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PETITIONER: COMMISSIONER OF INCOME-TAX, U.P.

       Vs.

RESPONDENT: LAXMI SUGAR & OIL MILLS LTD.

DATE OF JUDGMENT16/07/1986

BENCH: PATHAK, R.S. BENCH: PATHAK, R.S. MUKHARJI, SABYASACHI (J)

CITATION:  1986 AIR 1746            1986 SCR  (3) 214  1986 SCC  (3) 528        JT 1986   239  1986 SCALE  (2)33

ACT:      Super Profits  Tax Act, 1963, ss. 2(9), 4 and Rule 1 of Second Schedule-Standard  deduction-What is-Assessee setting apart amounts  for additional  cane price  payable to  cane- growers-Amounts-Whether  a   "provision"  or   a  "reserve"- Distinction between-Description  in  the  Balance-Sheet  not conclusive of its true nature.

HEADNOTE:      For the  assessment  years  1961-62  and  1962-63,  the respondent assessee had debited an amount of Rs.5,40,000 and an amount  of Rs.2,76,000  to its profit and loss account of the relevant  previous years  respectively. The amounts were debited on  the ground  that they represented the assessee’s liability of  the relevant  years for  the  additional  cane price payable  to cane-growers  under  the  Sugarcane  Price Control Order,  1955 and  were shown  in  the  balance-sheet under  the   head  "Current   liabilities  and  provisions". However, in  the subsequent accounting year ending September 1963, the  assessee had  credited its  profits by  the  said amounts by  reversing the entries, and had not made any such provision in the subsequent years.      In assessment  proceedings under  the Super Profits Tax Act, 1963  for the  assessment year  1963-64, the Income-tax Officer did  not include  both the  aforesaid amounts in the capital computation of the assessee. The Appellate Assistant Commissioner affirmed  the  view  taken  by  the  Income-tax Officer. But,  on second appeal, the Appellate Tribunal held that the  amount represented  a "reserved"  and should  have been included  in the  capital computation  of the assessee. The High Court also agreed with the Tribunal.      Dismissing the appeal by the Revenue, ^      HELD: 1.  The Rules  made under  the Super  Profits Tax Act, 1963 provide for computing the capital of a company for the purpose of super 215 profits tax. A perusal of Rule 1 of the Second Schedule will show that  for the  purposes of  that rule  the capital of a company includes  the reserve  created  under  some  of  the provisions of  the  Indian  Income-tax  Act  and  its  other

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reserves in  so far  as the  amount credited  to such  other reserves has  not been  allowed in computing its profits for the purposes of the Income-tax Act. [217D-E]      2. In determining whether an item is a "provision" or a "reserve" the  true nature  and  character  of  the  sum  so retained or  appropriated must  be determined  and its  mere description by  the assessee  in its  Balance-Sheet  is  not conclusive of  its true  nature. A  provision  is  a  charge against the  profits, being  made against anticipated losses and contingencies.  A "reserve",  on  the  contrary,  is  an appropriation  of   profits,  the  assets  by  which  it  is represented being  retained to  form  part  of  the  capital employed in  the business.  Unlike a  "provision" which is a present charge  against the  profits, the assessee continues to enjoy a proprietor’s interest in the "reserve" [218C-E]      In the  instant case,  the evidence  clearly  disclosed that there was no liability at all on the assessee requiring it to  set apart  a sum  as a charge against its profits and there was  never any intention to make payments to the cane- growers nor  was payment ever made but, on the contrary, the assessee reversed  the entries  in a  subsequent year in its books. It is apparent that the amount cannot be described as a "provision".  It can  only be described as a "reserve". It was part  of the  capital which  fell for  computation under Rule 1 of the Second Schedule. [218E-F]      Vazir  Sultan  Tobacco  Co.  Ltd.  v.  Commissioner  of Income-tax, A.P.,  [1981] 132  ITR 559; and Metal Box Co. of India Ltd. v. Their Workmen, [1969] 73 ITR 53 relied upon.

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil  Appeal  No.  1613 (NT) of 1974      From the  Judgment and  Order dated 26th April, 1973 of the Allahabad High Court in Misc. Case No. 202 of 1971.      B.B. Ahuja and Miss A. Subhashini for the Appellant.      P.K. Mukharjee and A.K. Sengupta for the Respondent.      The Judgment of the Court was delivered by 216      PATHAK J.  This appeal  by special  leave  is  directed against  the   judgment  of  the  High  Court  of  Allahabad pronouncing on  the meaning  of the expression ’reserves’ in the Second Schedule to the Super Profits Tax Act, 1963.      For  the  assessment  years  1961-62  and  1962-63  the assessee had  debited an amount of Rs.5,40,000 and an amount of Rs.2,76,000  to its  profit  and  loss  accounts  of  the relevant  previous  years  respectively.  The  amounts  were debited on  the ground  that they represented the assessee’s liability of  the relevant  years for  the  additional  cane price payable  to cane  growers in  terms of a price linking formula to  be fixed  by the  Competent Authority  under the Sugarcane Price  Control Order  1955. Accordingly an item of Rs.8,16,000 being  the sum  of the two amounts, was shown in the Balance  Sheet of the assessee as on September 30, 1962. The item  was shown  under the head "Current liabilities and provisions".      In assessment  proceedings under  the Super Profits Tax Act, 1963  for the  assessment year  1963-64, the Income-tax Officer did  not include  the amount  of Rs.8,16,000  in the capital  computation   of  the   assessee.  Dismissing   the assessee’s  appeal,  the  Appellate  Assistant  Commissioner affirmed the  view taken  by  the  Income-tax  Officer.  The Appellate Assistant  Commissioner held  that the  amount did not qualify  as a  ’reserve’ inasmuch  as the  assessee  had

