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PETITIONER: KARAMCHAND PREMCHAND PVT.  LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, GUJARAT

DATE OF JUDGMENT25/02/1993

BENCH: JEEVAN REDDY, B.P. (J) BENCH: JEEVAN REDDY, B.P. (J) VENKATACHALA N. (J)

CITATION:  1993 SCR  (2) 109        1993 SCC  Supl.  (2) 487  JT 1993  Supl.     56    1993 SCALE  (1)690

ACT: Super Profits Tax Act, 1963 Second  Schedule-Rule  1-Amount  set  apart  for  contingent liability  (Income-tax-Whether  a reserve  or  a  provision- Whether to be included in the Computation of Capital of  the assessee.

HEADNOTE: The appellant-assessee was issued a notice under Section 23A of  the  Income-tax Act, 1922.  The assessee  contested  the same.  At the same time, it set apart a sum of Rs.  6,52,000 in  its books for the year ending 31st March 1956,  to  meet the  contingency that may arise if his plea failed.   During the  year 1958-59 an amount of Rs. 2,02,000 out of the  said amount  was transferred to the profit & loss  account.   ’Me balance  amount of Rs. 4,50,000 continued to remain and  was shown  as  a  provision  set apart  to  meet  the  aforesaid contingent liability.  The assessee has been contesting  the said  proceedings.  Ultimately it succeeded before the  High Court  which held that no action could be taken against  the assessee under Section 23A. For  the  assessment year 1963-64 in proceedings  under  the Super  Profits Tax Act, the assessee claimed that  the  said sum of Rs. 4,50,000 was a reserve and should be included  in its  capital.   The  Income  tax  Officer  did  not   agree. Ultimately the matter reached the Tribunal which agreed with the assessee.  At the instance of Revenue the question as to whether  the  sum of Rs. 4,50,000 set apart  for  contingent liability  (taxation) was to be included in the  computation of  capital  of  the assessee-company under Rule  1  of  the Second  Schedule  of  the Super Profits Tax  Act,  1963  was referred to the High Court. The  High  Court having answered the  question  against  the assessee,  the,  assessee has preferred the  present  appeal contending that inasmuch as no order levying additional  tax under Sec. 23A was made the amount could not be treated as a provision. 109 110 Dismissing the appeals, this Court, HELD  : 1.1. Provisions made against anticipated losses  and contingencies are charges against profits and, therefore, to

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be  taken into account against gross receipts in  the  P.&L. accounts 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. [112G] 1.2. In the instant case, the provision made by the assessee in  its Books for meeting the anticipated liability  of  tax (under Section 23A of the Income Tax Act, 1922) was indeed a provision and not a reserve.  The assessee Itself called  it a  provision.   It  did not call it a reserve  nor  was  the amount set apart or appropriated as a reserve.  It is not to suggest that the description given or the Book entries  made by  the  assessee are conclusive, but to emphazise  how  the assessee   understood   the   said  item   itself   In   the circumstances  of  the  case the High  Court  was  right  in holding  it to be a provision and not a reserve, and so  the amount  of  Rs.  4,50,000  was not to  be  included  in  the computation of Capital of the assessee Company. [113E] Metal  Box  Company of India Limited v.  Their  Workmen,  73 I.T.R.  53  and Vazir Sultan Tobacco Co.Ltd.  etc.  etc.  v. Commissioner  of Income Tax, Andhra Pradesh etc.  etc.,  132 I.T.R. 559, relied on.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2230 (NT)  of 1977. From  the Judgment and Order dated 13.12.76 of  the  Gujarat High Court in Income Tax Reference No. 36 of 1972. Mrs. A.K. Verma, for JBD & Co. for the Appellant. G.C. Sharma, E.U.Eradi and T.R. Talwar for the Respondent. The Judgment of the Court was delivered by B.P.  JEEVAN  REDDY,  J. This appeal  is  preferred  by  the assessee  against  the judgment of the  Gujarat  High  Court answering the question, referred at the instance of Revenue, against  the assessee.  The following question was  referred under  Section 256(1) of the Income Tax Act for the  opinion of the High Court:  111 "Whether on the facts and in the circumstances of the  case, the following amounts are to be included in the  computation of  capital  of the assessee Company under Rule  1.  of  the Second Schedule of the Super Profits Tax Act, 1963:- (i)  Amount set apart for contingent      Rs. 4,50,000      liability (taxation) (ii) Amount set apart for proposed divi   Rs. 19,90,000      dend (iii) Reserve for Depreciation fund in ex- Rs. 6,77,122 cess of the amount allowed as depreciated in income-tax (iv) Excess provision in Revenue Acco-     Rs. 3,61,876 unts disallowed in income-tax assess- ment for the assessment years." Though  the question refers to four items, we are  concerned in  this  appeal  only  with  the  first  item.   We  shall, therefore,  state  the  facts only in so  far  as  they  are relevant to the said item. The  assessee is a Private Limited Company.  The  assessment year  concerned is 1963-64.  Sometime in 1955-56,  a  notice was  issued to the assessee under Section 23A of the  Income Tax  Act, 1922.  Apprehending that it may become  liable  to pay  additional tax under the said provision,  the  assessee set  apart a sum of Rs. 6,52,000 in its Books for  the  year ending March 31, 1956.  Out of this amount an amount of  Rs. 2,02,000  was  transferred to the profit  and  loss  account

