COMMISSIONER OF INCOME TAX (CENTRAL-II), CALCUTTA versus M/S. DUNCAN BROTHERS AND CO. LTD., CALCUTTA

Citation: [1996] 2 S.C.R. 492 · Decided: 13-02-1996 · Supreme Court of India · Bench: J.S. VERMA · Disposal: Appeal(s) allowed
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Judgment (excerpt)

A 
COMMISSIONER OF INCOME TAX (CENTRAL-II), CALCUTIA 
v. 
MIS. DUNCAN BROTHERS AND CO. LTD., CALCUTTA 
FEBRUARY 13, 1996 
B 
[J.S. VERMA, S.P. BHARUCHA AND SUJATA V. MANOHAR, JJ.] 
Super Profits Tax Act, 1963/Companies (Profits) Swtax Act, 1964 : 
Clause (ii) of Rule 1 of the Second Schedule/Rule 2(ii) of the Second 
C Schedule-Provision for taxation-Wliether could be deducted from the cost 
of excluded investments so as to augment the capital base-Held: No. 
Circulars-Central Board of Revenue-Circular No. J.P. (XV- 5) of 
1968 dated 23-1-1968-Applicability of 
D 
Words & Phrases : 
'Fund'-Meaning of 
For the assessment year 1963-64, the assessee company claimed for 
the purposes of Super Profits tax Act, 1963 in the computation of its 
E capital, a provision for taxation made by it should be treated as a part of 
its capital or as a deduction from the cost of investment. For the assess-
ment year 1964-65, the assessee made a similar claim in respect of a 
provision for taxation made by it. This claim was made under the 
provisions of the Companies (profits) Surtax Act, 1964. The Appellate 
p 
Assistant Commissioner of Income tax held that the provision for taxation 
cannot be considered as a reserve but was to be deducted from the cost of 
investments in computing the capital based of the company. 
On appeal, the Tribunal held that the provisions for taxation made 
in the said two. assessment years was not a reserve which could forni part 
G of the capital of the company; that the provisions for taxation was neither 
a fund nor a surplus but a "perfected debt" and as such it would not qualify 
for a deduction as claimed by the assessee. The Tribunal made a Reference 
to the High Court. Of the three questions referred to it, the High Court 
answered the first question viz. whether the Tribunal was right in holding 
H that 'provision for taxation' was not a reserve to form part of the capital, 
492 
,, 
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C.l.T. v. DUNKAN BROS. AND CO. 
493 
in favour of the Revenue. As regards the other two questions as to whether A 
the company was entitled to the benefit of deduction of the amount of 
'Provision for Taxation' from its cost of investments, in respect of assess-
ment years 1963-64 and 1964-65, the High Court answered in favour of the 
assessee. Against this, the Revenue has come in appeal. 
The Respondent-assessee contended that while the capital involved 
in the investment in shares had been deducted in the computation of its 
Capital, the amount of such capital deducted should be reduced by the 
amount of "any fund, any surplus and any reserve" in terms of clause (ii) 
of Rule 1 of the Second Schedule of the Super Profits tax Act, 1963 and 
the corresponding clause of Rule 2(ii) of the Second Schedule of the 
Companies (Profits) Surtax Act, 1964. 
Allowing the Revenue's appeal, this Court 
B 
c 
HELD : 1.1. Since the Second Schedule to both the Acts viz., Super D 
Profits Tax Act, 1963 and Companies (Profits) Surtax Act, 1964 pertains 
to computing the capital of a company for the purposes of tax under these. 
Acts, the terms used in the Second Schedule need to be interpreted in the 
context of the balance sheet of a company and it profit and loss account 
which will necessarily have to be looked at to ascertain the company's 
capital and its profits. The terms used must, therefore, be read in the light E 
of the provisions of the Companies Act and how these terms are under-
stood in accounting parlance. [499-C-Dj 
1.2. In the instant case there is no systematic accumulation of cash 
or any separation of assets to meet future tax liabilities. There is oqly an F · 
accounting entry of an exact sum being earmarked for payment df tax 
liability arising at· the end of the current accounting years. Such a 
provision cannot be con'sidered as a fund. [500-G-H] 
13. Circular No. I.P. (XV-5) of 1968 dated 23rd of January, 1968, 
issued by the Central Board of Revenue and relied on by the assessee deals G 
with the treatment of an amount standing to the credit of "reserve for 
unexpired risks" held by General Insurance Companies. But it is of no 
assistance in the present case. In the first place, the provision for taxation 
made is very different in nature from the reserve for unexpired risks 
referred to in the circular. The reserve in that case represented a sum of H 
r 
494 
SUPREME COURT REPORTS 
[1996] 2 S.C.R. < 
A 
money which would be available to the insurance company for payment or 
discharge of unexpected claims
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