Commissioner of Income Tax vs Modi Spinning and Weaving Mills

Satish Chandra, J.—The Tribunal has referred the following question of law for our opinion :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount of Rs. 20,40,721 on account of provision for taxation and Rs. 19,66,853 on account of proposed dividend were to be included in the computation of capital under the Super Profits Tax Act, 1963?"

The previous year relevant to the assessment year 1963-64 ended on April 30, 1962. The balance-sheet of the assessee-company was prepared as on that date. It included under the head "Current Liabilities & Provisions" Rs. 20,40,721 as provision for taxation and Rs. 19,66,853 for "proposed dividends". The assessee claimed that these two sums should be treated as "reserves" for purpose of computation of capital as provided under Rule 1 of the Second Schedule of the Super Profits Tax Act, 1963. The Super Profits Tax Officer repelled this submission as he was of the view that provision for taxation as well as dividends was intended to meet a contingent liability and should not be treated as "reserve" within the meaning of the rule. This view was confirmed on appeal.

When the matter came up before the Tribunal it relied on a decision of a Bench of this court in Commissioner of Income Tax Vs. Security Printers of India (P.) Ltd., as being directly in point. Accordingly, the Tribunal allowed the assessee''s appeal and directed that both these amounts be treated as "reserve" and so, as part of the assessee''s capital for computing the capital under the Act. The decision of this court in Commissioner of Income Tax Vs. Security Printers of India (P.) Ltd., as well as the subsequent decision in Commissioner of Income Tax Vs. Hind Lamps Ltd., were considered by the Himachal Pradesh High Court in Hotz Hotels Pvt. Ltd. Vs. Commissioner of Income Tax, . R. Section Pathak C.J., who was a member of the Bench which decided the two Allahabad cases mentioned above, held in Hotz Hotels'' case as follows (p. 600) :

"Our attention has been drawn to Commissioner of Income Tax Vs. Security Printers of India (P.) Ltd., , in which the Allahabad High Court appears to have held that certain sums representing provision for bonus, provision for taxation and provision for proposed dividends were reserves. It is necessary to point out, however, that in taking that view the court specifically observed that it was never the case of the revenue that the amounts represented liabilities which had already arisen and were not intended for future use in a future contingency. It is in that context that the decision in that case has to be appreciated. Subsequently, in Commissioner of Income Tax Vs. Hind Lamps Ltd., the same court held that sums representing proposed dividends and provision for taxation could not be treated as reserves because the material on the record indicated clearly that the amounts had been earmarked, the one for payment of the dividend, and the other for the discharge of a tax liability which had already accrued and merely awaited quantification by assessment. The qualitative difference in the material available in the latter case led to a decision different from that in the former case."

The question, therefore, is primarily one of fact. All relevant materials have to be considered in order to find whether the liability had actually arisen and the fund created for its discharge or whether the sums have been earmarked for a future liability. On facts, it has to be found as to what portion of the earmarked amounts represents either the former or the latter. The provision in respect of taxation can be treated as a "reserve" only to the extent that it exceeds the tax liability which had already accrued on April 30, 1962. Similarly, about the provision for dividends, it will have to be seen as to how the assessee conducted itself in the matter of deciding upon the dividends which were payable for the year. In the absence of findings on these crucial aspects, the question of law as found by the Tribunal cannot properly be decided.

We, therefore, send this reference back to the Tribunal with a direction that it will re-hear the appeal and decide the matter afresh, after recording appropriate findings on the various questions including questions of fact, in the light of the observations made above. Under the circumstances, we make no order as to costs.