COMMISSIONER OF INCOME TAX Vs. KARAM CHAND THAPAR

JUDGEMENT

(1.) The assessee is a limited company and the instant reference under Section 256(1) of the I.T. Act, 1961, read with Section 18 of the C. (P.) S.T. Act, 1964, relates to the assessment years 1964-65, 1965-66 and 1966-67. For these assessment years, the assessee-company claimed before the ITO that in the computation of capital under Schedule II to the C. (P.) S.T. Act, 1964, the reserves for depreciation on investments amounting to Rs. 3 lakhs should be included in the capital computation for all the three years. Similarly, for the assessment years 1965-66 and 1966-67, the assessee-company claimed that reserves for doubtful debts should be included in the capital computation. The ITO, however, did not accept this claim. Being aggrieved, the assessee preferred an appeal before the AAC. The AAC dealing with the said contention observed, inter alia, as follows: " The issue raised is the Income-tax Officer's not including the undermentioned reserves in the computation of the capital basis for working out the standard deduction for these three assessments :-- <FRM>JUDGEMENT_175_ITR131_1981Html1.htm</FRM>

(2.) The reserve for depreciation on investments was not included in the computation of the capital base on the ground that it represented a kind of a provision and did not constitute a reserve. The word 'reserve' has been interpreted to mean 'something specifically kept apart for future use or for specific action'. The word 'reserve' thus invariably bears the sense of a reservation of finance for long term use when employed in the context of accounting. If the reserve for depreciation is judged by this important criterion, it has to be accepted to be a reserve even if it is created with the object of preserving a company's position against future losses occurring as a result of depreciation in the value of the investment it owns.

(3.) However, there is another factor which strengthens the appellant's case in support of the inclusion of this reserve in the computation of its capital base. On 30-6-1963 and 30-6-64, the dates on which the appellant's previous years relevant to the assessment years 1964-65 and 1965-66 ended, the market value of the investments was substantially more than their book value not taking into account the unquoted shares. The position which can be easily ascertained from the appellant's printed account in respect of these two years was as follows :--