Bombay High Court
Richardson & Cruddas Ltd. vs Commissioner Of Income-Tax on 31 October, 1985
Equivalent citations: (1986)50CTR(BOM)1, [1986]162ITR753(BOM), [1986]27TAXMAN65(BOM)
JUDGMENT Bharucha, J.
1. At the instance of the assessee, two questions are put to us in this reference under section 256(1) of the Income-tax Act, 1961, read with section 19 of the Super Profits Tax Act, 1963. They read as follows :
"(1) Whether, on the fcts and in the circumtancances of the case, the excess in the profit and loss account of Rs. 25,81,671 was includible in the capital base under the Super Profits Tax Act, 1963, for granting the standard deduction ?
(2) Whether, on the facts and in the circumstances of the case, the provision for taxation of Rs. 52,68,486 or any part thereof was includible in the capital computation base under the Super Profits Tax Act, 1963, for granting standard deduction ? The assessment year involved is 1963-64 for which the previous year ended on June 30, 1962.
2. The Super Profits Tax Officer computed the capital base of the assessee for the purposes of computing the tax payable by the assessee under the Super Profits Tax Act, 1963 (hereinafter called "the said Act"), on July 1, 1961, being the first day of the previous year relevant to the assessment year 1963-64 in the sum of Rs. 1,26,44,495. In computing this figure, he did not include the sum of Rs. 25,81,671, being the surplus of the assessee's profit and loss account at the end of the previous year relevant to the assessment year 1962-63 brought forward to the first day of the previous year relevant to the assessment year 1963-64 and the sum of Rs. 52,68,486, being the provision for taxation as on July 1, 1961. The assessee appealed. The Appellate Assistant Commissioner allowed the appeal.
3. The Revenue appealed to the Income-tax Appellate Tribunal. The Tribunal held that the sum of Rs. 25,81,671 standing in the profit and loss account as surplus could not be regarded as a general reserve or equated with an earned surplus. It remained a mass of undistributed profits available for distribution, as it was not earmarked as a reserve. It could not, therefore, be included in the capital computation for the purposes of the super profits tax assessment. In regard to the sum of Rs. 52,68,486, being the provision for taxation, the Tribunal concluded that it did not represent a reserve and could not be included in the computation of the capital base.
4. Under section 4 of the said Act, tax was chargeable on every company for every assessment year commencing on and from April 1, 1963, in respect of so much of its chargeable profits of the previous year as exceeded the standard deduction at the rate specified in the Third Schedule to the said Act. "Standard deduction" was defined in section 2(9) thus : "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." Under rule 1 of the Second Schedule, reserves were includible in the computation of the company's capital.
5. Mr. Sathe, learned counsel for the assessee, pointed out to us that the relevant time a petition under sections 397 and 398 of the Companies Act, 1956, had been filed against the assessee in the Calcutta High Court and that the Calcutta High Court had appointed a special officer to administer the company. It is he who has signed the report annexed to the balance sheet, for there was no board of directors. He had brought the sum of Rs. 25,81,671 standing to the credit of the profit and loss account in the reserves and surpluses, as was shown by the assessee's balance-sheet for the year ended June 30, 1962. In Mr. Sathe's submission, it had not been possible for the special officer to distribute dividends and the assessee's annual report for the relevant year listed among the contingent liabilities not provided for an item in respect of arrears of cumulative preference dividends amounting to Rs. 20,200 subject to deduction of tax for the seven years ending June 30, 1962. In Mr. Sathe's submission, the amount of Rs. 25,81,671 should, in the special circumstances of the case, be considered a reserve under the provisions of rule 1 of the Second Schedule to the said Act.
6. Mr. Sathe placed reliance upon the decision of this court in Shree Ram Mills Ltd. v. CIT [1977] 108 ITR 27. It is difficult to see how this decision can help Mr. Sathe's contention for, having discussed certain earlier authorities, this court held that a mass of undistributedjprofits could not automatically become a reserve and that somebody possessing the requisite authority had to clearly indicate that the amount had been separated from the general mass of profits with a view to constitute it as a reserve and it should be apparent from the surrounding circumstances that the amount so set apart was, in fact, a reserve to be utilised in future for a specific purpose on a specific occasion. In the present case, as is apparent from the balance-sheet, the special officer made a provision for a general reserve, a dividend equalization reserve, a development rebate reserve and an insurance reserve. As far as the amount of Rs. 25,81,671 standing to the credit of the profit and loss account was concerned, while it was shown under the head of "Reserves and surpluses", it was not made a part of the general reserves, which were shown separately, nor was it indicated in any manner that it had been set apart for use in future for any specific purpose or on any specific occasion.
7. The leading decision of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT also makes it clear that a mass of undistributed profits cannot automatically become a reserve and that somebody possessing the requisite authority must clearly indicate that the amount has been separated from the general mass of profits with a view to constituting it as either a general or a special reserve and it should be apparent from the surrounding circumstances that the amount so earmarked or set apart is, in fact, a reserve to be utilised in future for a specific purpose on a specific occasion.
8. In the result, we must hold that the Tribunal was right in holding that the amount of Rs. 25,81,671 could not be included in the capital computation of the assessee.
