@JUDGMENTTAG-ORDER
Lakshmanan, C.J.@mdashHeard learned counsel for the petitioner.
(2). These reference applications have been filed u/s 256(2) of the Income Tax Act against the orders dated, 29.11.94 passed by the Income Tax Appellate Tribunal, Jaipur, in RA No. 202/JP/1994 arising out of STA No. 4/JP/1990 relating to the assessment year 1986-87 and RA No. 203/JP/1994 arising out of STA No. 5/JP/1990 relating to the assessment year 1987-88. While making the assessment u/s 6(2) of the Sur Tax Act, 1964, the Assessing Officer held that the provision for depreciation on investments, provision for bad and doubtful debts, provision for foreign exchange losses, provision for development fund for bank''s provision, are not ''reserves'' for the purposes of compulation of capital employed under Companies (profits) Surtax Act, 1964.
(3). Being aggrieved of the assessment order, the assessee filed appeal before the Commissioner of Income Tax (Appeals) who dismissed the appeal of the assessee (Annex. 2). There-after, the assessee filed further appeal before the Income Tax Appellate Tribunal. Jaipur, who by its order dated, 31.1.94 allowed the appeal of the assessee.
(4). Being aggrieved by the order of the Tribunal, the Commissioner of Income Tax submitted a reference application u/S 256(1) of the Income Tax Act, 1961, requesting the Tribunal to refer the following question of law for the opinion of this Court:
"Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in treating the provisions for depreciation on investments, bad and doubtful debts, provision for foreign exchange losses provision for development fund for bank premises as ''reserve'' for computation of capital employed under the Companies (Fronts) Sur Tax Act, 1964?"
(5). The Tribunal vide order dated, 29.11.94 rejected the reference application under Sec. 256(1) of the Income Tax Act, 1961 (Annex. 4). According to Mr. R.K. Agrawal, the question mentioned in paragraph supra is a pure question of law and ought to have been referred to this Court for its decision.
(6). We have considered the submissions made by the learned counsel for the applicant. We have also perused the order passed by the Income Tax Appellate Tribunal. Before the Tribunal, it was argued by the counsel for the assessee that the lower authorities had gone merely by the words "reserve" and "provision" without understanding their implications under the Act. The counsel referred to Schedule II Clause (iii) and Schedule (VI) of the Companies Act and also referred to the decisions in the cases of Vazir Sultan Tobacco Co. Ltd. C1T (1), CIT V. Laxmi Sugar & Oil Mills Ltd. (2); CIT V. Cymaid India Ltd., (3); and CIT V. Kirloskar Cummins Ltd. (4).
(7). In the instant case, it was explained that the depreciation on investments was in respect of the securities kept by the assessee bank and which are treated as stock-in-trade. It was also submitted that till the assessment year 1977-78, the bank had been valuing these securities at cost and if there were any profits on sales, they were shown as profits and income. From the assessment year 1978-79, the valuation system was changed, which was accepted by the Income Tax Department, to the effect that from that year onwards, the securities were being valued at cost or market price which ever is lower. Therefore, for the assessment 1976-77 provision for possible fall in the value of securities was made though there was no known liability and hence, this provision was, in fact, in the nature of reserve. It was also submitted that this view is supported by the decision in the cases of CIT vs. British India Corpn. (P) Ltd. (5), and CIT vs. English Electric Co. of India Ltd. (6).The Tribunal on consideration of the material placed before it and the authorities cited, came to the conclusion that the amount shown and claimed by the assessee would indicate that they are very exact amounts which are not merely for some contingent liability but which are against some ascertained liabilities arid that is why many of the figures are not in found figures to give exact amount. The Tribunal agreed with the arguments advanced by the counsel that since the calculation of these provisions is on some percentage basis, it cannot be said that they are against some ascertained liability. The Tribunal has also agreed that in view of the case law cited by the learned counsel for the assessee and also the principle distinguishing between provision and reserve, the items mentioned by the assessee for the year under appeal have to be treated as reserves for the purposes of Companies (Fronts) Sur Tax Act, 1964. Although, the word "provision" has been mentioned against them, yet, they should be considered as reserves for computation of capital under the Act. Accordingly, the Tribunal allowed the appeal filed by the assessee. The Tribunal has also held that they are unable to agree with the arguments given by the learned counsel for the Revenue and distinguished the judgments cited by him. Finally, the Tribunal held that the gross dividends received by the Bank and not merely dividend income as computed after giving deductions u/S 80M of the Income Tax Act should be taken into consideration for computation of chargeable profits under the Companies (Profits) Surtax Act, 1961. Accordingly, all the six appeals filed by the assessee were allowed.
(8). We have also perused the order passed in the reference application. In our opinion, the issue for reference raised in this reference application is well settled by the Apex Court in the case of Vazir Sultan Tobacco Co. Ltd. vs. Commissioner of Income Tax, A.P. (supra). It was also observed thai the appeals from which these appeals have arisen were also decided in the principles laid down by the Supreme Courl. In the case cited above, the Supreme Court has pointed out the broad distinction between the words "provision" and "reserve". It is useful to reproduce the relevant paragraph hereunder:
"The expression "reserve" has not been defined in the Super Profits Tax Act. 1963, or the C. (P.) S.T. Act, 1961. The dictionaries do not make any distinction between the two concepts "reserve" and "provision" white giving their primary meanings, whereas in the context of those Acts a clear distinction between the two is implied. Though the expression "reserve" is not defined, since it occurs in taxing statutes applicable to companies only and to no other assessable entities, the expression has to be understood in its popular sense, that is to say, the sense or meaning that is attributed to it by men of business, trade and commerce and by persons interested in or dealing with companies. Therefore, the meanings attached to the words "reserves" and "provisions" in the Companies Act, 1956, dealing with the preparation of the balance-sheet and the profit and loss account would govern their construction for the purposes of the two enactments. The broad distinction between the two is that whereas a "provision" is a charge against the profits to be taken into account against gross receipts in the profit and loss account, a "reserve" is an appropriation of profits, the asset or assets by which it is represented being retained to form part of the capital employed in the business."
(9). The Supreme Court, in the above case, has also referred to the various decisions of the Supreme Court and rendered the opinion that the amount set apart for the payment of any proposed dividend on the basis of the recommendation of the directors cannot constitute reserve for the purpose of computation of the capital of the Company.
(10). In view of the law laid down by the Supreme Court in the above case, no reference lies to this Court and hence, both the Tax Reference Applications are rejected.
