S T P LTD Vs. SURTAX OFFICER

JUDGEMENT

(1.) These two appeals, one by the assessee and the other by the Department, are centered on the same issue. They were, therefore, heard together and are disposed of a by a common order.

(2.) The issue involved in this case relates to the computation of capital under Schedule II of Companies (Profits) Surtax Act, 1964. The issue arises this way. There was one M/s. Lodna Colliery Co. (1922) Ltd. The said company, which was one of the companies belonging to the assessees group, used to supply coal to the assessee. The assessee owned an aggregate sum of Rs. 34,87,647 to the said colliery company towards coal supplied. The said colliery company was nationalised some time in 1972-73. In its accounts relating to the year ending on 30-6-1979 the assessee, it 1972-73. In its accounts relating to the year ending on 30-6-1979, the assessee, it would appear, unilaterally wrote back this amount to the P. & L. account. In the I. T. proceedings, the assessees case was that, there being no cessation of the liability in question, the unilateral writing off the said sum to the P. & L. account did not result in any taxable income. It would also appear that, in its accounts relating to the said year, the assessee created what was styled as Contingency Reserve in a sum of Rs. 35,76,704. The said amount was inclusive of the sum of Rs. 34,87,647 which the assessee company owed to the colliery company. (As for the balance of amount of Rs. 89,057, to a specific query in this regard from the Bench, the assessees counsel stated that it related to certain order debts owed by the assessee).

(3.) For the purpose of computing capital under Schedule II of the Act the assessee treated the said sum of Rs. 35,76,704 as a reserve. On his part, the ITO, observing that the said reserve had been created to cover the debt of Rs. 34,87,647 owed by the assessee to the colliery company, held that the liability, even on the assessees own showing, not having ceased, the so called contingency reserve is nothing but a provision. In this view of the matter, therefore, the ITO excluded the said sum of Rs. 35,76,704 from the capital base of the assessee company, and made a surtax assessment of the assessee for the assessment year 1981-82 on that basis.