Commissioner of Income Tax vs Cynamid India Ltd

Mrs. Sujata Manohar J.

This is an application u/s 256(2) of the Income Tax Act, 1961, requiring that we should direct the Tribunal to refer to us the following question as a question of law arising out of the Tribunal''s order. The question is :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the following funds constituted ''reserves'' and were to be included in the computation of the assessee-company''s capital for the purpose of the Companies (Profits) Surtax Act, 1964 :

(i) Reserve under the Drugs Order (Price Control)

(ii) Provision for contingencies (salary)

(iii) Provision for contingencies (bonus)

(iv) Reserve for depreciation

(v) Provision for taxation

(vi) Provision for doubtful debts ?"

The affidavit-in-reply of the respondent explains that the reserve under the Drugs Order (Price Control) is created as per the provisions of the Drugs (Price Control) Order, 1970. The amount standing to the credit of the said reserve has not been allowed as a deduction in computing the respondent''s income under the Income Tax Act, 1961, in any of the assessment years in which such amounts were transferred to the said reserve. It represents an amount set aside out of the profits and other surpluses not designated to meet any liability.

Item No. (ii) viz., provision for contingencies, is created in the following circumstances. The employees of the respondent had made claims for additional salary, dearness allowance, etc., which were not accepted by the respondent. Negotiations were going on between the respondent and representatives of the employees. In order to meet any possible claim that could arise on this account, the respondent had set aside the amount. The said amount has not been allowed as an expenditure in the computation of the respondent''s income.

Items No. (iii), which is also a provision for contingencies is to meet a possible liability for bonus. The respondent''s practice was to pay bonus to its employees irrespective of the salary earned by the employees. The Payment of Bonus Act, 1965, was amended with effect from December 18, 1985, as a result of which employees drawing salary in excess of Rs. 1,600 per month were not eligible for bonus. The said amendment further provided that when the salary or wage of an employee exceeded Rs. 750 per month, the bonus payable to such employee would be as if the salary were Rs. 750 per month. The respondent felt that despite these provisions of the Payment of Bonus Act, its employee might make a claim for bonus on the basis of its past practice. There was, in fact, no demand at the relevant time from the employees at all for such payment of bonus. This amount has been included in the computation of the respondent''s income.

The fourth item which is reserve for depreciation the fifth item which is in respect of provision for taxation are both only in respect of a provision which is in excess of the actual requirements of the respondent. The decision in the case of Vazir Sultan Tobacco Co. Ltd., Hyderabad and Others Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad, covers such a reserve. No useful purpose will be served by raising and referring the question regarding these items.

Regarding item No. (vi), viz., provision for doubtful debts, the respondent has stated that whenever any debts have become bad, they have been separately written off by the respondent by debiting such bad debts in its profit and loss account. The amounts so written off have not been debited to the provision for doubtful debts. This practice has been followed by the respondent from year to year. The provision for doubtful debts is also not claimed by the respondent as a deduction in its Income Tax returns. Hence, this is really in the nature of a reserve.

In respect of similar claims for the assessment year 1974-75, Income Tax application No. 24 of 1979 which was filed before this High Court for raising a similar question was rejected by the High Court. In the circumstances, in our view, it would be academic to raise the proposed question and direct the Tribunal to refer this question to us as the answer is obvious.

Accordingly, we discharge the rule.

No order as to costs.