1981 (3) TMI 32 - HC - Income Tax

Reserve Funds Deemed Capital, Not Revenue: Tribunal Decision Upheld

The Tribunal determined that the Debenture Sinking Fund, Replacement and Contingencies Fund, and Contingency Reserve Fund constituted reserves for ... Super Profits Tax Issues Involved:1. Whether the Debenture Sinking Fund constituted a reserve for computing the capital of the assessee-company under the Second Schedule to the Super Profits Tax Act, 1963.2. Whether the Replacement and Contingencies Fund constituted a reserve for computing the capital of the assessee-company under the Second Schedule to the Super Profits Tax Act, 1963.3. Whether the Contingency Reserve Fund constituted a reserve for computing the capital of the assessee-company under the Second Schedule to the Super Profits Tax Act, 1963.Detailed Analysis:1. Debenture Sinking Fund:The Tribunal found that the Debenture Sinking Fund was set up to provide money for redeeming debentures issued in 1950. The balance-sheet showed a gradual redemption of debenture stock and an increase in the sinking fund, indicating that the fund was used for business purposes to replace capital. The Tribunal concluded that the liability was known but not a revenue liability, thus forming part of the company's capital. The Tribunal's view was that the fund constituted a reserve for the purpose of computing the capital of the assessee-company under the S.P.T. Act, 1963.2. Replacement and Contingencies Fund:The Tribunal noted that the nomenclature of the fund was not significant, but its purpose was. The fund was not debited to the profit and loss account like depreciation, and its balance had been increasing, indicating its use for business purposes. The Tribunal found that the fund was meant for contingencies related to plant expansion and replacement. The Tribunal rejected the Revenue's argument that the company, being a licensee, should not be concerned with plant expansion. The Tribunal held that the fund should be included in the capital computation under the S.P.T. Act, 1963.3. Contingency Reserve Fund:The Tribunal noted that the Contingency Reserve Fund was created under the Electricity (Supply) Act, 1948, and was being used for business purposes. The fund had been increasing and was transferred to the head 'Special Appropriation for Plant Expansion, etc.' The Tribunal found that the fund was meant for capital liabilities and was set up under statute, with transfers made under government advice. The Tribunal concluded that the fund was correctly treated as a reserve for computing the capital of the assessee-company under the S.P.T. Act, 1963.Legal Principles Applied:1. The nomenclature of a fund is not decisive; the substance and purpose of the fund determine whether it is a reserve.2. A reserve must represent profits or other amounts available to the company, kept aside for future use.3. The reserve must be decided by competent authorities and can be built from profits or other sources.4. The expression 'reserve' in the S.P.T. Act, 1963, is meant in its ordinary sense and not necessarily in contrast to a provision.Conclusion:The Tribunal was correct in holding that the Debenture Sinking Fund, Replacement and Contingencies Fund, and Contingency Reserve Fund constituted reserves for the purpose of computing the capital of the assessee-company under the Second Schedule to the Super Profits Tax Act, 1963. The question referred to the court was answered in the affirmative and in favor of the assessee.