# COMMISSIONER OF INCOME-TAX, U.P v. LAXMI SUGAR & OIL MILLS LTD

- **Citation:** [1986] 3 S.C.R. 214
- **Court:** Supreme Court of India
- **Decided:** 1986-07-16
- **Bench:** R.S. Pathak, Sabyasachi Mukharji
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-u-p-v-laxmi-sugar-oil-mills-ltd-9151
- **Pages:** 5

## Headnote

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Super Profits Tax .Act, 1963, ss. 2(9), 4 and Rule 1 of Second
Schedule-Standard deduction-What is-Assessee setting apart
amounts for additional cane price payable to cane-growersAmounts-Whether a "11rovision" or a "reserve"-Distinction bet·
ween-Description in the Balance-Sheet not conclusive of its true
)_
nature.
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For the assessment years 1961-62 and 1962-63, the respondentassessee had debited an amount of Rs.5,40,000 and an amount of
Rs.2, 76,000 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
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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.
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In assessment proceedings under the Super Profits Tax Act, 1963
for the assessment year 1963-64, the Income-tax Officer did not include
both the aforesaid amounts in the capital computation of the asr.essee.
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 shoukl have been included
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in the capital computation of the assessee. The High Court also agreed
with the Tribunal.
Dismissing the appeal by the Revenue,
HELD: I. The Rules made under the Super Profits Tax Act, 1963
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provide for computing the capital of a company for the purpose of super
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C.l.T. v. LAXMJSUGAR&OIL MILLS
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. v. Commissioner of Income-tax,
A.P., [1981] 132 ITR 559; and Metal Box Co. of India Ltd. v. Their
Workmen, [1969] 73 ITR 53 relied upon.

## Text

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COMMISSIONER OF INCOME-TAX, U.P.
v.
LAXMI SUGAR & OIL MILLS LTD.
JULY 16, 1986
[R.S. PATHAK AND SABYASACHI MUKHARJI, JJ.J
c
Super Profits Tax .Act, 1963, ss. 2(9), 4 and Rule 1 of Second
Schedule-Standard deduction-What is-Assessee setting apart
amounts for additional cane price payable to cane-growersAmounts-Whether a "11rovision" or a "reserve"-Distinction bet·
ween-Description in the Balance-Sheet not conclusive of its true
)_
nature.
D
For the assessment years 1961-62 and 1962-63, the respondentassessee had debited an amount of Rs.5,40,000 and an amount of
Rs.2, 76,000 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
E
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.
F
In assessment proceedings under the Super Profits Tax Act, 1963
for the assessment year 1963-64, the Income-tax Officer did not include
both the aforesaid amounts in the capital computation of the asr.essee.
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 shoukl have been included
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in the capital computation of the assessee. The High Court also agreed
with the Tribunal.
Dismissing the appeal by the Revenue,
HELD: I. The Rules made under the Super Profits Tax Act, 1963
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provide for computing the capital of a company for the purpose of super
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)
C.l.T. v. LAXMJSUGAR&OIL MILLS
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. v. Commissioner of Income-tax,
A.P., [1981] 132 ITR 559; and Metal Box Co. of India Ltd. v. Their
Workmen, [1969] 73 ITR 53 relied upon.
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1613
(NT) of 1974
From the Judgment and Order dated 26th April, 1973 of the
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Allahabad High Court in Misc. Case No. 202 of 1971.
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B.B. Ahuja and Miss A. Subhashini for the Appellant.
P.K. Mukharjee and A.K. Sengupta for the Respondent.
The Judgment of the Court was delivered by
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216
SUPREME COURT REPORTS
[1986] 3 S.C.R.
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 Super Profits
Tax Act, 1963.
For the assessment years 1961-62 and 1962-63 the assessee had
debited an amount of Rs.5,40,000 and an amount of Rs.2,76,000 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 Rs.8,16,000 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 Super Profits Tax Act, 1963
for the assessment year 1963-64, the Income-tax Officer did not include the amount of Rs.8, 16,000 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
W?5 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 rhe 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:
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C.I.T. v. LAXMI SUGAR & OILS MILLS {PATHAK; J.]
217
"Whether on the facts and in the circumstances of the case
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the provision for additional cane price amounting to
Rs.8, 16,000 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
Super Profits Tax Act 1963 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-s. (9) of s. 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 Super Profits
Tax Act, 1963 and the analogous enactment, the Companies (Profits)
Super Tax Act, 1964. In a recent decision, Vazir Sultan Tobacco Co.
Ltd. v. Commissioner of Income-tax, A.P., [1981] 132 !TR 559, this
Court had occasion to examine the significance and scope '>f the concept. In doing so it referred to the earlier pronounce;,:ent of the Court
in Metal Box Co. of India Ltd. v. Their Workmen, [1969] 73 ITR 53.
"The distinction between a provision and a reserve is in
commercial accountancy fairly well known. Provisions
made against anticipated losses and contingencies are
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charges against profits and, therefore, to be taken into
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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
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SUPREME COURT REPORTS
[1986] 3 S.C.R.
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 BookKeeping and Accounts, 15th Edn., p. 42)".
Regard was had by the court to the relevant provisions of the
Companies Act, 1956 including the form set out in Part I, 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 ifitention 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 I of the Second
Schedule.
The appeal fails and is dismissed with costs.
M.L.A.
Appeal dismissed.