9. In regard to the second question, Mr. Sathe drew our attention to the order of the Tribunal passed upon a miscellaneous application of the assessee. The order noted that an argument on behalf of the assessee had not been mentioned in its judgment in this matter. The Tribunal, therefore, amended the judgment and added therein that it had been urged by the representative of the assessee that if, on the basis of the assessments finally made for the assessment years up to an including the assessment year 1962-63, any portion of the amount of Rs. 52,68,486 provided for tax was an excess provision, then the excess should be considered as a reserve and included in the computation of capital. The Tribunal in its order stated that the assessee's representative had not urged that at the relevant time the excess of the provision worked out to Rs. 24,17,116 and so that could not be cooperated in the Tribunal's judgment.
10. Annexed to the statement of the case is an application made by the assessee to the Tribunal, which set out thus :
11. The excess provision is Rs. 24,17,116 as explained below :
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Accounting Assessment Original Provision Final tax Excess
year year provision in as on liability provision
accounts 30-06-61 determined
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(1) (2) (3) (4)
(1-3)
Rs. Rs. Rs. Rs.j30-6-50 53,223
30-6-51 52-53 6.50.000 (2,76,171) 9,61,013 (3,11,013)
30-6-52 53-54 6,50,000 1,93,333 6,00,780 49,220
30-6-53 54-55 4,50,000 29,750 4,44,004 5,996
30-6-54 55-56 12,00,000 8,65,017 11,68,502 (30,458)
30-6-55 56-57 12,00,000 12,00,000 12,66,859 (86,859)
30-6-56 57-58 6,00,000 8,00,000 6,74,926 1,25,072
30-6-57 58-59 4,25,000 4,25,000 ----- 4,25,000
30-6-58 59-60 --- ---- ----- ----
30-6-59 60-61 5,50,000 3,50,000 ----- 3,50,000
30-6-60 61-62 9,80,000 9,80,000 ----- 9,80,000
30-6-61 62-63 9,45,000 9,54,000 95,798 8,49,202
--------- -------- --------- --------
76,50,000 52,68,486 52,32,884 24,17,116
net
----------- ---------- -------- -------
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12. It was urged by Mr. Sathe before us that on the basis of the assessments finally made for the assessment years up to the assessment year 1963-64, the amount of Rs. 24,17,116 out of the sum of Rs. 52,68,486, originally made as a provision for taxation as an excess which should be considered a reserve and included in the computation of the assessee's capital. Reliance was placed by Mr. Sathe upon the decision of the Supreme Court in Vazir Sultan Tobacco Company's case . The Supreme Court was dealing with a case in which a company had framed a scheme whereunder it was liable to pay gratuity to its employees upon the determination of their employment. Determination of their employment was an event certain to happen. The company could work out on an actuarial valuation its estimated liability and make a provision therefore over a number of years. An appropriation made by adopting such a scientific method would constitute a provision representing fairly accurately a known and existing liability for the year in question. If, however, an ad hoc sum had been appropriated without resorting to any scientific basis, that appropriation would be a provision intended to meet a known liability, though a contingent one. If the sum so appropriated was shown to be in excess of the sum required to meet the estimated liability calculated on a scientific basis, it was only the excess that would have to be regarded as a reserve. Since sufficient material was not on record as to whether the appropriation made by the company before the Supreme Court towards gratuity reserve was based on any actuarial valuation or whether it was an appropriation of an ad hoc amount, the Supreme Court remanded the matter to decide the issue in the light of the principles stated by it.
13. The principle is clear. Where a provision has been made on an ad hoc basis which could have been made fairly accurately on a scientific basis, it should be determined on a scientific basis and the excess, if any, should be regarded as a reserve. The principle is not a warrant for the argument which was advanced by Mr. Sathe that the difference between the provision originally made and the liability to tax as crystallized upon assessments should be treated as a reserve.
14. In any event, the facts in this behalf not having been placed before the Tribunal, there has been no determination by the Tribunal, as to whether the amount of the provision for taxation of Rs. 52,68,486 was in excess of the crystallized liability upon final assessments by Rs. 24,17,116. It has also not been determined that the amount of Rs. 52,68,486 was the provision of an ad hoc sum and not based upon ajcomputation of the assessee's estimated liability to tax. In fact, the Supreme Court has, in Vazir Sultan Tobacco Company's case , held that an amount set apart by a company for liability to taxation in respect of profits which it has earned would have to be regarded as a provision for a known and existing liability, quantification whereof had to be done later; it had, therefore, to be regarded as a provision and not as a reserve. It has also not been determined that all the liabilities over the several assessment years provided for by the amount of Rs. 52,68,486 had been crystallized by final assessments.
15. Mr. Sathe drew our attention to the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. CWT . We find it hard to appreciate its relevance to Mr. Sathe's argument, for it was there held that the liability to pay tax was a present liability though it became payable after it was quantified in accordance with ascertainable data. The rate was always ascertainable. All the ingredients of a "debt" being present, it was a present liability of an ascertainable amount.
16. We must hold, as the Tribunal did, that no part of the amount of Rs. 52,86,486 made as a provision for taxation could have been included in the capital computation of the assessee.
17. In the result, both the questions are answered in the negative and in favour of the Revenue.
18. The assessee shall pay to the Revenue the costs of the reference.