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itself shown  it as  a ’provision’  in its Balance Sheet. On second  appeal,   the  Appellate  Tribunal  noted  that  the liability had  not been  allowed as  a deduction  on revenue account by  the Income-tax authorities and that the decision was accepted  by the  assessee. It also observed that in the subsequent  accounting   year  ending  September  1963,  the assessee had  credited its  profits by  the said  amount  by reversing the entries, and further that the assessee had not made any such provision in the subsequent years. It was also not disputed  that no such payment was ever actually made by the assessee.  In the  circumstances, the Appellate Tribunal held that  the liability  for which the ’provision’ was made was at  the best unreal and imagined or the mere possibility of a  liability. The  Appellate Tribunal  was unimpressed by the description of the item as a ’provision’ by the assessee in its  Balance Sheet.  The Appellate Tribunal held that the amount represented a ’reserve’ and should have been included in the capital computation of the assessee.      At the  instance of  the Revenue the Appellate Tribunal referred the  case to  the High  Court of  Allahabad for its opinion on the following question: 217           "Whether on  the facts and in the circumstances of           the case  the provision  for additional cane price           amounting to  Rs.8,16,000 was rightly treated as a           ’reserve’ forming  part of  the assessee’s capital           for the  purposes of  assessment to  Super Profits           Tax for the year under consideration?"      The High Court answered the question in the affirmative by its judgment dated April 26, 1973.      We are of opinion that the High Court is right. Section 4 of the Super Profits Tax Act 1963 levies super profits tax on every  company in  respect of  so much  of its chargeable profits  of   the  previous  year  as  exceed  the  standard deduction. The expression ’standard deduction’ is defined by sub-s. (9) of s. 2 of the Act to mean 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. The Rules provide for computing the capital of a company for the purposes of  super profits  tax. A  perusal of rule 1 of the Second Schedule will show that for the purposes of that rule the capital  of a company includes the reserve created under some of the provisions of the Indian Income-tax Act and "its other reserves  in so  far as  the amounts  credited to such other reserves  have  not  been  allowed  in  conputing  its profits" for the purposes of the Income-tax Act. The concept embodied in  the word  "reserves" used in that rule has been examined by  this Court  in the context of the Super Profits Tax Act,  1963 and  the analogous  enactment, the  Companies (Profits) Super  Tax Act,  1964. In a recent decision, Vazir Sultan Tobacco  Co.  Ltd.  v.  Commissioner  of  Income-tax, A.P.,[1981] 132  ITR 559, this Court had occasion to examine the significance  and scope  of the  concept. In doing so it referred to  the earlier pronouncement of the Court in Metal Box Co. of India Ltd. v. Their Workmen, [1969] 73 ITR 53.           "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  and Loss  Account 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

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         of  the   capital  employed   in   the   business.           Provisions are  usually shown in the Balance Sheet           by way of deductions from the 218           assets in  respect of which they are made, whereas           general reserves  and reserve  funds are  shown as           part of the proprietor’s interest. (See Spicer and           Pegler’s Book-Keeping  and Accounts, 15th Edn., p.           42)".      Regard was  had by the court to the relevant provisions of the  Companies Act,  1956 including  the form  set out in Part I, Schedule VI thereof where both expressions "Reserves and Surpluses" and "Current Liabilities and Provisions" have been used.  It is  not necessary, we think, to embark upon a detailed discussion of the distinction between a ’provision’ and a  ’reserve’. It  is sufficient for us to point out that in determining  whether  an  item  is  a  ’provision’  or  a ’reserve’ the  true nature  and  character  of  the  sum  so retained or  appropriated must  be determined  and its  mere description by  the assessee  in its  Balance Sheet  is  not conclusive of  its true  nature. It  is now  settled that  a ’provision’ is  a charge  against the  profits,  being  made against anticipated  losses and  contingencies. A ’reserve’, on the  contrary, is an appropriation of profits, the assets by which  it is  represented being  retained to form part of the capital  employed in  the business. Unlike a ’provision’ which is  a present charge against the profits, the assessee continues to enjoy a proprietor’s interest in the ’reserve’.      In  the   present  case,   when  the  evidence  clearly discloses that there was no liability at all on the assessee requiring it  to set  apart a  sum as  a charge  against its profits and  there was  never any intention to make payments to the  cane-growers nor  was payment  ever made but, on the contrary, the  assessee reversed the entries in a subsequent year in its books, it is apparent that the amount can not be described as  a ’provision’.  It can  only be described as a ’reserve’. It  was  part  of  the  capital  which  fell  for computation under rule 1 of the Second Schedule.      The appeal fails and is dismissed with costs. M.L.A.                                     Appeal dismissed. 219