Commissioner of Income Tax vs Kirloskar Cummins Ltd.

T.D. Sugla, J.—These cross-references relate to the assessment of the assessee for the assessment years 1971-72, 1972-73 and 1973-74. BY its order dated March 15, 1977, u/s 256(1) of the Income Tax Act, 1961, the Tribunal had referred to this court the following two questions of law, one each at the instance of the Department and the assessee :

R.A. Nos. 354 and 355/ (PN) of 1975-76 :

"Whether, on the facts and in the circumstances of the case, the Tribunal ought to have held that the amount set apart for engine inspection and warranty and technical fees are not in the nature of a reserve but are current liabilities and provisions and, therefore, are not to be included in the computation of capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?"

R.A. Nos. 359, 360 and 361/(PN) of 1975-76 :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the general reserve as on the 1 st day of the accounting period should stand depleted by the amount of Rs. 8,98,848, Rs. 11,98,784 and Rs. 7,49,335 in the assessment years 1971-72, 1972-73 and 1973-74, respectively, being the dividends declared by the company at the annual general meetings ?"

Counsel are agreed that so far as question No. 2 is concerned, the question requires to be answered in the affirmative and in favour of the Revenue in view of the Supreme Court decision in the case of Vazir Sultan Tobacco Co. Ltd., Hyderabad and Others Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad, . The question is so answered.

As regards the first question, the relevant facts in brief are that the assessee company had set apart certain amounts for engine inspection and warranty and technical fees and described them in its books as "provision". However, a claim was made that these provisions were "reserves" within the meaning of rule 1 of the Second Schedule to the Surtax Act. Observing that the provision herein was not in the nature of a reserve but represented current liabilities of the assessee, the Income Tax Officer had disallowed the claim. The Appellate Assistant Commissioner having upheld the orders of the Income Tax Officer in this behalf, the assessee had come up in appeal before the Tribunal and, by its impugned order, the Tribunal accepted the assessee''s contention and held that the provisions for engine inspection and warranty and technical fees constituted "reserves".

Placing reliance on the Allahabad High Court decision in the case of Commissioner of Income Tax Vs. British India Corporation (P.) Ltd., and the Kerala High Court decision the case of Commissioner of Income Tax Vs. Periakaramalai Tea and Produce Co. Ltd., , it was submitted by Dr. Balasubramaian for the Department that the provision herein represented the assessee''s existing liability and the Tribunal was, therefore, not justified in treating the same as a reserve. Learned counsel for the assessee, on the other hand, submitted that though the provision represented some kind of anticipated liability, there was no certainty whether any liability in terms of money will at all be incurred by the assessee, and if incurred, what will be the extent thereof. According to him, this was, thus, a case of a reserve. He also pointed out that amount represented by the provision was, admittedly, not allowed deduction as a revenue expenditure.

It is pertinent to mention that the Supreme Court, in its judgment in the case of Vazir Sultan Tobacco Co. Ltd., Hyderabad and Others Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad, , approved the Madras High Court decision in the case of Commissioner of Income Tax Vs. Indian Steel Rolling Mills Ltd., . In that judgment, it was observed that though there is a distinction between a "reserve" and a "provision" in the Companies Act, 1956, that distinction cannot be imported into the meaning of the word "reserve" in rule 1 of the Second Schedule to the Super Profits Tax Act (in the present case, the Surtax Act). The term "reserve", it was stated, meant a sum specifically set apart for future use or for a specific occasion and it must be a specific sum for a specific use. In our judgment, the nature of the provision herein falls within the meaning of the word "reserve" ascribed to it in this judgment. Accordingly, we are in agreement with the Tribunal that these amounts correctly represented "reserve". The first question is, therefore, answered in the negative and in favour of the assessee.

There will be no order as to costs.