Judgment:
Mrs. Sujata Manohar, J.
1. In this reference, which is under section 256(1) of the Income-tax Act, 1961, one question has been referred to us at the instance of the assessee. This question relates to the assessment year 1966-67. Five questions are referred to us at the instance of the Revenue. These questions pertain to the assessment years 1966-67 and 1967-68. Therefore, in all six questions are before us. These questions are :
1. Assessee's appeal (assessment year 1966-67) :
'Whether having regard to the different provisions of the Companies (Profits) Surtax Act of 1964, the assessment made under section 6 of the Act of the assessment year 1966-67 on December 21, 1972, beyond the period of four years from the end of the assessment year in question is valid in law ?'
2. Revenue's appeals (assessment years 1966-67 and 1967-68) :
'(1) Whether, on the facts and in the circumstances of the case, the balance as on the first day of the accounting year in the account styled as 'foreign taxation reserve' is includible in computing the capital
(2) Whether, on the facts and in the circumstances of the case, the excess provision over the actual tax liability in the account styled as 'provision for taxation' is includible in computing the capital
(3) Whether, on the facts and in the circumstances of the case, the general reserve was required to be reduced by the amount of dividend declared at the annual general meeting of the shareholders much after the first day of the accounting year
(4) Whether, on the facts and in the circumstances of the case, the balances in the two accounts styled as 'reserve for doubtful debts' and 'contingency reserve' were includible in computing the capital
(5) Whether, on the facts and in the circumstances of the case, the surplus in the profit and loss appropriation account and the credit in the 'provision for taxation account' to the extent not treated as reserve in accordance with rule 1 could be reduced from the cost of assets to be excluded by virtue of rule 2(ii) while computing the capital under the Surtax Act ?'
2. In respect of the first question which has been raised at the instance of the assessee, a Division Bench of this court in the case of Indian Hume Pipe Co. Ltd. v. CIT : [1991]189ITR683(Bom) , has held that there is not time limit prescribed for completion of an assessment. However, the assessment should be completed within a reasonable period and what will constitute reasonable time will depend upon the nature of the order and the facts of the case. In the case before the Division Bench, the income-tax assessment was completed only on August 20, 1970. The surtax assessment was completed within less than two years of the completion of the income-tax assessment. This was held to be within a reasonable time and was not barred by limitation. In the present case the return under the Companies (Profits) Surtax Act was filed on September 29, 1966. The income-tax assessment for the same year was made on December 8, 1971, while the assessment order under the Companies (Profits) Surtax Act was made on December 21, 1971, within a few days of the income-tax assessment. This assessment is made within 15 days of the income-tax assessment. It is undoubtedly made within a reasonable time. Hence this question, which is raised at the instance of the assess, is answered in the affirmative and in favour of the Revenue.
3. Question No. 1 at the instance of the Revenue : The balance in the foreign taxation reserve stood at Rs. 12,57,000 as on September 1, 1964, as well as on September 1, 1965. The Tribunal has held that this reserve was created years ago in case any excess profits tax liability in Pakistan was raised by the Pakistan authorities. No such liability, however, was ever raised by the Pakistan authorities and ultimately the reserve account was closed by transferring the balance to the profit and loss appropriation account in accounting year 1971-72. The Tribunal has held that it had not been established that there was any liability towards excess profit tax payable in Pakistan and looking to all the circumstances set out above, the fund was in the nature of a 'reserve' and not a 'provision'. We agree with the finding of the Tribunal.
4. In the case of CIT v. Laxmi Sugar and Oil Mills Ltd. [1988] 161 ITR 168, the Supreme Court said that where there was no liability at all in discharge of which a provision had been made, the amount represented a 'reserve'. In the premises, applying the ratio of this judgment to the present case, question No. 1 is answered in the affirmative and in favour of the assessee.
5. Question No. 2 : It is an accepted position that in view of the ratio of the decision in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT : [1981]132ITR559(SC) , the question has to be answered in the affirmative and in favour of the assessee. The question is answered accordingly.
6. Question No. 3 : Once again it is an accepted position that in view of the ratio of the judgment in Vazir Sultan Tobacco Co. Ltd. v. CIT : [1981]132ITR559(SC) , the question must be answered in the affirmative and in favour of the Revenue. The question is answered accordingly.
7. Question No. 4 : In respect of the reserve for doubtful debts, the Tribunal has found that the balance in this account stood at Rs. 4,00,000 as on September 1, 1964, as well as on September 1, 1965. The account styled as reserve for doubtful debts appeared right from the accounting year 1939-40 and went on increasing gradually. The amounts were credited to this account on an ad hoc basis and had no relation with any existing and known losses by way of bad or doubtful debts. The account was never touched for debiting any bad or doubtful debts. The Tribunal has, therefore held that this was not a provision for meeting any losses in the form of bad or doubtful debts but was a 'reserve'. In view of the reasoning adopted by the Supreme court in the case Vazir Sultan Tobacco Co. Ltd. v. CIT : [1981]132ITR559(SC) , we agree with the conclusion arrived at by the Tribunal.
8. The second item in this question deals with 'contingency reserve'. The Tribunal has found that this 'reserve' was not created for meeting any known liability and the Tribunal rejected the Revenue's contention that this 'reserve' was created for paying gratuity. The Tribunal has found that the gratuity payment when made was debited to the profit and loss account and was not debited to the 'contingency reserve'. The Tribunal, therefore, said that this was in the nature of a 'reserve' and not a 'provision'. In the case of CIT v. Saran Engineering Co. Ltd. : [1986]161ITR741(SC) , the Supreme Court, inter alia, in the light of facts therein, held that in computing the capital, the contingency reserve fund should be included as a 'reserve' for the purpose of ascertaining the statutory deduction under the Companies (Profits) Surtax Act, 1964. Question No. 4 is, therefore, answered in the affirmative and in favour of the assessee.
9. Question No. 5 : This question relates to the calculation of surpluses and reserves which are not to be taken into account in computing the capital under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. In the present case, the assessee owns shares in Ganga Bridge Construction Company and Vikhroli Metal Fabricators Ltd. During one of the relevant assessment years it earned dividend in respect of some of these shares. Under rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, where a company owns, inter alia, such shares, the amount of its capital as computed under rule 1 shall be diminished by the cost to it of the said assets, in so far as such cost exceeds the aggregate of any moneys borrowed and remaining outstanding and the amount of 'any fund, any surplus and any such reserve' as is not to be taken into account in computing the capital under rule 1. In the present case, the surplus in the profit and loss appropriation account has not been taken added in computing capital under sub-rule 1 nor is the amount in 'provision for taxation account' to the extent that it is not treated as a 'reserve'. Therefore, these two amounts will have to be added to the aggregate of moneys borrowed and surpluses and reserves which have to be deducted from the cost of the assets under rule 2 for the purpose of determining the extent of diminution of capital under rule 2, Both the surplus in the profit and loss appropriation account as well as the provision for taxation account to the extent not treated as 'reserve', are to be so considered. This follows from the ratio of the judgment of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT : [1981]132ITR559(SC) , for determining 'reserves' which have to be taken into account in capital computation under rule 1. Rule 2 deals, inter alia, with 'reserves' not so covered. The two funds in question do not so qualify for inclusion under rule 1. They are 'surpluses' and/or 'reserves' falling under rule 2. Question No. 5 is, therefore, answered in the affirmative and in favour of the assessee.
10. No order as to costs.