of rule 1(xi)(b) of the First Schedule. A comparative chart showing the various items of reserves for the assessment year 1980-81 and the earlier three years and details of reserves as on 1-1-1979 was filed before us.
7. The learned departmental representative has been heard at great length. On his part, he vehemently supported the finding given by the Commissioner (Appeals) regarding non-application of ratio of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. (supra) to the issue in the case of the assessee. He pointed out that in the case of Vazir Sultan Tobacco Co. Ltd. (supra), the plea regarding provision for tax was not allowed to be raised and, therefore, there was no ratio or obiter or passing observation by the Supreme Court regarding the treatment of excess provision for tax as reserve. Therefore, he maintained that the question of treating excess provision for tax as a reserve for the purpose of computing chargeable profits and including in capital computation did not arise at all. Factually, the ITO had demonstrated that there was no case of excess provision but, on the other hand, the assessee was to pay balance of Rs. 96,37,644 to the department towards tax. In view of these circumstances, he pointed out that the issue assumed greater significance and it was essential to go into the question whether in fact there was excess provision at all or not in the assessment year 1979-80 and whether the excess provision would constitute reserve for the purpose of computation of chargeable profits and capital computation. Relying on the findings given by the ITO and the Commissioner (Appeals) in this regard, he urged that there was no excess provision at all. Even if there was an excess provision, the assessee was bound to get the benefit only for Rs. 14,70,021 which pertains to the assessment year 1980-81 and not Rs. 96,53,305. Regarding the assessee's claim for including the excess provision for tax in the capital computation, he referred to rule 1A of the Second Schedule to the Act and pointed out that in the case of any shortfall in the provision of taxes or proposed dividends, such shortfall is to be deducted from the capital computed under Rule 1 of the Second Schedule. On the contrary, there is no provision for increasing the capital computed under Rule 1 by the excess provision made for tax. Referring to relevant provisions of the Companies Act, 1956, he contended that only the excess provision over and above what is considered as reasonable by the directors constituted 'reserve' and if the directors had not considered so there could be no case of excess provision being treated as 'reserve'. Drawing our attention to Section 205A(3) of the Companies Act, he pointed out that dividends out of accumulated profits could not be declared except in accordance with the rules made by the Central Government and where declaration was not in accordance with such rules, such declaration should not be made without the previous approval of the Central Government. Whereas in the case of excess provision for tax, it was always possible for an assessee to plough back the excess provision for declaration of dividends and thereby defeating the purpose of creation of reserve. Referring to the Explanation to Rule 1 of the Second Schedule, he contended that any surplus out of profit and loss account, proposed additions to reserves and sinking fund under the heading 'Reserves and surplus' or any item under the heading 'Current liabilities and provisions' in column related to liabilities in the form of balance sheet given in Part I of Schedule VI of the Companies Act, should not be regarded as 'reserve' for the purpose of computation of capital.
8. In reply, the learned representative for the assessee maintained that actually the assessee made excess provision in the accounts and relied on the order of the Tribunal in the assessee's own case for 1979-80 regarding application of ratio of the Supreme Court's decision in the case of Vazir Sultan Tobacco Co. Ltd. (supra) to the issue under consideration.
9. We have duly heard the parties and given consideration to their contentions. In our view, it is not necessary for us to enter into any elaborate discussion about the fact whether there was excess provision in the assessment year 1979-80 or not and also whether the excess provision constituted 'reserve' for the purpose of Rule 1(xi)(b) of the First Schedule and Rule 1(ii) of the Second Schedule inasmuch as the question cropped up for the consideration of the Tribunal in the assessee's appeal for the assessment year 1979-80 and the Tribunal did consider the issue in extenso with reference to the applicability of the ratio of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. (supra) to the excess provision for tax and came to the conclusion that in the light of the ratio of the Supreme Court, it constituted 'reserve'. On our part, we adopt the reasons and conclusions drawn by the Tribunal in paragraphs 4 to 9 of its order in the assessment year 1979-80 for this year also, inasmuch as similar contentions were also raised on behalf of the department in that year. However, we wish to observe that the issue is highly dialectical in nature. While the assessee claimed excess provision for tax was in the nature of secret reserve, the revenue opposed the claim stating that such provision was not transferred to 'reserve'. Thus, there is thesis and antethesis, and therefore, the issue is to be resolved by synthesis. In our view the ratio of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. (supra) insofar as it is applicable to the excess provision for tax made in the account by the assessee partakes the nature of reserve or secret reserve as styled by the assessee and, therefore, it should be treated as 'reserve' for the purpose of rule 1(xi)(b) of the First Schedule and also, consequently, for the purpose of Rule 1(ii) of the Second Schedule. Regard should be given to the substance of transaction instead of raising controversy over the word 'reserve'. Coming to the question of such excess provision being admissible for deduction from chargeable profits it is to be stated that Sub-clause (b) of clause (xi) of Rule 1 of the First Schedule contains two limbs, namely, if any sums transferred in the previous year to any reserve including secret reserve and the aggregate of such sums not exceeding the highest of the aggregate of such sums if any transferred during any one of three previous years prior to the previous year which is higher. Applying the above provision, it is seen that although the assessee made excess provision for tax of Rs. 14,70,021 during the previous year 1979 relevant for the assessment year 1980-81 which alone, according to the learned departmental representative, is admissible as deduction. Nonetheless such provision as on 1-1-1979 on the first day of the accounting year alone is relevant which stood at Rs. 96,53,305. The chart filed by the learned representative of the assessee shows that there was no such excess provision for tax for the assessment years 1977-78 and 1978-79 and, therefore, such provision made for 1978-79 alone required for consideration. In this connection, it is to be pointed out that the ITO had allowed the aggregate of reserves in respect of six items while the Commissioner (Appeals) had allowed the reserve relating to bad and doubtful debts and in the absence of any appeal by the revenue, his decision thereon had become final. Therefore, for the purpose of second limb of Rule 1(xi)(b) of the First Schedule, only the excess provision of tax alone required to be considered. Thus, both under the first limb and the second limb of the aforesaid clause the sum of Rs. 96,53,305 requires to be deducted from the chargeable profits under rule l(xi)(b) of the First Schedule. For the same reasons, such amount is required to be included in the capital computation under Rule 1(ii) of the Second Schedule in the light of ratio of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. (supra), which was held to be applicable to the case of excess provision also for tax made in the assessment year 1979-80. Although under Rule 1A of the Second Schedule there is provision for deducting for any shortfall in the provision for tax and there is no specific provision for including excess provision in the capital computation, nonetheless by reading both the Rule 1A of the Second Schedule and Explanation together, such excess provision could be added to the capital computed under Rule 1(ii) of the Second Schedule, inasmuch as, the Explanation gives clear indication that in respect of proposed dividend, the reasonable amount is specified to be the amount of dividend declared or made by the company on or after the first day of the previous year relevant to the assessment year for the previous year immediately preceding the first mentioned previous year and there is provision regarding what is considered to be reasonable amount of provision for taxation in terms of Rule 1A of the Second Schedule. Thus, on the facts and in the circumstances of the case, there are merits in the grounds taken by the assessee and, therefore, we are inclined to accept them. In this view of the matter, therefore, we reverse the orders of the authorities on these points only and direct the ITO to allow the claims of the assessee.
10. In the result, the appeal succeeds partly.