1979 (1) TMI 14 - HC - Income Tax

Ruling on Reserves Inclusion for Tax Calculation

The court ruled on various issues regarding the inclusion of reserves in capital computation for super profits tax purposes. Reserves for terminal pay, ... Reserve, Super Profits Tax Issues Involved:1. Inclusion of reserves for terminal pay in capital computation for super profits tax purposes.2. Inclusion of reserves for bad and doubtful debts in capital computation for super profits tax purposes.3. Inclusion of reserves for staff gratuity in capital computation for super profits tax purposes.4. Inclusion of proposed dividends in capital computation for super profits tax purposes.5. Inclusion of general reserve in capital computation for super profits tax purposes.6. Inclusion of tax exempt dividend reserve in capital computation for super profits tax purposes.Detailed Analysis:Issue 1: Reserves for Terminal PayThe Tribunal initially held that the provision for terminal pay was for a known liability of which the amount could not be determined with substantial accuracy. However, the court found that the amount set apart for terminal pay was essentially for a possible claim for retrenchment compensation in the future, with no existing or known liability. Consequently, it was determined that this amount should be treated as a reserve and not a provision. The court referred to the case of CIT v. Otis Elevator Co. (India) Ltd., where a similar reserve was considered includible in capital computation for surtax purposes. Therefore, the reserve for terminal pay was includible in the capital computation for super profits tax purposes.Issue 2: Reserves for Bad and Doubtful DebtsThe Tribunal considered the reserve for bad and doubtful debts as a provision. However, the court noted that the reserve was created on an ad hoc basis without relation to any actual bad debts. The court referred to past assessments and the decision in CIT v. Golden Tobacco Co. Ltd., where similar reserves were deemed includible in capital computation for surtax purposes. The court concluded that the reserve for bad and doubtful debts was not made for any known liability and should be treated as a reserve, thus includible in the capital computation for super profits tax purposes.Issue 3: Reserves for Staff GratuityThe Tribunal treated the staff gratuity reserve as a provision. However, the court found that the reserve was created without estimating any present liability on an actuarial basis and was set apart on an ad hoc basis. Referring to CIT v. Forbes Forbes Campbell & Co. Ltd., the court held that such appropriations should be regarded as reserves and not provisions. Therefore, the staff gratuity reserve was includible in the capital computation for super profits tax purposes.Issue 4: Proposed DividendsThe Tribunal held that the amount set apart for proposed dividends was not a reserve. The court agreed, citing Shree Ram Mills Ltd. v. CIT, where it was held that amounts specifically set apart for dividends could not be treated as reserves. This view was supported by decisions from the Madras and Calcutta High Courts. Although the Gujarat High Court had a contrary view in CIT v. Mafatlal Chandulal & Co. Ltd., the court preferred to follow its own precedent. Thus, the proposed dividends were not includible in the capital computation for super profits tax purposes.Issue 5: General ReserveThe Tribunal included the general reserve in the capital computation, following CIT v. Aryodaya Ginning and Manufacturing Co. Ltd. The court noted that this issue was settled by the Supreme Court in CIT v. Mysore Electrical Industries Ltd., which supported the inclusion of the general reserve. Therefore, the general reserve was properly includible in the capital computation for super profits tax purposes.Issue 6: Tax Exempt Dividend ReserveThe Tribunal included the tax exempt dividend reserve in the capital computation. The court observed that the reserve was created to facilitate the identification of profits exempt under section 84 of the Income-tax Act and was not related to any existing liability. Therefore, the tax exempt dividend reserve was properly includible in the capital computation for super profits tax purposes.Conclusion:1. Reserves for terminal pay of Rs. 74,279 are includible in the capital computation for super profits tax purposes.2. Reserve for bad and doubtful debts of Rs. 38,600 is includible in the capital computation for super profits tax purposes.3. Reserve for staff gratuity of Rs. 4,08,731 is includible in the capital computation for super profits tax purposes.4. Proposed dividends of Rs. 43,05,000 are not includible in the capital computation for super profits tax purposes.5. General reserve of Rs. 76,25,519 is properly includible in the capital computation for super profits tax purposes.6. Tax exempt dividend reserve of Rs. 1,91,170 is properly includible in the capital computation for super profits tax purposes.Since the assessee succeeded substantially, the assessee was awarded the costs of the reference from the revenue.