TaxTMI 
TaxTMI 
2006 (5) TMI 113
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....ely strong, durable and insect resistant. The plywood was specifically designed for use in construction work and the Central Excise department has treated the concrete shuttering p plywood on par with structural plywood and demanded the differential duty on account of short levy in the assessment of several years in the past. The liability on such excise duty for shuttering plywood at Dandeli and Taluppa factory which were still outstanding was as under as at the end of the relevant accounting year: Dandeli Rs. 1,03,96,726 Taluppa Rs. 13,12,597 ---------------- Rs. 1,17,09,323 ---------------- This liability was also disputed befo....
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....ut the allowable deduction under section 32AB of the Act, he calculated the same by excluding the above written back amount. In other words, while taxing the same as income of the year, the Assessing Officer applied the provisions of section 32AB(3)(a) to reduce the profit to arrive at a lower profit for the purposes of granting relief under section 32AB of the Act. It was contended on behalf of the assessee before the CIT(A) that what is to be reduced from the profits is any amount withdrawn from reserves or provision if such amounts are credited to the profit and loss account. In the present case, the provisions were made in the earlier years for ascertained liabilities and do not represent any ad hoc provision which is the nature of a free reserve. Thus, according to the assessee, there was no withdrawal from reserves or provision. The amount has been written back to the profit and loss account as the provision for the ascertained liability was no longer required. The contention of the assessee was not accepted by the CIT(A) and the assessee is in appeal before the Tribunal. 3. When the matter has come up for hearing before the Division Bench a decision of the Tribunal in the c....
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....r provisions, if such amounts are credited to the profit and loss account. The profits computed in accordance with the requirement of Parts II & III of the Sixth Schedule is to be increased by various items mentioned in clauses (i) to (vii) if they are debited to the Profit & Loss Account. Clause (v) refers to the provisions made for meeting the liabilities other than ascertained liabilities. The eligible profits are to be reduced by any amount or amounts withdrawn from reserves or provisions if such amounts are credited to the profits and loss accounts. 8. It is pertinent to note that the Legislature has consciously used the term 'ascertained liabilities' in clause (v) when it dealt with the amounts to be added for determination of eligible profits and excluded the term 'ascertained liabilities' when it dealt with the provisions to be reduced for determining eligible profits. Therefore, it follows that if unascertained liabilities were debited to the Profit & Loss account then they had to be added for the purposes of computation of eligible profits because they are not an allowable deduction under the Income-tax Act, whereas the ascertained liabilities are allowable deduction und....
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....y assessed by the Assessing Officer on 15-1-1990. This order, in the opinion of the department, was for bringing the cessation of the liability to tax in the assessment year 1983-84. Similar findings are given in relation to the liability in respect of the royalty payable to the Government of Karnataka. 5. It was argued by the learned counsel for the assessee that the department is not justified in reducing the write back of the provision from the profits computed for the purposes of section 32AB of the Act in respect of what is known as ascertained liability. Our attention was also invited to the decision of the Apex Court in the case of Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 and also the decision of the Madras High Court in the case of CIT v. Tamil Nadu Mercantile Bank Ltd. [2002] 255 ITR 205. Reference was also made to the decision of the Supreme Court in Vazir Sultan Tobacco Co. Ltd, v. CIT [1981] 132 ITR 559, wherein the distinction between reserves and provisions have been discussed, which may be relevant for deciding the issue in hand. 6. The learned Departmental Representative, on the other hand, strongly relied on the decision of Bombay High Court in Alfa Laval Indi....
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....r: '(i) The term "provision" means any amount written off or retained by way of providing for depreciation, renewals or diminution in value of asset or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy. (ii) The expression "reserve" shall not include any amount written off or retained by way of providing for depreciation, renewal or diminution in value of the assets or retained by way of providing for any known liability. (iii) The expression "capital reserve" shall not include any amount regarded as free for distribution through the profit and loss account. (iv) The expression "revenue reserve" shall mean any reserve other than the capital reserve. (v) The expression "liability" shall include all liabilities in respect of expenditure contracted for and all disputed or contingent liabilities.' In terms of requirement of sub-clauses (viii) and (ix) of clause 3 of Part II of Schedule-VI to the Companies Act, the amounts set aside or proposed to be set aside to reserves and provisions and the amount withdrawn from such reserves and provisions are to be set out in the profit and loss account under the most conv....
