VAZIR SULTAN TOBACCO CO. LTD. ETC. ETC. versus COMMISSIONER OF INCOME-TAX ANDHRA PRADESH, HYDERABAD

Citation: [1982] 1 S.C.R. 789 · Decided: 25-09-1981 · Supreme Court of India · Bench: V.D. TULZAPURKAR · Disposal: Disposed off

Cited by 1 judgment(s) · see the full citation network in Lexace

Judgment (excerpt)

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789 
A 
VAZIR SULTAN TOBACCO CO. LTD. ETC. ETC. 
v. 
COMMISSIONER OF INCOME-TAX 
ANDHRA PRADESH, HYDERABAD 
September 250 !981 
(V.D. TULZAPURKAR, E.S. VENKATARAMIAH AND 
AMARENDRA NATH SEN, JJ.] 
Super Profits Tax Act, 1963 and Company's (Profits) Sur-tax Act, 1964-
Ru/e I of Second Schedule-Scope of-'' Provision" and "Reserve"·-Distinction-
A sum of money transferred from current profits to general reserves-Dividend paid 
from that fund-General reserve how calculated. 
The Super (Profits Tax) Act, 1963 and the Company's (Profits) Sur-ta. 
Act, 1964 (the scheme and main provisions of both of which are almost identical) 
impose a special tax on excess profits earned by companies. The special t~ is 
imposed in respect of so much of a company's "chargeable profits" of the 
previous year as exceeded the "standard deduction"-
The term "chargeable 
profit" is defined to mean th~ total income of an assessee computed under the 
Income Tax Act, 1961 for aDy previous year and adjusted in accordance with 
the provisions of that Act. 
"Standard deduction" is determined by computing 
the capital of a company in accordance with the rules laid down in the schedule. 
The material part of rule 1 provides that before any amount or sum qualifies 
for inclusion in capital computation of a company two conditions are required 
to be fulfilled namely : (i) that the amount or sum must be a "reserve" and (b) 
that it must not have been allowed . in computing the company's profit for the 
purposes of Income Tax Acts, 1922 or 1961. 
In their respective balance sheets, the assessees had shown under the heading 
"current liabilities and provisions" appropriations of large sums of money for 
taxation, retirement gratuity and dividends and claimed that for the purposes of 
1<uper profits tax these sums should be regarded as "other reserves" within the 
meaning of Rule 1 of Second Schedule to the Act and that for the computation 
of capital they should be taken into account . 
Treating these sums as "provisions" and not as "reserves", the Super 
Profits Tax Officer determined the capital and the standard deduction by exclud~ 
ing them from the computation of the capital. He then levied super profits tax 
on that portion of the chargeable profits of the previous year as exceeded the 
standard deduction. 
B 
c 
D 
E 
F 
G 
While the Appellate Assistant Commissioner upheld the assessee's contention 
ff 
that these sums were "reserves" which should be taken into account for comput· 
ing their capital, the Appellate Tribunal held that these were not "reserves" within 
B 
c 
D 
E 
F 
G 
H 
790 
SUPREME COURT REPORTS 
[ 1982] I S.C.R. 
the meaning of Rule 1 of the Second Schedule to the Act and as such could not 
enter into capital computation. 
On reference the High Court held that the sums set apart were not "reserves" 
and so should be excluded in the computation of the capital for the purposes of 
levying the super profits tax. 
In Tax Reference no. 5 (a case under the Companies (Profits) Sur-tax Act, 
1964) the assessee transferred from out of its current profits a large sum of 
money to the general reserves and paid dividend to its shareholders from out of 
the augmented general reserves. 
On the question whether for computing the 
capital for the purpose of sur-tax the general reserves should or should not be 
reduced by the sum of dividend paid, the taxing authorities and the appeUate 
tribunal ignored this amount holding that it was not a "reserve". 
None of the items of appropriation either for taxation or for retirement 
gratuity or for proposed dividend in the asses!!:ees' cases had been allowed in 
computing their profits under the Income Tax Act, 1961. 
I 
HELD : [per Tulzapurkar & Venkataramiah, JJ] 
~ 
The expressions' 'reserve" and "provision" have not been defined in the 
Act. 
Standard dictionaries, without making any distinction between the 
two concepts, use them more or less S}nonymously connoting the same idea. But 
since in the context of the legislation a clear distinction between the two is 
implied it is essential to know the exact connotation of the two concepts and the 
distinction as known in commercial accountancy. The rules for computation of 
capital contained in the Second Schedule to the Act proceed on the basis of the 
formula of capital plus reserve, a formula well known in commercial accountancy. 
But since they occur in a taxing statute applicable to companies only these 
expressions will have to be understood

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