Commissioner Of Income-Tax, ... vs Bharat Commerce & Ind. Ltd.
2000 Latest Caselaw 553 Del

ORDER

Arijit Pasayat, C.J.

1. Accepting prayer for reference made by the Revenue by applications under Section 2561(1) of the Income-tax Act, 1961 ('the Act' for short), the Income-tax Appellate Tribunal, Delhi Bench-E ('the Tribunal' for short) has referred the following questions, pertaining to assessment years 1973-74 and 1974-75, for opinion of this Court:

"1. Whether on the facts and in the circumstances of the case the Tribunal was justified in including the dividends of Rs.7,37,028/- and Rs. 27,27,790/- declared by the assessee company in respect of the assessment years 1973-74 and 1974-75 respectively in the capital base on the fist day in respect of the respective accounting periods relevant to the assessment years 1973-74 and 1974-75 for the purpose of computing the chargeable profits under the Companies (profits) Sur-tax Act, 1964?

2. Whether on the facts and in the circumstances of the case, the Tribunal was justified in confirming the direction given by the Appellate Assistant Commissioner to the Income-tax Officer that the capital of the assessee company was not to be reduced by an amount of Rs.19,04,304/- representing capital for relief under Section 80-J for each of the assessment years 1973-74 and 1974- 75?"

2. A brief reference to the factual aspects would suffice. Assessee adopts the calendar year as its period of accounting. The accounts were closed on 31st December, 1972 and 31st December, 1973 respectively for the concerned two assessment years. Assessee claimed that sum of Rs.7,37,028/- and Rs.27,27,790/-, which were ultimately declared as dividend after the annual general meetings held respectively on 19th June, 1973 and 3rd June, 1974, qualified for inclusion in the capital base under the Companies (Profits) Sur-tax Act, 1964 (for short 'the Sur-tax Act'). The Sur-tax Officer, rejected the assessee's claim and excluded the dividends for both the years on the ground that the assessee company did not make any appro-priation of profits by making a provision for dividend in the accounts and was not thus entitled to lessen the incidence of sur-tax. Relief claimed under Section 80J of the Act while computing the capital also was a subject-matter of dispute. It was held by the Assistant Appellate Commissioner (AAC for short) that assessee's claim under Section 80J was allowable. Revenue challenged the ACC's order before the Tribunal. Reliefs granted on the aforesaid two scores were assailed. Tribunal held that when dividend becomes payable out of the general reserve, there was no question of making any provision for the dividend which can be deducted from the general reserve for the purpose of determining the capital of the company under the Sur-tax Act. It was inter alia observed that in such a case, the liability arises prospectively and, therefore, there is no question of any relating back to the first day of the accounting year. It was held that a subsequent approval can relate back to an act which was performed earlier; and if there was no act performed earlier, there is no question of subsequent approval relating back to the same. So far as relief under Section 80J of the Act is concerned, reliance was placed on a decision of the Karnataka High Court in Stumpp, Schuele & Somappa Pvt. Ltd Vs. Second Income-tax Officer, Company Circle, Bangalore and Others (1976) 102 ITR 320 and Second Income-tax Officer, Company Circle, Bangalore and Another Vs. Stumpp, Schuele and Somappa Private Limited (1977) 106 ITR 399 to sustain relief granted by the assessee.

3. Learned counsel for the Revenue submitted that approach of the Tribunal is erroneous because the liability arises only retrospectively and there is no question of it arising prospectively. Relief granted under Section 80J was assailed on the ground that the provisions have been misinterpreted. Learned counsel for the assessee supported the conclusions of the AAC and the Tribunal. So far as relief under Section 80J is concerned, reliance was placed by him on a decision of the Apex Court in Second Income-tax Officer and Another Vs. Stumpp Schuele and Somappa P. Ltd. (1991) 187 ITR 108 to submit that the relief granted was in order.

