COMMISSIONER OF INCOME TAX Vs. HEMALATHA TEXTILES LIMITED

JUDGEMENT

(1.) IN this reference which arises under the provisions of the Companies (Profits) Surtax Act, 1964, the following question of law has been referred to this court under section 18 of the Companies (Profits) Surtax Act, 1964, read with section 256(1) of the INcome-tax Act, 1961:

(2.) THE assessee has been assessed to surtax for the assessment year 1975- 76. THE assessee took up the stand that the "plant replacement reserve" should be treated as a free reserve for there purpose of inclusion in the capital computed under the Second Schedule to the Act. While completing the surtax assessment for the said assessment year, the Income-tax Officer held that the amount standing to the "plant replacement reserve" is not a reserve and should not be taken as a capital for the purpose of levy of surtax, as it is provided to meet a specific liability. On appeal, the Commissioner of Income-tax (Appeals), following the decision of the Appellate Tribunal in the case of Gordon Woodroffe and Co. Ltd. (I. T. A. Nos. 14 and 15 (Mds)/1981- 82 dated January 29, 1982,) for the assessment years 1976-77 and 1977- 78, held that the plant replacement reserve should be taken as capital for levy of surtax. In the appeal filed by the Department, this finding has been confirmed by the Appellate Tribunal. It is against this order of the Tribunal that the Revenue sought for and obtained an order of reference of the question of law referred to supra for an authoritative pronouncement on the question referred.

(3.) THUS, the Supreme Court has laid down that only when the amount set apart is towards a specific liability in respect of plant replacement, it could be regarded as a provision and when the amount set apart is for future contingency that might arise for replacement of plant, then it could be classified only as a reserve. In this context, the finding of the Commissioner of Income-tax (Appeals) in this case will be relevant as he had found that the reserve was created in the profit and loss appropriation account and subsequently it was transferred to a general reserve. This finding only shows that this amount was not earmarked for purchase of any specific machinery in respect of which a liability has already acquired. This is only created for a contingency and hence it could not be classified as a provision.