Commissioner Of Income Tax vs Usha Sales Pvt. Ltd.
1984 Latest Caselaw 223 Del

JUDGMENT

D.K. Kapur, J.

1. Although the question referred to us lies in a narrow compass there is some difficulty in answering the question referred because of some new facts which have been brought to our notice during the hearing which are based entirely on the balance-sheet of the company. We have been at pains not to take any new facts into consideration, but have referred to the balance-sheet to explain the factual position.

2. The facts of the case are quite simple. For the asst. yr. 1964-65, the ITO computed the net income chargeable profit for the purpose of Surtax Act at Rs. 1,13,399. To determine the capital position, the ITO computed the net income chargeable profit for the purpose of Surtax Act at Rs. 1,13,399. To determine the capital Position, the ITO took into consideration a capital of Rs. 26,42,513 which consisted of paid-up capital Rs. 15,60,000, general reserve Rs. 10,00,000 and dividend rebate reserve Rs. 82,513. The company urged that it had an additional reserve for taxation amounting to Rs. 11,65,000 and that should also be taken into account. The AAC agreed with the assessed and held the amount was covered by r. 1(iii) of the Sch. II to the Companies (Profits) Surtax Act, 1964.

3. The view of the AAC was confirmed by the Tribunal.

4. Before the Tribunal, the point urged by the departmental representative was that the assessed had paid a sum of Rs. 11,54,000 towards tax, and hence, there was no reserve available except a sum of Rs. 11,000 only. The Tribunal rejected this contention on the ground that the assessed maintained two accounts - one being taxation reserve and the other being a taxation account. The actual amount was paid out of the taxation account and hence the reserve was available for computation of capital employed in the business. Under s. 256(1) of the IT Act, 1961, the following question has been referred to us :

"Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that an amount of Rs. 11,65,000 representing reserve for taxation should be taken into consideration for the purpose of computation of capital as 'reserve' under the Companies (Profits) Surtax Act, 1964 ?"

Learned counsel for the department strenuously attacked the view point and urged that the amount of tax has been paid out of the reserve and, therefore, no reserve was available.

5. We have been referred to the balance-sheet of the company. The reserve for taxation shown in the balance-sheet as on 31-3-1964, was Rs. 11,65,000 (as on 31-3-1963). An additional amount of Rs. 4,96,000 was credited during the year and a sum of Rs. 11,54,074 was transferred to the profits for capital taxation leaving a balance of Rs. 5,06,926 as on 31-3-1964.

6. In another part of the balance-sheet under head 'current liabilities and provisions', the provisions are set out. These are as per last account Rs. 37,09,522. Then is set out the amount transferred from the reserve for taxation which was Rs. 11,54,074 maing a total of Rs. 48,63,596, and the payments of the adjustments against assessment for the year 1959-60 and against provisional assessments amounted to Rs. 43,20,692. Thus, the payment towards income tax during this particular accounting period was Rs. 43,20,692 and not Rs. 11,54,074 as appears from the argument of ld. counsel for the department. This sum has been paid out of the provision for taxation after debiting an amount of Rs. 11,54,000 to the taxation reserve which has thus got depleted during the year. The problem we are faced with is, what is the taxation reserve maintained by the company ? Is it the opening amount or is it the closing amount ? For reasons which will just be explained, this question need not be answered because it makes no difference in this case whether the sum is taken to be Rs. 11,65,000 or Rs. 5,06,926. The reason why this result follows is based on the terminology of the Act.

7. According to the calculation set out in the AAC's order, the chargeable profit u/r 2(i) is Rs. 3,48,696. Against this the statutory deduction is 10 per cent of the employed capital, which is Rs. 43,83,679.

8. If we include the sum of Rs. 11,65,000. Ten per cent of this is Rs. 4,38,368. Hence no Surtax was payable. If instead of Rs. 11,65,000 we have the amount of Rs. 5,06,926, then the employed capital is Rs. 37,25,605 of which 10 per cent would be Rs. 3,72,560 and again the Surtax would not be chargeable, because even this amount is greater than Rs. 3,48,696.

9. In view of the fact that no Surtax is payable whether the sum of Rs. 11,65,000 is treated as a reserve for taxation or Rs. 5,06,976 is treated as a reserve, we do not purpose in the present case to determine which of the two amounts is to be taken into consideration as 'reserve'. In either case no Surtax is payable.

10. It was urged by ld. counsel for the department that the deduction could not be allowed against the reserve for taxation. For this purpose, we have been referred to some cases. In CIT, West Bengal-I, Calcutta v. Braithwaite Burn and Jessop Construction Co. Ltd. , it was held by the Calcutta High Court that a taxation reserve in the circumstances of that case was a reserve for the purpose of the Super Profits Act. That was a reserve created for uncompleted contracts and the Court held that the assessed had made the reserve created for uncompleted contracts and the Court held that the assessed had made the reserve out of abundant caution and not the reserve out of abundant caution and not due to any immediate liability. Reference was also made to Vazir Sultan Tabacco Co. Ltd. v. CIT, A.P. , decided by the Supreme Court by the both counsel. It so happened that in Vazir Sultan's case (supra), there was a provision for taxation, but it was urged that it was an excess provision and the court accepted the fact that if an excess provision was made, then the balance i.e., the excess would be a reserve. In the present case, it appears that the company was making provision for taxation. As pointed out earlier, the provision for taxation amounted to Rs. 37,09,522, but this was not enough to meet the demand actually faced by the company. The amount adjusted for asst. yr. 1959-60 was Rs. 7,50,380 and against provisional assessment, a sum of Rs. 35,70,312 was paid. The company had to draw on the reserve for taxation. When there is both a provision and a reserve, it may be said that the provision is meant to meet the immediate liability and the reserve is maintained to meet a liability that might arise in the future. Though the provision was quite large, it still proved inadequate and to the extent the reserve was drawn upon, it can be said that the excess was not a reserve employed as capital by the company. We can, therefore, take the amount of reserve as being Rs. 5,06,926 which remained on 31-3-1964. Even if that amount is taken into consideration as a reserve, the company does not have chargeable profits after allowing the ten per cent deduction permitted by law. This is explained in the analysis made earlier.

11. In the circumstances, we agree that the AAC and the Tribunal took the correct view on this point of law, and we accordingly answer the question referred to us in the affirmative with the observation that even if the reserve for taxation was taken to be the sum of Rs. 5,06,926 remaining on 31-3-1964, or whether the amount to be taken into consideration was 11,65,000, there would be no chargeable profits of the company under the Companies (Profits) Surtax Act, 1964, after making the statutory deduction. The assessed will be entitled to costs. Counsel's fee Rs. 500.