4. In Indian Tube Co. Private Limited Vs. Commissioner of Income-tax (1992) 194 ITR 102 the Apex Court indicated the distinction between "proviions" and "reserve". If an amount is set aside out of profits and other surpluses, not to meet any liability, contingency, commitment or diminution in the value of the assets known to exist at the time of the balance-sheet, it is a "reserve". The amount set aside out of profits and other surpluses to provide for any known liability of which the amount could be determined with certainity, is a "provision". The position has been elaborately dealt with any an eminent under William Pickles in his book "Accountancy" (2nd Edition at page 192). Creating a reserve out of the profit is a stage distinct in point of fact and anterior in point of time to the stage of making a recommendation for payment of dividend by the general body of the shareholders. A conjoint reading of the scheme of the Sur-tax Act and the Companies Act, 1956 (in short the Companies Act) suggests that the appro-priation made by the board of directors by recommending payment of dividend, in the nature of things, does not constitute a "reserve". The resolution by the general body of the shareholders to declare dividend out of profits at a particular percentage crystalizes into a liability, and subsequent payment relates back to the relevant date, namely, the closing of the accounting year during which the liability had arisen.

5. 'Reserve' has to be clearly distinguished from 'Provision". As per the clarification contained in Part III of Schedule VI of the Companies Act, reserve does not include "any amount written off or retained by way of providing for depreciation, renewals or diminution in the value of assets or retained by way of providing for any known liability". On the other hand 'provision' is an "amount written off or retained by way of providing for depreciation, renewals or diminution in the value of assets or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy". If a provision has been made for an amount in excess of what is considered by the Directors as reasonably necessary for the purposes, the excess should be treated as a reserve and not a a provision. Thus, if there is a provision for taxation of Rs. 5,00,000/- whereas only Rs. 3,00,000/- are necessary for this purpose, Rs.2,00,000/- should be treated as a reserve and not as a provision.

6. Distinction between "provision" and "reserve" was discussed in Metal Box Co. India Ltd. Vs. Their Workmen . The Apex Court observed "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 P&L account and the balancesheet. 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 as shown as part of the proprietor's interest.

7. The distinction made by William Pickles as indicated, above was noted by the Supreme Court in Vazir Sultan Tobacco Co. Ltd. Vs. CIT . It was held that on a plain reading of these terms "provision" was defined positively by specifying what it meant, whereas "reserve" was defined in a negative form and was not exhaustive in the sense that it only specifies certain amounts which was not included in the term "reserve". The Court said: "In other words, the effect of reading the two definitions together is that if any retention or appropriation of a sum falls within the definition of "provision" it can never be a "reserve", but it does not follow that if the retention or appropriation is not a "provision" it is automatically a "reserve" and the question will have to be decided having regard to the true nature and character of the sum so retained of appropriated depending on several factors including the intention with which and the purpose for which such retention or appropriation has been made because the substance of the matter is to be regarded and in this context the primary dictionary meaning of term `reserve' may have to be availed of. But it is clear beyond doubt that if any retention or appropriation of a sum is not a provision, that is to say, if it is not designed to meet depreciation, renewals or diminution in value of assets or any known liability, the same is not necessarily a reserve".

8. In Karamchand Premchand Vs. CIT, Madras, it was held that an amount set apart for proposed dividend and profit/sharing bonus cannot be regarded as 'reserves' but the amount set apart from pension scheme is a `provision'. An amount credited to depreciation fund which was in excess of the amount actually allowed as depreciation in the assessment would constitute a `reserve' within the meaning of Sur-tax Act.

9. The above being the position, answer to the first question has to be in the negative i.e. in favour of the Revenue nd against the assessee.

10. So far as the second question is concerned, as accepted by learned counsel, in view of decision of the Apex Court in Second Income-tax Officer & Another Vs. Stumpp Schuele and Somappa P. Ltd. (1991) 187 ITR 108 answer to the second question has to be in the affirmative i.e. in favour of the assessee and against the Revenue.

The reference is accordingly disposed of.