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....or various expenses and claimed them as deduction in the earlier years. When these provisions made in the earlier years were no longer required, the said amounts were written back to the profit & loss account, which was treated as an income relating to the business and also treated as part of the book profit for the purposes of relief under section 32AB of the Act. The Division Bench, after appreciating the various clauses of section 32 AB(3) of the Act, felt it appropriate and directed the Assessing Officer to re-consider the provisions written back to be part of the profits of the assessee. In taking this view, the Tribunal has followed its Special Bench decision in the case of Highway Cycle Industries Ltd., for the proposition that the profits from the eligible business for the purposes of section 32AB are not to be computed under the Income-tax Act, but as would be required to be computed under Schedule VI to the Companies Act, 1956. It is the commercial profit of an undertaking as understood by the people conversant with the Companies Act, that is to be computed by applying the well-settled principles of accounting. This proposition has since been approved by the Hon'ble Supre....
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....fferent from provisions or reserves and, therefore, the question of reduction for write back of such amounts is not implied in the scheme of provisions of section 32AB of the Act. What is to be reduced for is basically the provisions and reserves and not which are in the nature of expenditure or known ascertained liabilities. Any amounts set apart will become reserve only when they arc not in respect of ascertained liabilities. Although the terminology 'ascertained liability' is not added in the clause, just like as in clause (v) of sub-section (3) of section 32AB, but it is more than clear if one were to consider the context requiring the increase or decrease to be made. They are mainly in respect of reserves or provisions representing unascertained or unknown liabilities. In our view, any provision made for ascertained liability cannot be treated as a reserve or provision to be reduced as envisaged in sub-section (3) of section 32AB of the Income-tax Act within the meaning of the expression "reserve" as defined in part III of the Sixth Schedule to the Companies Act, extracted earlier in this order. 12. Now we will discuss the above in the light of the facts of the present case. ....
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.... reserve, which is a fund set apart to take care of the possible losses or liabilities of the future. In the facts of this case, the liability had fallen upon the assessee as a result of the specific demand made by the Central Excise Authorities with regard to differential excise duty as also the Government of Karnataka in respect of royalty payment. The amounts were clearly for meeting ascertained liabilities. When such ascertained liabilities ceased to exist the department has rightly brought them to tax as a part of the assessee's total income. It is strange for the department now to turn around and to say that such profits are not the profits for the purposes of computing relief under section 32AB(3) of the Act. Although the term 'ascertained liabilities' is not specifically found a place in the clause, but having regard to the totality of the scheme of computation under section 32AB(3), the answer is self-evident. 13. The Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. observed as under:- 'The expression "reserve" has not been defined in the Super Profits Tax Act, 1963, or the C.(P) S.T. Act, 1964. The dictionaries do not make any distinction between the two conce....
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....ounts withdrawn from the reserve or profession. 16. Again, it may be emphasized that the term "any amount or amounts withdrawn from reserves or provisions" appearing in the latter part of sub-section (3) has to be understood in the light of clauses (iv) and (v) providing for increase in the aggregate amount of the profit by these two items. Unless the amount withdrawn are out of reserves or provisions in the nature of the items (iv) and (v) of sub-section (3) of section 32AB, the withdrawal or writing off the same in the profit and loss account would not be reduced to ascertain the amount of profits of the business or profession. It also synchronizes with the object of defining the term "profit of business or profession" for the purpose of granting deduction under sub-section (1) of section 32AB of the Act in the sense that the reserves and provisions which are not for meeting an ascertained liability would be an allocation of profits and, therefore, the profit of an assessee is increased by that amount in the year when they are debited and it is to be reduced from the profit and loss account on the withdrawal or writing off of the same if credited to the profit and loss account i....