Law: Income Tax Act, 1922

Section: 10

Schedule II to the Super profits tax Act, 1963 - Capital - Computation of - Assessment year 1963-64 - Assessee claimed provision for taxation and proposed dividend as reserve in computation of its capital - Whether so much of provision for taxation, as related to discharge of tax liability which had already arisen, whether it had been quantified or not under relevant statute, could not be considered as reserve - Held, yes - Whether since amount shown as proposed dividends had been earmarked for payment of dividend by directors and recommendation in respect of dividend was approved by shareholders, amount being set apart for specific purpose could not be treated as reserve - Held, yes FACTS In the assessment proceedings under the Act for the relevant assessment year, the assessee claimed the two items as reserves in the computation of its capital under rule 1 of the Second Schedule : 1. Provision for taxation as on the first day of previous year and 2. Proposed dividends. The ITO rejected the claim of the assessee. An appeal by the assessee before the AAC and a second appeal before the Tribunal did not succeed. On reference : HELD The capital of the company includes its paid up share capital and its reserves. One kind of reserve is specifically mentioned in rule 1 of Schedule II, and that is the development rebate reserve created under proviso (b ) to section 10(2)(vib) of the Indian Income-tax Act, 1922, or section 34(3) of the Income-tax Act, 1961. Rule 1 also speaks of 'other reserves'. It is now well-settled that a reserve is an amount set apart or appropriated for some future use. The distinction between a reserve and a provision is well-known in commercial accountancy. Provisions made against anticipated losses and contingencies are charges against profits and are, therefore, taken into account against gross receipts in the profit and loss account and the balance-sheet. Reserves, on the other hand, are appropriations of profits, the assets by which they are represented being retained to form part of the capital employed in the business. To constitute a provision, it must be in respect of a known liability, of which the amount cannot be determined with…

Deprecated: trim(): Passing null to parameter #1 ($string) of type string is deprecated in /home/digixyei/sldsystempk.com/view/master-layout/view_case.php on line 492