Bombay High Court

N.W. Exports Ltd. vs Asstt. Cit on 4 August, 2002

Equivalent citations: (2004) 86 TTJ Mumbai 294

ORDER

B.L. Chrober, A.M.:

The only ground raised in this appeal by the assessee reads as under :

The Commissioner (Appeals) has erred in confirming the addition made by the Assistant Commissioner of Income-tax (hereinafter referred to as "Assistant Commissioner") to the "Book Profits" under section 115J of the Income Tax Act, 1961 (hereinafter referred to as "the Act") towards provision of Rs. 1,00,200 for diminution in value of investments and Rs. 8,08,434 on account of doubtful loans and advances. The Commissioner (Appeals) totally misdirected himself in applying clause (b) of Explanation to sub-section (1A) of section 115J of the Act and holding that the said provisions are actually reserves and could only be appropriated after the profits were ascertained. The Commissioner (Appeals) further erred in. wrongly interpreting the Supreme Court decision in Vazir Sultan Tobacco Co. Ltd. v. CIT (1981) 132 ITR 559 (SC) as regards the distinction between "provision" and "reserves"."

2. The assessee-company is engaged in export of textiles manufactured by the Bombay Dyeing and Manufacturing Company Ltd. During the course of assessment proceedings while computing deemed income under section 115J, the assessing officer added back to the disclosed book profit the following two provisions debited to profit & loss a/c.

(i) Diminution in value of investments

Rs. 1,00,200

(ii) For doubtful loans and advances

Rs. 8,08,434

Rs. 9,08,634

The assessment order does not contain any reasoning to support the action of the assessing officer but it appears that he invoked the provisions of Explanation (c) appended to section 115J(1A).

3. On appeal, the Commissioner (Appeals) held that the two items under discussion, though called a provision, were really in the nature of reserves and hence, are caught in the ambit of item (b) of the Explanation. In support of this finding, he placed reliance on Vazir Sultan Tobacco Co. Ltd. v. CIT (1981) 132 ITR 559 (SC). He accordingly confirmed the action of the assessing officer though for different reasons.

4. Shri Vijay Kakwani, the learned counsel for the assessee submitted that the book profits of the assessee- company had been computed in accordance with the requirements of the Companies Act, 1956. This could be seen from the report of the auditors, M/s AR Ferguson & Co. who have stated that the accounts give a true and fair view of the profit for the year. He drew our attention to Sch. 13 (p. 22 of the paper book) where the two amounts have been shown under the head "provisions for" and submitted that the provisions made in the profit & loss a/c, could not be faulted on the ground that these were not in accordance with the Companies Act. Any other addition to the profit could be made only in the circumstances mentioned in Explanation to section 115J(1A). According to the learned counsel, the provisions under discussion did not fall within the ambit of any of the items listed in the Explanation. In particular, item (c) speaks of provisions made for meeting liabilities and the provisions under discussion were made in respect of assets and not caught by item (c) of the Explanation. The learned counsel further submitted that the Commissioner (Appeals) himself directed in applying clause (b) of Explanation to sub-section (1A) of section 115J of the Act and holding that the said provisions are actually reserves and could only be appropriated after the profits were ascertained. The reliance placed by the Commissioner (Appeals) on the judgment of Supreme Court in the case of Vazir Sultan Tobacco (supra) is misplaced. On the other hand, he relied upon the judgment of the Hon'ble Supreme Court in the case of CIT v. Jyoti Ltd. (1996) 219 ITR 388 (SC) where the distinction between a provision and a reserve has been explained and according to the learned counsel, as per the aforesaid decision of the Supreme Court the two items are provisions and not reserves. The learned counsel also placed reliance on the decision of Delhi Bench 'C' (Third Member) in the case of Steel Authorities of India v. Dy. CIT (2001) 70 TTJ (Del)(TM) 849.

5. Shri S.N. Shrivastava, the learned departmental Representative strongly supported the orders of the authorities below. He submitted that the Commissioner (Appeals) has correctly appreciated the facts of the case and relying on the judgment of the Hon'ble Supreme Court in Vazir Sultan Tobacco Ltd. (supra), he has rightly held that the two items are in the nature of reserves and has rightly invoked clause (b) of Explanation to sub-section (1A) of section 115J of the Act.

6. We have considered the rival submissions and perused the facts on record. "Book Profit" has been defined in section 115J of the Act to mean the net profit as shown in the profit & loss a/c for the relevant previous year in accordance with the provisions of Part II and III of Schedule VI of the Companies Act, 1956, as adjusted by the amounts mentioned under Explanation of sub-section (1A) of section 115J of the Act. One such adjustment specified in clause (c) of the Explanation is that the amount or amounts set aside to provision made for meeting liabilities other than ascertained liabilities is to be added back to the "Book Profits" to determine the deemed total income under section 115J of the Act. In our opinion, the provisions made for diminution in value of investment and for doubtful loans cannot be covered by the said clause (c) inasmuch as such provisions are in respect of an asset and not for unascertained or contingent liabilities. (Emphasis, italicised in print. applied).

7. Eric Kohler's "A Dictionary for Accountants" (Fifth Edition) defines "assets" to mean any owned physical object (tangible) or right (intangible) having economic value to its owner; and item or source of wealth, expressed for accounting purposes, in terms of its cost, depreciated cost, or less frequently, some other value, hence, any cost benefiting a future period. The same book defines "liability" to mean an amount owning by one person (a debtor) to another (a creditor), payable in money, or in goods or services. It is thus obvious that a provision made for diminution in value of an asset can never be equated with provisions for a contingent liability. Now the amount to be added back to the book profit figure as per clause (c) of Explanation to sub-section (1A) of section 115J of the Act is the amount set aside to provisions made for meeting liabilities other than ascertained liabilities. Accordingly, both the above mentioned provisions cannot be added back for the purpose of determining "Book Profit" under section 115J of the Act.

8. Coming to the view of the Commissioner (Appeals) that provisions of clause (b) of Explanation to sub-section (1A) of section 115J of the Act were attracted we hold that the same is erroneous because he has treated the provisions as "reserves". The Hon'ble Supreme Court in the case of CIT v. Jyoti Ltd. (supra) has held as under :

"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 & loss a/c 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 assets in respect of which they are made whereas general reserves and reserve funds are shown as part of the proprietor's interest. An amount set aside out of profits and other surpluses, not designed to meet a liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance sheet is a reserve but an amount set aside out of profits and other surpluses to provide for any known liability of which the amount cannot be determined with substantial accuracy is a provision. Where the liability has actually arisen or been anticipated legitimately by the assessee though the quantum of the liability has not been determined, a fund to meet such present liability cannot be treated as a "reserve". A fund, however, created for payment of a liability which had not already arisen or fallen due but is only a provision with regard to the sum that might become liable to be paid is "other reserves" within the meaning of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, and should be taken into account in computing the capital of the company for the purpose of the Act."

9. In view of the above ratio laid down by the Hon'ble Supreme Court, we do not find any merit in the observations of the learned Commissioner (Appeals) that "that two items under discussion, though called as provisions, are really in the nature of reserves and hence are caught in the ambit of item (b) of the Explanation".

10. In the light of the above discussion, we hold that neither clause (b) nor clause (c) of Explanation to sub-section (1A) of section 115J of the Act is applicable and accordingly, the assessing officer is not justified in adding the two provisions debited to profit & loss a/c while computing the deemed income under section 115J. We, accordingly, reverse the findings of the authorities below.

11. In the result, the appeal is allowed.