Law:

Section:

Rule 1(iii) of the second schedule to the super profits tax act, 1963- Capital-Computation of-Reserve-Whether provision for taxation and unappropriated profits not transferred to reserve account could; be treated as reserve for purpose of? rule 1 of the second schedule to the act-Held, no Facts The assessee-company showed, in its balance sheet as on 31-12-1961, Rs. 3,35,914 under the head "Provision" as 'provision for taxation less advance payments under provisional assessments' and Rs. 11,41,689 under the head "Reserves and Surplus" as 'manufacturing, trading and profit and loss account balance at credit after providing for the proposed dividend for the year ended 31-12-1961'. For the assessment year 1963-64, the assessee-company claimed that the two amounts should be treated as reserves under rule 1 of the Second Schedule to the Act. The ITO held that the said amounts did not represent reserves inasmuch as one of them was specifically earmarked as a provision to meet a particular liability and the other represented unappropriated profits not transferred to the reserve account. The AAC held that Rs. 3,35,914 was a provision against a known liability and Rs. 11,41,689 was undistributed profits without any allocation or appropriation. The assessee-company contended before the Tribunal that as the assessee did not file any return at the relevant time and no tax was determined on 1-1-1962, the said sum of Rs. 3,35,914 could not be a provision against any accrued liability but was a free reserve includible in the capital base of the assessee-company for computation of super profits tax. The assessee-company further contended that Rs. 11,41,689 were stated to have been set apart by the directors of the assessee-company to be carried over to the next accounting year and, therefore, the said sum amounted to a reserve. The Tribunal held that the assessee-company treated Rs. 3,35,914 in its books as a provision for tax liability calculated on actual book profits shown in its own account. This liability was to be discharged in respect of the said accounting year and as such, the item was a provision and not a reserve. The Tribunal further held that the unappropriated…

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