COMMISSIONER OF INCOME-TAX, U.P.versusLAXMI SUGAR & OIL MILLS LTD.

A


               COMMISSIONER OF INCOME-TAX, U.P.
                              v.
                 LAXMI SUGAR & OIL MILLS LTD.
B
                                JULY 16, 1986

         [R.S. PATHAK AND SABYASACHI MUKHARJI, JJ.J

          Super Profits Tax .Act, 1963, ss. 2(9), 4 and Rule 1 of Second
    Schedule-Standard deduction-What is-Assessee setting apart
c   amounts for additional cane price payable to cane-growers-
    Amounts-Whether a "11rovision" or a "reserve"-Distinction bet·
    ween-Description in the Balance-Sheet not conclusive of its true              )_
    nature.

D         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 re-
    presented the assessee's liability of the relevant years for the additional
    cane price payable to cane-growers under the Sugarcane Price Control
E   Order, 1955 and were shown in the balance-sheet under the head "Cur-
    rent 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.
                                                                                  \
F          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 asr.essee.
    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 shoukl have been included
G   in the capital computation of the assessee. The High Court also agreed
    with the Tribunal.

          Dismissing the appeal by the Revenue,

         HELD: I. The Rules made under the Super Profits Tax Act, 1963
H   provide for computing the capital of a company for the purpose of super
                          C.l.T. v. LAXMJSUGAR&OIL MILLS                      215

      profits tax. A perusal of Rule 1 of the Second Schedule will show that         A
      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 amount credited to such other
      reserves has not been allowed in computing its profits for the purposes
      of the Income-tax Act. [217D-E]                                                B
             2. In determining whether an item is a "provision" or a "re-

J     serve" the true nature and character of the sum so retained or ap-
      propriated 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            c
      profits, the assets by which it is represented being retained to form part
 l    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]
                                                                                     D
            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 "provi-         E
      sion''. 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.                                         F
           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.                            G

            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                               H
    216                   SUPREME COURT REPORTS             [1986] 3 S.C.R.

          PATHAK J. This appeal by special leave is directed against the
A
    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
B   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
c   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
                                                                                -
                                                                                )




D   for the assessment year 1963-64, the Income-tax Officer did not inc-
    lude the amount of Rs.8, 16,000 in the capital computation of the asses-
    see. Dismissing the assessee's appeal, the Appellate Assistant Com-
    missioner affirmed the view taken by the Income-tax Officer. The
    Appellate Assistant Commissioner held that the amount did not qua-
    lify as a 'reserve' inasmuch as the assessee had itself shown it as a
E   'provision' in its Balance Sheet. On second appeal, the Appellate Tri-
    bunal noted that the liability had not been allowed as a deduction on
    revenue account by the Income-tax authorities and that the decision
    W?5 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
F   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 rhe description of the item as a 'provi-
G   sion' 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 follow-
H   ing question:
            C.I.T. v. LAXMI SUGAR & OILS MILLS {PATHAK; J.]              217

               "Whether on the facts and in the circumstances of the case       A
               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?"
                                                                                B
         The High Court answered the question in the affirmative by its



I
    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       c
    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    D
    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
                                                                                E
    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 !TR 559, this
j   Court had occasion to examine the significance and scope '>f the con-
    cept. In doing so it referred to the earlier pronounce;,:ent of the Court   F
    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         G
               account against gross receipts in the Profit and Loss
               Account and the Balance Sheet. On the other hand, re-
               serves are appropriations of profits, the assets by which
               they are represented being retained to form part of the
               capital employed in the business. Provisions are usually
               shown in the Balance Sheet by way of deductions from the         H
    218                   SUPREME COURT REPORTS              [1986] 3 S.C.R.

A              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
B
    Companies Act, 1956 including the form set out in Part I, Schedule VI
    thereof where both expressions "Reserves and· Surpluses" and "Cur-
    rent 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
c   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 anti-
    cipated losses and contingencies. A 'reserve', on the contrary, is an
    appropriation of profits, the assets by which it is represented being
D
    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
E
    sum as a charge against its profits and there was never any ifitention 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 I of the Second
F
    Schedule.

          The appeal fails and is dismissed with costs.

     M.L.A.                                                 Appeal dismissed.