COMMISSIONER OF INCOME-TAX, U.P. versus LAXMI SUGAR & OIL MILLS LTD.

Citation: [1986] 3 S.C.R. 214 · Decided: 16-07-1986 · Supreme Court of India · Bench: R.S. PATHAK · Disposal: Dismissed
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Judgment (excerpt)

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COMMISSIONER OF INCOME-TAX, U.P. 
v. 
LAXMI SUGAR & OIL MILLS LTD. 
JULY 16, 1986 
[R.S. PATHAK AND SABYASACHI MUKHARJI, JJ.J 
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Super Profits Tax .Act, 1963, ss. 2(9), 4 and Rule 1 of Second 
Schedule-Standard deduction-What is-Assessee setting apart 
amounts for additional cane price payable to cane-growers-
Amounts-Whether a "11rovision" or a "reserve"-Distinction bet· 
ween-Description in the Balance-Sheet not conclusive of its true 
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nature. 
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For the assessment years 1961-62 and 1962-63, the respondent-
assessee had debited an amount of Rs.5,40,000 and an amount of 
Rs.2, 76,000 to its profit and loss account of the relevant previous years 
respectively. The amounts were debited on the ground that they re-
presented the assessee's liability of the relevant years for the additional 
cane price payable to cane-growers under the Sugarcane Price Control 
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Order, 1955 and were shown in the balance-sheet under the head "Cur-
rent liabilities and provisions''. However, in the subsequent accounting 
year ending September 1963, the assessee had credited its profits by the 
said amounts by reversing the entries, and had not made any such 
provision in the subsequent years. 
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In assessment proceedings under the Super Profits Tax Act, 1963 
for the assessment year 1963-64, the Income-tax Officer did not include 
both the aforesaid amounts in the capital computation of the asr.essee. 
The Appellate Assistant Commissioner affirmed the view taken by the 
Income-tax Officer. But, on second appeal, the Appellate Tribunal held 
that the amount represented a "reserved" and shoukl have been included 
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in the capital computation of the assessee. The High Court also agreed 
with the Tribunal. 
Dismissing the appeal by the Revenue, 
HELD: I. The Rules made under the Super Profits Tax Act, 1963 
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provide for computing the capital of a company for the purpose of super 
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C.l.T. v. LAXMJSUGAR&OIL MILLS 
215 
profits tax. A perusal of Rule 1 of the Second Schedule will show that 
for the purposes of that rule the capital of a company includes the 
reserve created under some of the provisions of the Indian Income-tax 
Act and its other reserves in so far as the amount credited to such other 
reserves has not been allowed in computing its profits for the purposes 
of the Income-tax Act. [217D-E] 
2. In determining whether an item is a "provision" or a "re-
serve" the true nature and character of the sum so retained or ap-
propriated must be determined and its mere description by the assessee 
in its Balance-Sheet is not conclusive of its true nature. A provision is a 
charge against the profits, being made against anticipated losses and 
contingencies. A "reserve", on the contrary, is an appropriation of 
profits, the assets by which it is represented being retained to form part 
of the capital employed in the business. Unlike a "provision" which is a 
present charge against the profits, the assessee continues to enjoy a 
proprietor's interest in the "reserve" [218C-E] 
In the instant case, the evidence clearly disclosed that there was 
no liability at all on the assessee requiring it to set apart a sum as a 
charge against its profits and there was never any intention to make 
payments to the cane-growers nor was payment ever made but, on the 
contrary, the assessee reversed the entries in a subsequent year in its 
books. It is apparent that the amount cannot be described as a "provi-
sion''. It can only be described as a "reserve''. It was part of the capital 
which fell for computation under Rule 1 of the Second Schedule. [218E-F] 
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Vazir Sultan Tobacco Co. Ltd. v. Commissioner of Income-tax, 
A.P., [1981] 132 ITR 559; and Metal Box Co. of India Ltd. v. Their 
Workmen, [1969] 73 ITR 53 relied upon. 
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1613 
(NT) of 1974 
From the Judgment and Order dated 26th April, 1973 of the 
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Allahabad High Court in Misc. Case No. 202 of 1971. 
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B.B. Ahuja and Miss A. Subhashini for the Appellant. 
P.K. Mukharjee and A.K. Sengupta for the Respondent. 
The Judgment of the Court was delivered by 
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SUPREME COURT REPORTS 
[1986] 3 S.C.R. 
PATHAK J. This appeal by special leave is directed against the 
judgment of the High Court of Allahabad pronouncing on the meaning 
of the expression 'reserves' in the Second Schedule to the Super Profits 
Tax Act, 1963. 
For the assessment years 1961-62 and 1962-63 the assessee had 
debited
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