Case: Commissioner Of Income-Tax(Central-Ii), Calcutta Vs. M/S.Duncan Brothers &amp; Co.Ltd., Calcutta

The assessee is a company and the accounting years involved are the years ending on December 31, 1962, and December 31, 1963, relevant to the assessment years 1963-64 and 1964-65,the assessment year 1963-64, the assessee claimed that for purposes of the Super Profits Tax Act, 1963, in the computation of its capital, a provision for taxation made by it to the tune of Rs. 16, 48, 888 should be treated either as a part of its capital under rule 1 of the Second Schedule to the Super Profits Act, 1963, or in the alternative as a deduction from the cost of investment under clause (ii) of rule 1 of the Second Schedule to the Super Profits Tax Act,the assessment year 1964-65, the assessee made a similar claim in respect of a provision for taxation made by it to the tune of Rs. 17, 52, 920. For this assessment year, the relevant provisions which were applicable were under the Companies (Profits) Surtax Act,claim of the assessee was disallowed by the Income-tax Officer. In appeal before the Appellate Assistant Commissioner for the assessment year 1963-64, the Appellate Assistant Commissioner held that as the provision for taxation was only an amount set apart to meet the liability for taxation which would accrue on the last day of the accounting year, it could not be treated as a reserve and be included in the capital of the assessee under the Super Profits Tax Act, 1963. He, however, accepted the alternative contention of the assessee that the provision for taxation fell within clause (ii) of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, and it should be deducted from the cost of investments in computing the capital base of the assessee-company under the Super Profits Tax Act, 1963For the assessment year 1964-65, the Appellate Assistant Commissioner similarly held that the provision for taxation cannot be considered as a reserve but it was to be deducted from the cost of investments under rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act,matter was taken in appeal before the Tribunal which came to the conclusion that the provision for taxation made in the two assessment years was not a reserve which would form a part of the capital of the company. It further held that the provision for taxation was also neither a fund nor a surplus. It was a provision against a "perfected debt" and as such it would not qualify for a deduction as claimed by theTribunal made a reference to the High Court under section 256(1) of the Income-tax Act, 1961. The questions of law which arose for determination were as follows (page 887 of 111the assessment year(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the provision for taxation is not a reserve as to form part of the capital under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963 ?(2) If the answer to the above question is in the affirmative, whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that in the computation of capital the company was not entitled to the benefit of deduction of the amount of provision for taxation from its cost of investments in terms of clause (ii) of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963 ? "e assessment yearWhether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in the computation of capital, the company was not entitled to the benefit of deduction of provision for taxation from its cost of investments in terms of clause (ii) of rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ? "Calcutta High Court has answered question No. 1 for the assess ment year 1963-64 in the affirmative in favour of the Revenue. It has answered question No. 2 for64 and the question for-65 in the negative and in favour of the assessee. The Revenue has come in appeal before us from the above decision of the Calcutta High Court. The assessee has not filed an appeal before us in respect of the decision of the Calcutta High Court on question No. 1 for

Reasoning: We, however, have to consider the alternative submission that it should be treated as a fund, and, therefore should be deducted from the cost of the assets required to be excluded from the capital of the companySince the Second Schedule to both these Acts pertains to computing the capital of a company for purposes of tax under these Acts, the terms used in the Second Schedule need to be interpreted in the context of the balance-sheet of a company and its profit and loss account which will necessarily have to be looked at to ascertain the companys capital and its profits. The terms used must, therefore, be read in the light of the provisions of the Companies Act and how these terms are understood in accountingthe present case there is no systematic accumulation of cash or any separation of assets to meet future tax liabilities. There is only an accounting entry of an exact sum being earmarked for payment of tax liability arising at the end of the current accounting year. Such a provision cannot be considered as acircular, however, is of no assistance in the present case. In the first place, the provision for taxation made in the present case is very different in nature from the reserve for unexpired risks referred to in the circular. The reserve in that case represented a sum of money which would be available to the insurance company for payment or discharge of unexpected claims that may arise in respect of policies which extend beyond the accounting year. The provision for taxation in the present case, however, is set apart to meet a specific liability which would arise at the end of the current accounting year. It cannot, in any manner, be compared to a fund of the kind referred to in the circular of theargument has no merit. The Board has considered the etymological meaning of "fund" in considering a reserve to meet future unexpired risks. A sum of money set apart to meet such unforeseen risks was considered as a fund. We fail to see, how the circular helps the assessee in the case before us. A provision for taxation of the kind in question is not a fund either etymologically or in accounting parlance. The more relevant meaning of the term "fund" in the context of the two Acts is what that term is commonly considered to connote when used in a balance-sheet or profit and loss account of a company. A specific provision for an ascertained liability is not a fund within the meaning of that term in the rules in questionIn the premises, question No. 2 for64 and the question for-65 has to be answered in the affirmative and in favour of the Revenue.