Civil Appeal No 1613 NT of 1974 From the Judgment and Order dated 26th April 1973 of the Allahabad High Court in Misc
Case No 202 of 1971
BB Ahuja and Miss A Subhashini for the Appellant
PK Mukharjee and AK Sengupta for the Respondent
The Judgment of the Court was delivered by 216 PATHAK J
This appeal by special leave is directed against the judgment of the High Court of Allahabad pronouncing on the meaning of the expression reserves  in the Second Schedule to the 
For the assessment years 1961 62 and 1962 63 the assessee had debited an amount of Rs540000 and an amount of Rs276000 to its profit and loss accounts of the relevant previous years respectively
The amounts were debited on the ground that they represented the assessee s liability of the relevant years for the additional cane price payable to cane growers in terms of a price linking formula to be fixed by the Competent Authority under the Sugarcane Price Control Order 1955
Accordingly an item of Rs816000 being the sum of the two amounts was shown in the Balance Sheet of the assessee as on September 30 1962
The item was shown under the head Current liabilities and provisions
In assessment proceedings under the for the assessment year 1963 64 the Income tax Officer did not include the amount of Rs816000 in the capital computation of the assessee
Dismissing the assessee s appeal the Appellate Assistant Commissioner affirmed the view taken by the Income tax Officer
The Appellate Assistant Commissioner held that the amount did not qualify as a reserve  inasmuch as the assessee had itself shown it as a provision  in its Balance Sheet
On second appeal the Appellate Tribunal noted that the liability had not been allowed as a deduction on revenue account by the Income tax authorities and that the decision was accepted by the assessee
It also observed that in the subsequent accounting year ending September 1963 the assessee had credited its profits by the said amount by reversing the entries and further that the assessee had not made any such provision in the subsequent years
It was also not disputed that no such payment was ever actually made by the assessee
In the circumstances the Appellate Tribunal held that the liability for which the provision  was made was at the best unreal and imagined or the mere possibility of a liability
The Appellate Tribunal was unimpressed by the description of the item as a provision  by the assessee in its Balance Sheet
The Appellate Tribunal held that the amount represented a reserve  and should have been included in the capital computation of the assessee
At the instance of the Revenue the Appellate Tribunal referred the case to the High Court of Allahabad for its opinion on the following question 217 Whether on the facts and in the circumstances of the case the provision for additional cane price amounting to Rs816000 was rightly treated as a reserve  forming part of the assessee s capital for the purposes of assessment to Super Profits Tax for the year under consideration The High Court answered the question in the affirmative by its judgment dated April 26 1973
We are of opinion that the High Court is right
Section 4 of the levies super profits tax on every company in respect of so much of its chargeable profits of the previous year as exceed the standard deduction
The expression standard deduction  is defined by sub section
9 of section 2 of the Act to mean an amount equal to six per cent of the capital of the company as computed in accordance with the provisions of the Second Schedule or an amount of fifty thousand rupees whichever is greater
The Rules provide for computing the capital of a company for the purposes of super profits tax
A perusal of rule 1 of the Second Schedule will show that for the purposes of that rule the capital of a company includes the reserve created under some of the provisions of the Indian Income tax Act and its other reserves in so far as the amounts credited to such other reserves have not been allowed in conputing its profits for the purposes of the Income tax Act
The concept embodied in the word reserves used in that rule has been examined by this Court in the context of the and the analogous enactment the Companies Profits Super Tax Act 1964
In a recent decision Vazir Sultan Tobacco Co Ltd vs Commissioner of Income tax AP1981  this Court had occasion to examine the significance and scope of the concept
In doing so it referred to the earlier pronouncement of the Court in Metal Box Co of India Ltd vs Their Workmen The distinction between a provision and a reserve is in commercial accountancy fairly well known
Provisions made against anticipated losses and contingencies are charges against profits and therefore to be taken into account against gross receipts in the Profit and Loss Account and the Balance Sheet
On the other hand reserves are appropriations of profits the assets by which they are represented being retained to form part of the capital employed in the business
