Commissioner of Income Tax vs Yamuna Syndicate Ltd.

A.L. Bahri, J.—These references relate to adjudication of questions of; law arising out of the order of the Tribunal with respect to the two assessment years 1975-76 and 1976-77. For the first assessment year, the following two questions of law stand referred :

" (1) Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that the amount of Rs. 2,64,544 constituted of the sums of Rs. 1,77,358, Rs. 36,257 and Rs. 50,949, respectively, marked by the assessee as "reserve for house", "reserve for doubtful debts" and "reserve for gratuity" could be taken into consideration in the computation of capital employed for the purpose of statutory deduction under the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in affirming the order of the Commissioner of Income Tax (Appeals) holding that deductions allowed under Sections 80G and 80M falling under Chapter VI-A of the Income Tax Act, 1961, could not be considered as sums not "includible" in the total income for Income Tax assessment and, therefore, would not fall for deduction under rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, for the purposes of computing the capital employed ?"

For the second assessment year similar questions as reproduced above, with the modification of figures in question No. 1, were referred. A third question was also referred for the assessment year 1976-77 which is as under :

"(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in affirming the order of the Commissioner of Income Tax (Appeals) holding that the sum of Rs. 17,545 being unclaimed dividends, should not have been deducted while computing the capital employed ?"

The first two questions are already covered by the decision of this court in the cases reported as Commissioner of Income Tax Vs. Avery Cycle Industries (P.) Ltd. (No. 1), ; Commissioner of Income Tax Vs. Usha Aggarwal, and Commissioner of Income Tax Vs. Tej Cloth Weaving Factory, . Hence, the questions are answered in the negative and in favour of the assessee for the reasons recorded in the aforesaid cases.

In the third question which has been argued by counsel for both the parties, the Super Tax Officer, Companies Ward, Rohtak, deleted a sum of Rs. 17,545 unclaimed dividend out of general reserve. The Commissioner reversed the aforesaid order and the Tribunal affirmed the order of the Commissioner.

The Tribunal referred the aforesaid question to this court for adjudication.

Counsel for both the parties have relied upon the decision of the Supreme Court in Vazir Sultan Tobacco Co. Ltd., Hyderabad and Others Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad, , wherein a clear distinction was drawn between "provision" and "reserves" as contemplated under the statute (Super Profits Tax Act, 1963, or the Companies (Profits) Surtax Act, 1964). While referring to the earlier decision on the subject, it was observed as under (at page 581) :

" The following aspects provide some guidelines :

(a) a mass of undistributed profits cannot automatically become a reserve and somebody possessing the requisite authority must clearly indicate that a portion thereof has been earmarked or separated from the general mass of profits with a view to constituting it either a general reserve or a specific reserve,

(b) the surrounding circumstances should make it apparent that the amount so earmarked or set apart is in fact a reserve to be utilised in future for a specific purpose and on a specific occasion, and

(c) a clear conduct on the part of the directors in setting apart a sum from out of the mass of undistributed profits avowedly for the purpose of distribution as dividend in the same year would run counter to any intention of making that amount a reserve."

The question which was adjudicated by the High Court was as under (at page 565) :

" Whether, on the facts and in the circumstances of the case, the provisions, (a) for taxation Rs. 33,68,360, (b) for retirement gratuity Rs. 9,08,106, and (c) for dividends Rs. 18,41,820, could be treated as ''reserves'' for computing the capital for the purpose of super profits tax under the Second Schedule to the Super Profits Tax Act, 1965, for the assessment year 1963-64 ?"

The High Court answered the question in respect of the three items aforesaid in favour of the Revenue. The amount was set apart by the assessee-company in its balance-sheet as not "reserves" and had to be excluded in the computation of its capital i''or the purposes of levying super profits tax payable on the chargeable profits for the relevant accounting year. It is thereafter that the matter was considered by the Supreme Court and the order of the High Court was affirmed holding that the Tribunal was right in excluding the amounts from the general reserves while computing the capital of the assessee-company for the assessment year in the absence of express indication to the contrary. The Supreme Court held as under fat page 586) :

" It is not possible to accept either of these contentions urged by the counsel for the assessee-company. It is true that u/s 205(1) of the Companies Act, 1956, it is open to the directors to recommend and the shareholders to approve payment of dividends either from the current year''s profits or from the past years'' profits. It is also true that on transfer of a portion of the current year''s profits to the general reserve, the augmented general reserve becomes a conglomerate fund but having regard to the natural course of human conduct of hard-headed men of business and commerce it is not difficult to predicate that the dividends would ordinarily be paid out from the current income rather than from the past savings, unless the directors in their report expressly or specifically state that the payment of dividends would be made from the past savings. From the commercial point of view if any amount is required for incurring any expenditure or making any disbursement like distribution of dividends in a current year, then ordinarily the same will come out of the current income of the company if it is available and only if the same is insufficient then the past savings will be resorted to for the purpose of incurring that expenditure or making that disbursement ; such a course would be in accord with the common sense point of view."

The position in the present case is almost akin. No material was produced before the authorities that any resolution was passed by the directors of the company forfeiting unclaimed dividend that it could form part of the general reserves. Simply adding the amount of unclaimed dividend in the general reserves it could not form its part. The amount was for known liability and was rightly excluded by the Super Tax Officer. The Tribunal was not justified on the facts and circumstances of the case while affirming the order of the Commissioner that such sum should not have been deducted while computing the capital employed. The question is, therefore, answered in the negative and in favour of the Revenue.

ANNEXUEE

Order dated August 24, 1994, in Income Tax References Nos. 27 and 28 of 1981

A. L. Bahri, J.

Shri S. S. Mahajan has produced a copy of letter from the Company Law Institute of India Private. Ltd., dated August 13, 1994, and has pointed out that in the judgment dated December G, 1993, rendered in Income Tax References NOS. 27 and 28 of 1981, reference to two citations has been made incorrectly and unnecessarily. The two questions arising in the case already stood covered by the decision of this court in the case of Commissioner of Income Tax Vs. Avery Cycle Industries (P.) Ltd. (No. 1), . The other two cases, Commissioner of Income Tax Vs. Usha Aggarwal, and Commissioner of Income Tax Vs. Tej Cloth Weaving Factory, , were on different points. After perusal of these references, we notice that there was no need for making reference for the two later cases. Thus reference to these two cases is scored off from the judgment which will not affect the merits of the case as being unnecessary. In this respect, a letter be written to the Company Law Institute of India Pvt. Ltd., 88, Thyagaraya Road, T. Nagar, Madras-600 017, informing that reference to the two cases Commissioner of Income Tax Vs. Usha Aggarwal, and Commissioner of Income Tax Vs. Tej Cloth Weaving Factory, , has been deleted in the judgment, with copy to Shri S. S. Mahajan, Advocate, Chandigarh.