COMMISSIONER OF INCOME TAX, KANPUR versus SARAN ENGINEERING CO. LTD.

Citation: [1986] 3 S.C.R. 398 · Decided: 31-07-1986 · Supreme Court of India · Bench: R.S. PATHAK · Disposal: Disposed off

Judgment (excerpt)

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COMMISSIONER OF INCOME TAX, KANPUR 
v. 
SARAN ENGINEERING CO. LTD. 
JULY 31, 1986 
[R.S. PATHAK AND SABYASACHI MUKHARJI, JJ.J 
Computation of capital-Super Profits Tax Act, 1963, Second 
Schedule-Whether capital reserve, stock and stores Reserves, Bad and 
. doubtful debts reserves, Rehabilitation Reserve, Obsolescence reserve, 
Loans and Insurance reserve, Investment reserve and Forfeited moneys 
reserves are to be included in the computation of capital reserve. 
Company (Profits) Surtax Act, 1964, Rule (/) of the Second 
Schedule-Computation of the company law made-Whether the 
Gratuity Reserve, Reserve for Special Survey, Reserve for contingen-
cies, Fleet Replacement Reserve, Reserve for exempted profits under 
section 84 of the Income Tax, Reserve for investment depreciation and 
Dividend Equalisation Reserve etc. are includible. 
The assessee, in CA 1546 of 1974, M/s British India Corporation 
Ltd. claimed capital Reserve, Stocks and Stores Reserves, Bad and 
doubtful debts Reserves, Obsolescence reserve, Loans and Insurance 
reserve, investment reserve and forfeited moneys reserves as ''standard 
deduction" as defined in section 2(a) of the Super Profits Tax Act, 1963 
in the computation of its profits under the relevant Income Tax Act. 
The claim having been disallowed, the question has been referred to this 
Court by the Tribunal. 
In Civil Appeal No. 1599/74 the Saran Engineering Company Ltd. 
claimed similar deductions in respect of capital reserve, Rehabilitation 
Reserve, Stores Reserve forfeited moneys Reserve and Bad and doubt-
ful debts reserve. The Income Tax Officer rejected the claim. On appeal 
the Appellate Assistant Commissioner allowed the claim in part. The 
Tribunal however allowed the assessee's claim in full in further appeal 
while rejecting the Revenue's appeal against A.A.C's order. At the 
instance of the Revenue, the Tribunal referred the matter to the High 
Court. The High Court answered the reference partly in favour of the 
Revenue by negativin~ th1• daim as to forfeited moneys reserve and 
398 
C.I.T. v. SARANENGIN. CO. 
399 
restricting the quantum of amount allowed by the AAC regarding capi-
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tal reserve, as the assessee did not seek a reference against it. Hence the 
appeal by Revenue by Special Leave. 
In the Special Leave Petition No. SLP (C) 4815A/77 the High 
Court's rejection order of the revenue's request under section 256(2) 
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for calling for a case against the Tribunal's findings regarding the. 
Gratuity Reserve, Reserve for Sepcial Survey, Reserve for contingen-
cies, fleet Replacement reserve, Reserve for exempted Profits under 
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section 84 of the Income Tax Act, Reserve for Investment depreciation 
and Dividend Equalisation Reserve but allowing only in relation to the 
Reserve for special Survey come to be considered. 
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Allowing the two civil appeals in part and dismissing the Special 
Leave Petition, the Court 
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HELD: 1. In the facts and circumstances of the case, except the 
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obsolescence Reserve and the forfeited moneys reserve, all the Reser-
ves, namely, capital Reserve, Stocks and Stores Reserve, Bad and 
doubtful debts reserves, Loans and Insurance Reserve, Investment re-
serve, and rehabilitation reserve are to be included in the computation 
of capital according to the provisions in the Second Schedule to the 
Super Profits Tax Act, 1963. 
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2. Where the liability bas actually arisen or anticipated Iegiti-
mately by the assessee though the quantum of the liability has not been 
determined, to meet such present liability cannot be treated as"'re-
, serve". A fund, however, created for payment of a liability which had 
not already arisen or fallen due but orly a provision with regard to the 
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sum that might become liable to be paid is "other reserve within the 
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meaning of rule ( l) of second schedule and should be taken into acoount 
in computing the capital of the company for the purpose of the Com-
panies (Profit) Surtax Act, 1964. Except the item relating to Reserve for 
special survey, it is not necessary to call for any statement of the case in 
respect of other items in SLP (C) 4815/./77. [406G-H; 407A] 
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Commissioner of Income Tax, Kanpur v. The Elgin Mills Ltd., 
Kanpur, [1986] 3 SCR P. 408, followed. 
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1599 
of 1974 
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400 
SUPREME COURT REPORTS 
11986] 3 S.C.R. 
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From the Judgment and Order dated 19.7.1973 of the Allahabad 
High Court in I.T. Reference No

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