Provisions are usually shown in the Balance Sheet by way of deductions from the 218 assets in respect of which they are made whereas general reserves and reserve funds are shown as part of the proprietor s interest
See Spicer and Pegler s Book Keeping and Accounts 15th Edn p 42
Regard was had by the court to the relevant provisions of the including the form set out in  Schedule VI thereof where both expressions Reserves and Surpluses and Current Liabilities and Provisions have been used
It is not necessary we think to embark upon a detailed discussion of the distinction between a provision  and a reserve 
It is sufficient for us to point out that in determining whether an item is a provision  or a reserve  the true nature and character of the sum so retained or appropriated must be determined and its mere description by the assessee in its Balance Sheet is not conclusive of its true nature
It is now settled that a provision  is a charge against the profits being made against anticipated losses and contingencies
A reserve  on the contrary is an appropriation of profits the assets by which it is represented being retained to form part of the capital employed in the business
Unlike a provision  which is a present charge against the profits the assessee continues to enjoy a proprietor s interest in the reserve 
In the present case when the evidence clearly discloses that there was no liability at all on the assessee requiring it to set apart a sum as a charge against its profits and there was never any intention to make payments to the cane growers nor was payment ever made but on the contrary the assessee reversed the entries in a subsequent year in its books it is apparent that the amount can not be described as a provision 
It can only be described as a reserve 
It was part of the capital which fell for computation under rule 1 of the Second Schedule
The appeal fails and is dismissed with costs
MLA Appeal dismissed


Summary:
For the assessment years 1961 62 and 1962 63 the respondent assessee had debited an amount of Rs540000 and an amount of Rs276000 to its profit and loss account of the relevant previous years respectively
The amounts were debited on the ground that they represented the assessee s liability of the relevant years for the additional cane price payable to cane growers under the Sugarcane Price Control Order 1955 and were shown in the balance sheet under the head Current liabilities and provisions
However in the subsequent accounting year ending September 1963 the assessee had credited its profits by the said amounts by reversing the entries and had not made any such provision in the subsequent years
In assessment proceedings under the for the assessment year 1963 64 the Income tax Officer did not include both the aforesaid amounts in the capital computation of the assessee
The Appellate Assistant Commissioner affirmed the view taken by the Income tax Officer
But on second appeal the Appellate Tribunal held that the amount represented a reserved and should have been included in the capital computation of the assessee
The High Court also agreed with the Tribunal
Dismissing the appeal by the Revenue  HELD 1
The Rules made under the provide for computing the capital of a company for the purpose of super 215 profits tax
A perusal of Rule 1 of the Second Schedule will show that for the purposes of that rule the capital of a company includes the reserve created under some of the provisions of the Indian Income tax Act and its other reserves in so far as the amount credited to such other reserves has not been allowed in computing its profits for the purposes of the Income tax Act
217D E 2
In determining whether an item is a provision or a reserve the true nature and character of the sum so retained or appropriated must be determined and its mere description by the assessee in its Balance Sheet is not conclusive of its true nature
A provision is a charge against the profits being made against anticipated losses and contingencies
A reserve on the contrary is an appropriation of profits the assets by which it is represented being retained to form part of the capital employed in the business
Unlike a provision which is a present charge against the profits the assessee continues to enjoy a proprietor s interest in the reserve 218C E In the instant case the evidence clearly disclosed that there was no liability at all on the assessee requiring it to set apart a sum as a charge against its profits and there was never any intention to make payments to the cane growers nor was payment ever made but on the contrary the assessee reversed the entries in a subsequent year in its books
It is apparent that the amount cannot be described as a provision
It can only be described as a reserve
It was part of the capital which fell for computation under Rule 1 of the Second Schedule
218E F Vazir Sultan Tobacco Co Ltd vs Commissioner of Income tax AP  and Metal Box Co of India Ltd vs Their Workmen relied upon