COMMISSIONER OF INCOME TAX (CENTRAL-II), CALCUTTA vs. M/S. DUNCAN BROTHERS AND CO. LTD., CALCUTTA

CIVIL APPEAL No. 595/1978Supreme Court[1996] 2 S.C.R. 49213 February 1996Bench: 3 JudgesAuthor: J.S. VERMA, S.P. BHARUCHA, SUJATA V. MANOHAR COMMISSIONER OF11 pages
AI SummaryAllowed

What were the facts?

For assessment year 1963-64, under the Super Profits Tax Act, 1963, the assessee company claimed that a provision for taxation of Rs. 16,48,888 should be treated as part of its capital or as a deduction from the cost of investments. For assessment year 1964-65, under the Companies (Profits) Surtax Act, 1964, a similar claim was made for a provision for taxation of Rs. 17,52,920. The Income-Tax Officer disallowed the claim. The Appellate Assistant Commissioner held that the provision for taxation was not a reserve but should be deducted from the cost of investments. The Tribunal held that the provision for taxation was neither a reserve, nor a fund, nor a surplus, but a 'perfected debt', and thus not eligible for deduction. The High Court answered the question on whether the provision was a reserve in favour of the Revenue but answered the questions regarding deduction from investments in favour of the assessee. The Revenue appealed to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court allowed the Revenue's appeal. The Court held that the Second Schedule to both the Super Profits Tax Act, 1963 and the Companies (Profits) Surtax Act, 1964, concerning the computation of a company's capital, must be interpreted in the context of the company's balance sheet and profit and loss account, read in light of the Companies Act and accounting parlance. The Court found that there was no systematic accumulation of cash or separation of assets to meet future tax liabilities; it was merely an accounting entry for an exact sum earmarked for payment of tax liability arising at the end of the current accounting year. Such a provision could not be considered a 'fund'. The Court also distinguished Circular No. I.P. (XV-5) of 1968 from the Central Board of Revenue, noting that it dealt with 'reserve for unexpired risks' in general insurance companies, which represented money available for unexpected claims extending beyond the accounting year, unlike the provision for taxation which was for a specific, ascertained liability arising within the current year. Therefore, the provision for taxation was not a fund etymologically or in accounting parlance. The Court answered the questions regarding the deduction of 'Provision for Taxation' from the cost of investments in favour of the Revenue. The appeal was accordingly allowed.

What were the issues?

1. Whether the Tribunal was right in holding that 'provision for taxation' was not a reserve to form part of the capital (under the Super Profits Tax Act, 1963 and Companies (Profits) Surtax Act, 1964)? 2. Whether the company was entitled to the benefit of deduction of the amount of 'Provision for Taxation' from its cost of investments in respect of assessment years 1963-64 and 1964-65 (under Clause (ii) of Rule 1 of the Second Schedule of the Super Profits tax Act, 1963 and Rule 2(ii) of the Second Schedule of the Companies (Profits) Surtax Act, 1964)? Assessee's Contentions: The assessee contended that the amount of capital deducted in the computation of its capital should be reduced by the amount of 'any fund, any surplus and any reserve' in terms of the relevant rules. Revenue's Contentions: The Revenue contended that the provision for taxation was not a reserve and could not be deducted from the cost of investments.

Which sections of the Income-tax Act were involved?

Section 256(1)

AI-generated summary — verify with the full judgment below

A COMMISSIONER OF INCOME TAX (CENTRAL-II), CALCUTIA v. MIS. DUNCAN BROTHERS AND CO. LTD., CALCUTTA FEBRUARY 13, 1996 B [J.S. VERMA, S.P. BHARUCHA AND SUJATA V. MANOHAR, JJ.] Super Profits Tax Act, 1963/Companies (Profits) Swtax Act, 1964 : Clause (ii) of Rule 1 of the Second Schedule/Rule 2(ii) of the Second C Schedule-Provision for taxation-Wliether could be deducted from the cost of excluded investments so as to augment the capital base-Held: No.

Circulars-Central Board of Revenue-Circular No. J.P. (XV- 5) of 1968 dated 23-1-1968-Applicability of D Words & Phrases : 'Fund'-Meaning of For the assessment year 1963-64, the assessee company claimed for the purposes of Super Profits tax Act, 1963 in the computation of its E capital, a provision for taxation made by it should be treated as a part of its capital or as a deduction from the cost of investment. For the assess- ment year 1964-65, the assessee made a similar claim in respect of a provision for taxation made by it. This claim was made under the provisions of the Companies (profits) Surtax Act, 1964. The Appellate p Assistant Commissioner of Income tax held that the provision for taxation cannot be cons

The order continues below.

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