COMMISSIONER OF INCOME TAX, KANPUR vs. SARAN ENGINEERING CO. LTD.

CIVIL APPEAL No. 1599/1974Supreme Court[1986] 3 S.C.R. 39831 July 1986Bench: 2 JudgesAuthor: R.S. PATHAK, SABYASACHI MUKHERJI B10 pages
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What were the facts?

The appeals before the Supreme Court concerned the computation of capital for the purpose of the Super Profits Tax Act, 1963, and the Companies (Profits) Surtax Act, 1964. In one case (CA 1546/1974), British India Corporation Ltd. claimed various reserves as "standard deduction." In another (CA 1599/1974), Saran Engineering Company Ltd. made similar claims. The Income Tax Officer disallowed these claims, leading to appeals. The Tribunal allowed the claims in full for Saran Engineering, but the High Court partially disallowed the claim for forfeited moneys reserve and restricted the quantum for capital reserve. In a third matter (SLP 4815A/1977), the High Court rejected the Revenue's request for a statement of case on several reserves claimed by an assessee, except for Reserve for Special Survey. The Supreme Court considered these matters together.

What did the Supreme Court hold?

The Supreme Court held that, except for Obsolescence Reserve and Forfeited Moneys Reserve, all other reserves claimed in the first issue (Capital Reserve, Stocks and Stores Reserve, Bad and Doubtful Debts Reserves, Loans and Insurance Reserve, Investment Reserve, and Rehabilitation Reserve) are to be included in the computation of capital under the Super Profits Tax Act, 1963. For the second issue, the Court reiterated the principle that a fund created for a liability not yet arisen or fallen due, but only a provision for a potential future liability, constitutes an "other reserve" includible in the capital computation under the Companies (Profits) Surtax Act, 1964. The Court found that Gratuity Reserve, Reserve for Contingencies, Fleet Replacement Reserve, Reserve for exempted profits under section 84, Reserve for Investment Depreciation, and Dividend Equalisation Reserve were includible. The Reserve for Special Survey was also found to be includible. The High Court's rejection of the Revenue's request for a statement of case on most of these items was upheld, except for the Reserve for Special Survey where the High Court had allowed the Revenue's request. The ratio is that reserves for future, uncertain liabilities, not for present ascertained liabilities, are includible in capital computation.

What were the issues?

1. Whether, under the Second Schedule to the Super Profits Tax Act, 1963, Capital Reserve, Stocks and Stores Reserves, Bad and Doubtful Debts Reserves, Obsolescence Reserve, Loans and Insurance Reserve, Investment Reserve, and Forfeited Moneys Reserves are to be included in the computation of capital. The Assessee argued these should be included as "standard deduction." The Revenue contended they should not be. 2. Whether, under Rule (1) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, Gratuity Reserve, Reserve for Special Survey, Reserve for Contingencies, Fleet Replacement Reserve, Reserve for exempted profits under section 84 of the Income Tax Act, Reserve for Investment Depreciation, and Dividend Equalisation Reserve are includible in the computation of capital. The Assessee argued for their inclusion. The Revenue's arguments are not explicitly detailed for all these items, but their challenge implies they should not be included.

Which sections of the Income-tax Act were involved?

Section 2(a),Section 4,Section 84,Section 256(2)

AI-generated summary — verify with the full judgment below

A B c D E F G H COMMISSIONER OF INCOME TAX, KANPUR v. SARAN ENGINEERING CO. LTD. JULY 31, 1986 [R.S. PATHAK AND SABYASACHI MUKHARJI, JJ.J Computation of capital-Super Profits Tax Act, 1963, Second Schedule-Whether capital reserve, stock and stores Reserves, Bad and . doubtful debts reserves, Rehabilitation Reserve, Obsolescence reserve, Loans and Insurance reserve, Investment reserve and Forfeited moneys reserves are to be included in the computation of capital reserve.

Company (Profits) Surtax Act, 1964, Rule (/) of the Second Schedule-Computation of the company law made-Whether the Gratuity Reserve, Reserve for Special Survey, Reserve for contingen- cies, Fleet Replacement Reserve, Reserve for exempted profits under section 84 of the Income Tax, Reserve for investment depreciation and Dividend Equalisation Reserve etc. are includible.

The assessee, in CA 1546 of 1974, M/s British India Corporation Ltd. claimed capital Reserve, Stocks and Stores Reserves, Bad and doubtful debts Reserves, Obsolescence reserve, Loans and Insurance reserve, investment reserve and forfeited moneys reserves as ''standard deduction" as defined in section 2(a) of the Super Prof

The order continues below.

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