Mettur Industries Ltd. vs Commissioner of Income Tax

Ismail, J.—The Income Tax Appellate Tribunal, Madras Bench, u/s 256(1) of the Income Tax Act, 1961, has referred the following

question for the opinion of this court:

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the amounts of Rs. 15,50,000 being

provision for tax liability, Rs. 1,36,060 being provision for payment of gratuity to employees and Rs. 5,69,000 being provision for payment of

bonus to employees as on 1st April, 1962, being the first day of the previous year relevant to the assessment year 1963-64, were not to be

included in computing the assessee''s capital for the purpose of the Super Profits Tax Act, 1963?"" The matter lies within a very narrow compass

and it concerns the question as to what constitutes ""reserve"" as contemplated by Paragraph 1 of Schedule II of the Super Profits Tax Act, 1963

(hereinafter called ""the Act"").

The assessee is a public limited company registered under the Companies Act and is running a composite spinning and weaving mills at Mettur

Dam, Salem District. Before the Income Tax Officer, certain amounts under various heads had been claimed as reserve for the purpose of

computation of capital besides the opening share capital of Rs. 60,00,000, The Income Tax Officer was of the view that only general reserve raw

material fluctuation and fixed assets replacement reserve were in the nature of reserves to qualify as reserves for inclusion in the capital. According

to him, credit balance in profit and loss account, advertisement reserve, reserve for bonus, reserve for tax, reserve for gratuity and proposed

dividends would not fall under ""reserve"". On appeal preferred by the asses-see, the Appellate Assistant Commissioner held against the assessee

with regard to reserve for proposed dividends, reserve for taxation, reserve for gratuity and reserve for bonus. On further appeal to the Tribunal,

the Tribunal also held that the three amounts involved in the question, namely, the provision for tax liability of Rs. 15,50,000, the provision for

payment of gratuity to employees of Rs. 1,36,060 and provision for payment of bonus to employees of Rs. 5,69,000, cannot be said to be

reserves within the scope of Paragraph 1 of Schedule II of the Act. It is the correctness of this conclusion that is challenged in the present reference

in the form of the question extracted above.

Consequently, we have to consider the three provisions, namely, provision for tax liability in the sum of Rs. 15,50,000, the provision for

payment of gratuity in the sum of Rs. 1,36,060 and the provision for payment of bonus to the employees in the sum of Rs. 5,69,000 separately. As

far as the. first amount being the provision for payment of tax liability is concerned, this court has already held that the said provision will constitute

only ""provision"" and will not constitute ""reserve"". The Supreme Court in Metal Box Company of India Ltd. Vs. Their Workmen, has held that an

amount set aside out of the profit and other surplus not designed to meet a liability, contingency, commitment or diminution in value of assets

known to exist at the date of the balance-sheet is a reserve but an amount set aside out of the profits and other surpluses to provide for any known

liability so that the amount cannot be determined with substantial accuracy is a provision. The Supreme Court in Kesoram Industries and Cotton

Mills Ltd. Vs. Commissioner of Wealth Tax, (Central) Calcutta, , has held that liability to pay Income Tax was a present liability though the tax

became payable after it was quantified in accordance with the ascertainable data. Consequently, the provision made by the assessee for tax liability

in the sum of Rs. 15,50,000 cannot be said to be reserve at all and can only be a provision and, therefore, the Tribunal rightly held that the same

cannot be included in the capital. The learned counsel for the assessee sought to contend, relying upon a decision of this court in Nagammal Mills

Ltd. Vs. Commissioner of Income Tax, , that excess provision which was available to the company for its use has to be treated as a reserve. No

case was put forward by the assessee before any of the authorities that the sum of Rs. 15,50,000 set apart towards, tax liability consisted of any

amount by way of excess provision, Consequently, such an argument or case cannot be said to arise out of the order of the Tribunal.

As far as the provision for payment of gratuity to employees in a sum of Rs. 1,36,060 is concerned, it is clear from the order of the Tribunal that

the said sum was not set apart in any one particular year. It would appear that the assessee was setting apart a lump sum of Rs. 54,000 towards

the payment of gratuity to its employees year after year and, after actual payment, the amount stood to the credit of this account as on April 1,

1962, was Rs. 1,36,060.41. There is absolutely no material before the Tribunal to show that the Jump sum provision made year after year was on

the basis of any ascertainable amount due to the employees in a particular year. Therefore, it will merely mean a provision made to meet a

contingent liability. If it is a provision made to meet a contingent liability, then the result will be that the amount cannot be said to be a ""provision

but it could only be a reserve. The Supreme Court in Standard Mills Co. Ltd. Vs. Commissioner of Wealth-tax, Bombay City, had actually to deal

with the provision made for gratuity payable to its employees. In that case, on the basis of an award, gratuity was payable to the employees when

the employment was determined by death, incapacity, retirement or resignation. The Supreme Court observed :

There is little doubt on the plain terms of the awards that the liability to pay gratuity to the employees of the appellant-company on determination

of employment is a mere contingent liability which arises only when the employment of the employee is determined by death, incapacity, retirement

or resignation.

After extracting the terms of the awards, the Supreme Court proceeded to point out (page 474):

The right to obtain gratuity under the awards arises only when there is determination of employment and not before, The liability does not exist in

presenti ; it is contingent upon the determination of employment.

It is clear that the amount set apart to meet such a contingent liability cannot, be said to be a ""provision"" but can only be said to be a ""reserve"".

This court in Commissioner of Income Tax Vs. Indian Steel Rolling Mills Ltd., has taken the same view. Therefore, we hold that, as far as this sum

of Rs. 1,36,060 is concerned, this constituted a ""reserve"" and should be taken into account in the computation of the capital as provided for in

Paragraph 1 of the Second Schedule to the Act.

Then remains the last question regarding the provision for payment of Rs. 5,69,000 to the employees of the assessee as bonus. The Tribunal has

stated in paragraph 6 of its order that the said amount had been debited under the caption ""expenses"" to the profit and loss account and its nature

was apparent from the following extract from the report of the directors to the shareholders :

Regarding bonus provision for the year 1961-62, the shareholders will observe that a sum of Rs. 5,69,000 has been provided in the accounts.

This amount has been computed by the bonus formula agreed to between the union representative and the management in an agreement which was

effective until the end of March, 1962.

Thus, it is clear that the said amount did not represent any amount to meet an unforeseen, contingent or unexpected liability but was set apart for

the purpose of meeting the known present liability of payments of bonus to the employees according to the bonus formula in terms of the

agreement in force between the employer and its employees. Consequently, the Tribunal rightly held that this amount would not constitute ""reserve

within the Explanation of Paragraph 1 of Schedule II to the Act. The result is, we answer the question referred to us in the affirmative so far as the

two amounts of Rs. 15,50,000 and Rs. 5,69,000 are concerned and against the assessee and in the negative in respect of Rs. 1,36,060 and

against the revenue. There will be no order as to costs.