Karamchand Premchand Pvt. Ltd v. Commissioner Of Income Tax, Gujarat

KARAMCHAND PREMCHAND PVT. LTD. v. COMMISSIONER OF INCOME TAX, GUJARAT FEBRUARY 25, 1993 (B.P. JEEVAN REDDY AND N. VENKATACHALA, JJ.) Super Profits Tax Act, 1963 : Second Schedule-Rule I-Amount set apart for contingent liability (Income-tax}-Whether a reserve or a provision-Whether to be included in C the Computation of Capital of the assessee. The appellant-assessee was issued a notice under Section 23A of the Income-tax Act, 1922. The '\Ssessee 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 D March 1956, to meet the contingency that may arise if bis 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. The balance amount of Rs. 4,50,000 continuer) to remain and was shown as a provision set apart to meet the aforesaid contingent liability. The assessee bas been contesting the said proceedings. Ultimately it succeeded before the High Court which E 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 F not agree. Ultimately the matter reached the Tribunal which agreed with the assessee. At the instance of Revenue the question as to whether the snm 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 G to the High Court. The High Court having answered the question against the assessee, th. assessee bas 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. Dismissing the appeals, this Court, HELD : 1.1. Provisions made against anticipated losses and contin-gencies 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 band, reserves are appropriations of profits, the assets by which they B 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 C 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 snggest that the description given or the Book entries made by the assessee are con-clusive, 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 D 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 Compa11y of India Limited v. Their Worl<men, 73 I.T.R. 53 and Vazir Sulta11 Tobacco Co .• Ltd. etc. etc. v. Commissio11er of /11come Tax, E Andhra pradesh etc. etc., 132 I.T.R. 559, relied on. 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. Shar.ma, 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 H opinion of the High Court: Though the question refers to four items, we are concerned in this D 110 111