1990 (4) TMI 91 - AT - Income Tax

Tribunal rules on treatment of contingency reserves as provisions for tax assessment years.

STP. Limited. Versus Surtax Officer.

The Tribunal upheld the exclusion of the contingency reserve from the capital base for the assessment year 1981-82, treating it as a provision. However, ... Contingency Reserve, General Reserve Issues Involved:1. Computation of capital under Schedule II of the Companies (Profits) Surtax Act, 1964.2. Treatment of contingency reserve as a provision or reserve.3. Impact of transferring contingency reserve to the general reserve on its characterization.Detailed Analysis:Issue 1: Computation of Capital under Schedule II of the Companies (Profits) Surtax Act, 1964The primary issue in this case is the computation of capital under Schedule II of the Companies (Profits) Surtax Act, 1964. The assessee owed Rs. 34,87,647 to a colliery company, which was nationalized in 1972-73. The assessee unilaterally wrote back this amount to the P. & L. account and created a Contingency Reserve of Rs. 35,76,704, inclusive of the owed amount. The ITO treated this as a provision rather than a reserve and excluded it from the capital base, leading to surtax assessments for the years 1981-82 and 1982-83.Issue 2: Treatment of Contingency Reserve as a Provision or ReserveThe assessee argued that the contingency reserve was not created to cover the debt owed and should be treated as a reserve. They cited several Supreme Court cases, including CIT v. Laxmi Sugar & Oil Mills Ltd., CIT v. Elgin Mills Ltd., and CIT v. Saran Engg. Co. Ltd., to support their claim. However, the CIT(Appeals) dismissed the appeal for 1981-82, emphasizing that a fund created for a liability already arisen constitutes a provision. The CIT(Appeals) noted that the major liability of Rs. 34,87,647 was already known, and the unilateral writing back of the debt did not extinguish the liability.Issue 3: Impact of Transferring Contingency Reserve to General Reserve on its CharacterizationFor the assessment year 1982-83, the assessee transferred the contingency reserve to the general reserve. The CIT(Appeals) allowed the appeal, stating that the general reserve, which was available for any purpose, should be considered in the capital computation. The Department contended that the unilateral transfer did not change the nature of the provision. The Tribunal agreed with the Department, stating that a provision remains a provision until the liability is discharged or waived. The transfer to the general reserve did not convert the provision into a reserve.Conclusion:1. Assessment Year 1981-82: The Tribunal upheld the CIT(Appeals)' decision, treating the contingency reserve as a provision and excluding it from the capital base.2. Assessment Year 1982-83: The Tribunal reversed the CIT(Appeals)' decision, agreeing with the Department that the contingency reserve did not shed its character as a provision even after being transferred to the general reserve.Final Judgment:- Assessee's Appeal for 1981-82: Dismissed.- Department's Appeal for 1982-83: Allowed.