Law: Income Tax Act, 1922

Section:

(a) Income-tax---Company---Surtax---Computation of capital---Difference between reserve and provision---Debenture redemption reserve---Finding that amount set apart was less than actual liability of company---Amount was not a reserve and was not includible in capital---Indian Companies (Profits) Surtax Act. 1964, Sched.II---Indian Companies Act, 1956, Sched. VI, Part III. (b) Income-tax--- ----Company---Super profits tax---Computation of capital---Amount appropriated to gratuity reserve is a provision---Not includible in capital--¬Indian Super Profits Tax Act, 1963, Sched.II---[CIT v. Peico Etectronics and Electricals (1987) 166 ITR 299 (Cal.) and CIT v. Modi Industries Ltd. (No.2) (1992) 197 ITR 655 (Delhi) overruled]. . The expressions "provision" and "reserve" have not been defined under the Companies (Profits) Surtax Act, 1964. Therefore, the two concepts "reserve" and "provision" which are fairly well known in commercial accountancy and which are used under the Companies Act dealing with preparation of balance-sheet and profit and loss accounts, have to be gathered from the meanings attached to them by the Companies Act, itself "Provision" and "reserve" have been defined in Part III of Schedule V I to the Companies Act, 1956. The definition clearly indicates that if an amount i: retained by way of providing for any known liability that amount shall not N, treated as reserve. Clause 7(2)(b) makes it clear that only an amount which is in excess of what is reasonably necessary for meeting a known liability shall be treated as reserve and not as provision. The directors will have to form an opinion as to what is reasonably necessary for meeting the known liability of a company. The opinion of an accountant or an auditor or a lawyer is quite immaterial for this purpose. The liability to repay arises the moment money is borrowed. The amount borrowed may be repayable immediately or in future. The date of repayment of loan may be deferred by agreement but the obligation or the liability to repay will not cease on that account. By issuing debentures a company takes a loan against the security of its assets. This loan may not be repayable in the year of account. But…

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