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during  the year 1958-59, with the result that a sum of  Rs. 4,50,000  continued to remain and was shown as  a  provision set apart to meet the taxation liability which the  assessee called  a  contingent  liability.   At  the  same  time  the assessee  had been contesting the proceedings taken  against it  under  Section  23A.  Though it failed  at  the  earlier stages, it succeeded ultimately in the Letters Patent Appeal filed  by  it in the East Punjab High Court.   In  the  said appeal  decided on May 24, 1965, it was held that no  action can  be taken against the assessee under Section 23A.   With this  order, all the orders passed and notices issued  under the  said provision prior to the date of the  said  judgment stood vacated. In  its assessment relating to the assessment  year  1963-64 under the 112 Super Profits Tax Act, the assessee contended that the  said sum  of Rs. 4,50,000 is a reserve and should be included  in its  capital  for the purposes of the Act.  The  Income  Tax Officer did not agree and the matter was ultimately taken to the Income Tax Appellate Tribunal.  By the date this  appeal was  taken up for hearing, another appeal preferred  by  the assessee  relating to the subsequent assessment year  (1964- 65)  was also before the Tribunal.  That appeal arose  under the  provisions of the Companies Sur-tax Profits  Act,  1964 which  replaced  the Super Profits Tax  Act.   The  Tribunal first disposed of the appeal relating to the-assessment year 1964-65.  In so far as the item in question is concerned  it held  that it was a reserve.  Following the  said  judgment, the  appeal  pertaining to the assessment year  1963-64  was also  allowed.  (It  may be stated that  the  order  of  the Tribunal   relating   to   assessment   year   1964-65   was subsequently  rectified by an order dated February 15,  1972 and  the said item was held to be a provision.  But no  such order  was passed with respect to the assessment year  1963- 64). Aggrieved  by  the  judgment of  the  Tribunal  the  Revenue obtained  the aforesaid reference.  The High Court  answered the  same.  in favour of Revenue and  against  the  assessee following the decision of this Court in Metal Box Company of India Limited v. Their Workmen, 73 I.T.R. 53.  It held  that the  said amount being a provision made towards a  liability which  had attached on account of the issuance of  a  notice was  a  provision  and not a reserve.  In  this  appeal  the correctness  of  the said view is questioned.   The  learned counsel  for the appellant-assessee submitted that  inasmuch as  no  order levying additional tax under Section  23A  was made  on or before the date relevant to the assessment  year 1963-64  the said amount cannot be treated as  a  provision. We find it difficult to agree.  In Metal Box, which has been followed  in  Vazir  Sultan Tobacco Co.  Ltd  etc.  etc.  v. Commissioner  of Income Tax, Andhra Pradesh etc.  etc.,  132 I.T.R. 559, the distinction between provision and reserve is stated in the following words:               "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. accounts and  the  balance-sheet.               On the other hand, reserves are appropriations               of profits, the assets by which they are  rep-               resented  being retained to form part  of  the               capital

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              113               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.   (See   Spicer   and               Pegler’s Book keeping and Accounts, 15th  Edn.               p. 42)."               While  approving  the said  statement  it  was               stated in Vazir Sultan:               "In other words the broad distinction  between               the  two  is  that whereas a  provision  is  a               charge  against the profits to be  taken  into               account  against gross receipts in the P.&  L.               account,  a  reserve is  in  appropriation  of               profits,  the asset or assets by which  it  is               represented being retained to form part of the               capital employed in the business.  Bearing  in               mind  the aforesaid broad distinction we  will               briefly  indicate  how the  two  concepts  are               defined  and dealt with by the Companies  Act,               1956." Applying  the said test it must be held that  the  provision made   by  the  assessee  in  its  Books  for  meeting   the anticipated liability of tax (under Section 23A) was  indeed a  provision and not a reserve.  The assessee itself  called it a provision.  It did not call it a reserve nor was it set apart  or appropriated as a reserve.  We are not  suggesting that  the description given or the Book entries made by  the assessee  are conclusive.  We are only emphasizing  how  the assessee   understood   the  said  item  itself.    In   the circumstances  of the case we must hold that the High  Court was right in holding it to be a provision and not a reserve. The appeal accordingly fails and is dismissed.  No costs. G.N.           Appeals dismissed. 114