LexCOMMISSIONER OF INCOME TAX, KANPUR versus TIIE ELGIN MILLS LTD., KANPUR
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A B c COMMISSIONER OF INCOME TAX, KANPUR v. TIIE ELGIN MILLS LTD., KANPUR JULY 31, 1986 [R.S. PATIIAK, SABYASACHI MUKHARJI AND K.N. SINGH, JJ.] Companies (Profits) Surtax Act, 1964, Schedule 2 Rule }- ''Investment reserve'', ''rehabilitation reserve'', ''capital reserve'', "depreciation reserve" and "forfeited dividends" -Whether statutory deductions--''provision" and "reserve" -Distinction between. • In Civil Appeal No. 1665 of 1974, a dispute arose between the D respondeut-assessee and the Revenue with regard to the computation of "standard deductions" under the provision of Companies Profits (Surtax) Act, 1964. The respondent-assessee claimed that the three amounts in respect of three accounts, namely, (a) investment reserve (b) rehabilitation reserve and ( c) forfeited dividend reserve should be tre11ted as reserves for the purposes of computation of its capital for the E assessment year 1964-65 of which the relevant previous year ended on 30th Sept., 1963. The Income-tax Officer did not include any of the said "reserves" in the capital of the respondent-<0mpany on the basis that these did not represent "reserve" in the real sense. The matter, ulti- mately went before the Tnbunal. It held: (i) that all the three accounts represented "reserves" for the purposes of assessment under the Super F Profits Tax Act, 1963 and as the principle involved was the same as under the Companies Profits (Surtax) Act, 1964, the accounts in ques- tion represented "reserves" nuder the latter Act also. The High Court also, relying on its earlier decision in Commissioner of Income-tax, Kanpur v. British India Corporation (P) Ltd. 92 ITR 38, affirmed the view taken by the Tribunal and held (i) that under both the Acts charg- G ing sections (s. 4) were identically worded except that expression (Standard Deduction) in Super Profits Tax Act, 1963 had been replaced by the expression "statntory deductions" in Companies Profits (Surtax) Act, 1964; (ii) that under both Acts these deductions had to be computed with reference to the capital employed in the assessee's- Companies; and (iii) that under both the Acts reserves of the company H were to be treated as its capital and the only difference was in the 408 ~ r \ . ~. C.LT. v. ELGIN MilLS 409 Second Schedule to the Companies Profits (Surtax) Act, 1964 where an explanation had been added, and this explanation merely clarified what was implicit in the Super Profit Tax Act, 1963. In C.A. No. 145 of 1976 the assessee-respondent had shown capital of Rs.2,63, 79,218 which included inter-a/ia investment re- serve, rehabilitation reserve, capital reserve, depreciatiq_n reserve and forfeited dividends. The High Court held that the fU"st four items con· stituted reserves and the forfeited dividends account did not represent reserve. Dismissiq the C.A. No. 145 of 1976 and allowing CA No. 1665 of 197 4 in part, HELD: 1.1 The conclusion of the High Court in CA 1665of1974 holding that the investment reserve and rehabilitation reserve were reserves and were entitled to be treated so under the relevant Act is right. But, in the facts of the case, the High Court was not right in holding that the "forfeited dividend reserve" was reserve. However, in CA No. 145 of 1976, the Tribunal and the High Court had rightly excluded "forfeited dividend account" from the reserve. [417G-H; 418DJ 2.1 The Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. Commissioner of Income Tax [1981] 132 ITR, 559 held that the expres- sion "reserve" in Super Profits Tax Act, 1963 and the Companies Profits (Surtax) Act, 1964 are inpari materia. [413C-D] 2.2 The distinction between "provision" and "reserve'' is while the "provision" is a charge of profits which are taken into account in the gross receipt of Profits and Loss Account, "reserve" is an appropri- ation of profit to provide for the asset which it represented. Reserve might be general or specific reserve, what is required is that the amount should be kept apart for one or the other purpose either general or specific. The distinction between provision and reserve must be found out bearing in mind the main features of the reserve. These are: (i) it must be an appropriation of profits, current or accumulated and not a charge against the profits for the year; (ii) the conduct of the parties must bear out that intention; (iii) it must not be to set apart to meet any known liability-a liability known to exist o
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