United Nilgiri Tea Estates Co. Ltd. vs Commissioner of Income Tax

V. Ramaswamy, J.—For the assessment year 1962-63 corresponding to the previous year ended March 31, 1962, the assessee which is a

public limited company claimed deduction of the following reserves as on March 31, 1972, for determining the capital base for the purpose of the

Super Profits Tax Act, 1963 :

Rs.

Taxation 12,15,000

Proposed dividends 3,18,026

Amount in credit of the depreciation reserve account in excess of the amount 1,31,000

allowed for tax purposes

The Super Profits Tax Officer by his order dated January 31, 1964, refused to allow the claim as in his view the provision for taxation and

proposed dividends were not reserves within the meaning of the Act and the question of allowing the excess depreciation did not arise as it was

transferred to the general reserve only after 31st March, 1963.

On appeal, the Appellate Assistant Commissioner held that all the above amounts were allowable as the conditions laid down in the Second

Schedule to the Super Profits Tax Act, 1963, were satisfied. On appeal by the department, the Tribunal held that the provision made for payment

of taxes and proposed dividends cannot be treated as reserves for the purpose of computing the capital base. For that view the Tribunal relied on

decisions of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. Vs. Commissioner of Wealth Tax, (Central) Calcutta, and

Commissioner of Income Tax, Bombay City Vs. The Century Spinning and Manufacturing Co. Ltd., Regarding the excess depreciation the

Tribunal held that as the accounts merely showed certain amounts having been adjusted towards depreciation, the same does not satisfy the

requirement of Rule 2(1) of Schedule 2 of the Super Profits Tax Act. At the instance of the assessee the following question has been referred to us

for our opinion :

Whether, on the facts and in the circumstances of the case, the provision for taxation, proposed dividends and excess depreciation of Rs.

1,31,600 adjusted to general reserve constituted a reserve within the meaning of the Second Schedule to the Super Profits Tax Act ?

The question involved in this case appears to be concluded by a decision of this court in Nagammal Mills Ltd. Vs. Commissioner of Income

Tax, . In that case we have specifically dealt with the question as to whether the provision for taxation, for dividend and for development rebate

could be treated as reserves within the meaning of Rule 1 of Schedule 2 to the Super Profits Tax Act, 1963. After considering the relevant

provisions of the statute and the decided cases on the point, we have held as regards the provision for taxation that the amount paid out by the

company for discharging the actual tax liability cannot be taken to be an amount set apart or appropriated for a specific purpose or for future use

of the company and it is only a provision made for discharging a specific liability, and hence, it cannot be treated as a reserve. But, the excess

provision which was available to the company for its use has to be treated as a reserve.

In this case, though a sum of Rs. ''12,16,000 has been set apart as provision for taxation, the entire amount cannot be taken to be available to

the company for its use and it is only the excess over the actual liability for Income Tax for the assessment year that can be taken to be a reserve. It

has not been ascertained as to what is the actual liability for Income Tax during the assessment year and the authorities below including the Tribunal

have not found out the excess provision made for taxation which alone can be treated as a reserve. This question will, therefore, be considered by

the Tribunal at the time of passing the consequential order.

As regards the provision for dividend, it has been held in the said earlier judgment of this court in Nagammal Mills Ltd. v. Commissioner of

Income Tax that the amount set apart as a provision for dividend is for payment towards a specific liability and it cannot, therefore, be said to be a

reserve for future use of the company. Following the said decision, we (sic) to hold that a sum of Rs, 3,18,026 set apart as proposed dividend

cannot be treated as a reserve for future use of the company.

As regards the amount in credit of the depreciation reserve account in excess of the amount allowed for tax purpose, it is seen that it is part of

the amount set apart as provision for depreciation. Though a provision for depreciation was not actually considered in Nagammal Mills Ltd. v.

Commissioner of Income Tax, the reasoning given there in relation to the excess development rebate will equally apply here. Dealing with the

provision for development rebate it has been held, that, as it has been utilised by the company for its business purpose, it should be treated as a

reserve within the meaning of Rule 1 of Schedule 2 of the Act Following that view, we have to hold that the sum of Rs. 1,31,000 which is found to

be excess of the amount of depreciation allowed for tax purposes has to be treated as a reserve for the purpose of the Super Profits Tax Act,

1963. The question referred is, therefore, answered accordingly. There will be no order as to costs.