Lallubhai Amichand Pvt. Ltd. Vs. Commissioner of Income-tax, Bombay City-ii, Bombay - Court Judgment

Mrs. Sujata V. Manohar, J.

1. The assessment years under reference are 1964-65 and 1966-67, and the relevant previous years are Samvat years 2019 and 2021, respectively. Out of its profits for the accounting year, which is S.Y. 2018 (ended on October 28, 1962), the assessee had set apart a sum of Rs. 13 lakhs as provision for taxation. The assessee had also in addition set apart for that year a sum of Rs. 5,36,000 as 'Reserve for tax contingency'.

2. In S. Y. 2020 (ended on November 4, 1964), the assessee had transferred a sum of Rs. 8,25,000 as provision for taxation. It had also shown a sum of Rs. 4,30,164 as 'reserve for tax contingency'. No part of the amount of Rs. 5,36,000 or Rs. 4,30,164 shown for the relevant years as aforesaid had been utilised for tax payment. The ITO did not include the said amounts of Rs. 5,36,000 and Rs. 4,30,164 in the computation of capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964, without giving any reasons. The AAC, before whom the assessee-company preferred an appeal, held that the said amounts were provision for taxation and, therefore, could not be included in the computation of capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964. This finding has also been upheld by the Income-tax Appellate Tribunal. Questions Nos. 1 and 2 referred to us relate to these findings.

3. In the assessee's balance-sheet as on October 24, 1965, that is to say, the last day of S.Y. 2021, a sum of Rs. 9,16,285 stood credited to the capital reserve account of the assessee, being realisations on account of the sale of import entitlements under the Export Promotion Scheme. The assessee contended that this amount, if held to be a capital receipt (in Income-tax Application No. 5653 of 1969-70 filed by it), should be excluded from the chargeable profits for the assessment year 1966-67. This amount was held by the Tribunal as an amount which should be included in the chargeable profits for the year 1966-67.

4. In respect of these findings, both the assessee as well as the Department asked the Tribunal to raise certain questions and refer them to us for determination. As a result, the following questions have been referred to us for determination :

'(1) Whether, on the facts and in the circumstances of the case, the sum of Rs. 5,36,000 in the reservation for tax contingency account as on October 28, 1962, was eligible for inclusion in the computation of the capital of the company under the Second Schedule to the Companies (Profits) Surtax Act, 1964, for the assessment year 1964-65 ?

(2) Whether, on the facts and in the circumstances of the case, the sum of Rs. 4,30,164 in the reserve for tax contingency account as on November 4, 1964, was eligible for inclusion in the computation of its capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964, for the assessment year 1966-67 ?

(3) Whether, on the facts and in the circumstances of the case, the sum of Rs. 9,16,285 should be excluded from the chargeable profits for the assessment year 1966-67 ?

5. As far as question No. 3 is concerned, it is an accepted position that the point at issue is covered by the decision of a Division Bench of this court consisting of S.K. Desai and Bharucha JJ., in Income-tax Reference No. 132 of 1974 decided on September 2, 1983 (see p. 215 infra), the judgment having been delivered by S. K. Desai J. In view of this judgment, question No. 3 is answered in the negative, that is to say, in favour of the Department and against the assessee.

6. As far as questions Nos. 1 and 2 are concerned, the assessee had made a separate provision for its liability relating to taxation. The amounts in question were additional amounts shown as a reserve for tax contingency. No part of these amounts has been utilised for payment of any tax, and in a subsequent assessment year, these amounts have been transferred to 'General Reserve'. These amounts are, therefore, a reserve and not a provision. Secondly, as held by the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT : [1981]132ITR559(SC) , if a provision for a known or existing liability is made in excess of the amount that would be reasonably necessary for the purpose, the excess should be treated as a 'reserve'. Therefore, it would be includible in the capital computation. In the present case, the amounts shown as reserve for tax contingencies are, in any event, an excess provision made for taxation. Therefore, these amounts should be treated as a reserve for the purpose of capital computation under the Second Schedule to the Companies (Profits) Surtax Act, 1964.

7. In the result, if the said amounts are looked upon as provision for taxation, it is a provision which is in excess of the needs of the assessee. Otherwise, it is a reserve against which there is no existing liability. In either case, the result would be that these amounts will have to be included in the computation of capital of the company under the Second Schedule to the Companies (Profits) Surtax Act, 1964.

8. Questions Nos. 1 and 2 are, therefore, answered in the affirmative, that is to say, in favour of the assessee and against the Department.

9. There will be no order as to costs.