1957 (8) TMI 32 - HC - Income Tax

Advance tax payments not reserves for computing capital under tax laws

The court held that advance payments of tax under section 18A of the Income-tax Act cannot be treated as reserves for computing capital under rule 2(1) of ... - Issues Involved:1. Whether advance payments of tax under section 18A of the Income-tax Act can be treated as a reserve for the purpose of computing capital under rule 2(1) of Schedule II of the Business Profits Tax Act.Detailed Analysis:Issue 1: Treatment of Advance Payments of Tax as ReserveThe primary question addressed in this judgment is whether advance payments of tax under section 18A of the Income-tax Act can be treated as a reserve for computing the capital of a company under rule 2(1) of Schedule II of the Business Profits Tax Act.The case originated from a reference under section 66(1) of the Income-tax Act, where three questions were referred to the court. Two questions were resolved earlier, and the third question required further examination, leading to this judgment.Background and Context:- The Business Profits Tax Act defines 'taxable profits' and 'abatement' with reference to the company's capital as per Schedule II of the Act.- The assessee company made advance payments of income-tax amounting to Rs. 13,54,054 under section 18A during the period ending March 31, 1948.- The company claimed that these payments should be included as part of its reserve when computing its capital for business profits tax assessment.- The Income-tax Officer denied this claim, and the Appellate Assistant Commissioner held that the amount was already included in a larger reserve sum, thus disallowing a double allowance.- The Tribunal rejected the assessee's claim, stating that payments under section 18A were made to meet a statutory liability and not as a reserve.Tribunal's Findings:- The Tribunal's supplementary statement clarified the company's accounting methods, showing that advance payments of tax were debited to an 'advance payment of tax' account, while a separate 'taxation reserve account' was maintained for estimated tax liabilities.- The Tribunal concluded that the advance payment amount of Rs. 13,54,054 was not included in the larger reserve sum of Rs. 36,67,481.Court's Analysis:- The court examined the nature of a reserve, referring to the Supreme Court's definition in the case of Commissioner of Income-tax v. Century Spinning and Manufacturing Co. Ltd. A reserve is something set aside for future use or contingencies, not for meeting current liabilities.- The court emphasized that payments under section 18A do not fit this definition as they are made to discharge a present statutory liability, not set aside for future contingencies.- The court highlighted that reserves are typically created out of profits, whereas advance tax payments may be made even when no profits are available.- The court also noted that the company's control over the advance payments is relinquished once paid to the government, contradicting the notion of these payments being a reserve.Conclusion:- The court held that payments under section 18A could not be regarded as reserves since they are made to discharge immediate tax liabilities and do not meet the criteria of being set aside for future use.- The court also pointed out that the sum of Rs. 13,54,054 was effectively included in the larger reserve sum of Rs. 36,67,481, supporting the Appellate Assistant Commissioner's view that no double allowance should be granted.Judgment:- The court answered the referred question in the affirmative, agreeing that the Income-tax Officer was correct in holding that advance payment of tax under section 18A was not a reserve of the assessee as mentioned in rule 2(1) of Schedule II.- The Commissioner of Income-tax, West Bengal, was awarded the costs of the reference.This comprehensive analysis ensures that the relevant legal terminology and significant phrases from the original text are preserved while providing a detailed issue-wise breakdown of the judgment.