RAM MILLS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) TWO questions, the first one at the instance of the assessee and the second one at the instance of the Department, that have been referred to us for our opinion are :

(2.) THE questions relate to the assessment made under the Super Profits Tax Act, 1963, in respect of the asst. year 1963 64 for which the corresponding previous year was the calendar year ended on 31st Dec., 1962. The assessee which is a public limited company claimed in the assessment proceeding under the Super Profits Tax Act, 1963, two items as being includible in the computation of its capital under the Second Schedule of the Act, viz., (i) provision for taxation : Rs. 22,75,000, and (ii) proposed dividend : Rs. 11,83,050. In regard to the first item, being provision for taxes in the sum of Rs. 22,75,000, the ITO held that it could not be said to be a "reserve" within the meaning of r. 1 of the Second Schedule to the Super Profits Tax Act, 1963, and in that behalf reliance was placed by him upon the decision of the Supreme Court in the case of Kesoram Industries & Cotton Mills Ltd. vs. CWT (1966) 59 ITR 767 (SC). He, accordingly, excluded the item from the capital computation. Similarly, in regard to the other item of proposed dividends in the sum of Rs. 11,83,050, he excluded the same from the capital computation on the ground that it represented an amount which had been set aside to meet a known and immediate liability to be discharged towards the shareholders and it could not, therefore, be a "reserve". Feeling aggrieved by this order of the ITO passed on 31st March, 1967, the assessee preferred an appeal to the AAC, who upheld the decision of the ITO as regards both the items by his order dt. 27th Sept., 1967. He took the view that, in the light of the decision of the Supreme Court in Kesoram Industries & Cotton Mills Ltd.'s case (1966) 59 ITR 767 (SC), the provision made for taxation liabilities was a "debt" as at the end of the accounting year and, therefore, at the crucial date it would be a provision and not a reserve. As regards the item of proposed dividend he took the view that it was an amount of provision for an apprehended and impending liability to be discharged towards the shareholders and, in view of the definition given in the Companies Act of the expressions "provision" and "reserves", he confirmed the exclusion of the said item from capital computation. The matter was then carried by the assessee in second appeal to the Tribunal. The Tribunal upheld the decision of the lower authorities in regard to the exclusion of the provision for taxation but reversed their decision as regards the item of proposed dividends (Rs. 11,83,050) and while reversing the decision of the lower authorities as regards the item of proposed dividends the Tribunal observed thus :

(3.) UNDER S. 4 of the Act, there shall be charged on every company for every assessment year commencing on and from 1st April, 1963, a tax, called the super profits tax, in respect of so much of its "chargeable profits" of the previous year as exceed the "standard deduction", at the rate or rates specified in the Third Schedule. Sec. 2(5) defines the expression "chargeable profits" to mean the total income of an assessee computed under the IT Act, 1961, for any previous year and adjusted in accordance with the provisions of the First Schedule, while S. 2(9) defines the expression "standard deduction" to mean an amount equal to six per cent of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of fifty thousand rupees, whichever is greater. In order to determine "standard deduction" it becomes necessary to compute the capital of the company in accordance with the rules laid down in the Second Schedule and r. 1 is relevant for our purposes, the material portion whereof runs as follows :