COMMISSIONER OF INCOME TAX v. GANGANAGAR SUGAR MILLS LTD
[Citation -1985-LL-0911-2]

Citation 1985-LL-0911-2
Appellant Name COMMISSIONER OF INCOME TAX
Respondent Name GANGANAGAR SUGAR MILLS LTD.
Court ITAT
Relevant Act Income-tax
Date of Order 11/09/1985
Assessment Year 1969-70
Judgment View Judgment
Keyword Tags diminution in value of assets • bad and doubtful debts • reference application • change of opinion • capital employed • mistake apparent • capital reserve • mistake of law • capital base • new plant
Bot Summary: After the completion of the surtax assessment, the Income-tax Officer initiated proceedings for rectification of his earlier order under section 13 of the Act of 1964 and held that the amounts kept apart by the company as reserves for redemption of debentures and for meeting bad and doubtful debts could not be treated as reserves, as these were provisions made by the company for meeting its liabilities. On further appeal by the company, the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, was of the view that the amounts set apart by the company out of its profits during the relevant assessment year as reserves were in substance reserves and not provisions made to meet a known liability. The Appellate Tribunal was of the view that since the matter was highly debatable and there was no mistake apparent on the record, the Income-tax Officer held that the aforesaid reserves were actually no reserves but were provisions. The provisions of section 13 of the Act of 1964 could not have been resorted to merely because of a change of opinion on a debatable question as to whether the reserves for redemption of debentures and for bad and doubtful debts were really of the nature of reserves or were provisions made by the company for the purpose of meeting known liabilities. CIT v. Indian Telephone Industries 1979 118 ITR 291, wherein it was held that the amount appropriated to the reserves created for bad and doubtful debts was not one set apart to meet known liabilities and that it was a reserve and not a provision as was sought includible in the capital base of the company. Their Lordships of the Supreme Court in Metal Box Company of India Ltd. v. Their Workmen 1969 73 ITR 53, while dealing with the question as to v. Their Workmen 1969 73 ITR 53, while dealing with the question as to whether a particular amount set apart was a reserve or a provision, observed as under: The next question is whether the amount so provided is a provision or a reserve. In ClT v.Standard Vacuum Oil Co.1966 59 ITR 685,the in Lordships of the Supreme Court gave examples of different types of reserves maintained by companies in India, such as capital reserve, reserve for redemption of debentures, reserve for replacement of plant and machineries, reserve for buying new plant to be added to the existing ones, reserve for bad and doubtful debts, reserve for payment of dividends and general reserves.


JUDGMENT JUDGMENT judgment of court was delivered by DWARKA PRASAD J.-This application under section 256(2) of Income- tax Act, 1961 (hereinafter referred to as " Act "), raises question as to whether there was mistake apparent from record on basis of which Income-tax Officer was justified in exercising jurisdiction under section 13 of Companies (Profits) Surtax Act, 1964 (hereinafter referred to as " Act of 1964 "). While computing capital base of assessee, M/s. Ganganagar Sugar Mills Ltd., in proceedings for assessment year 1969-70 for assessment of surtax, Income-tax Officer took into consideration reserve for redemption of debentures and for meeting bad and doubtful debts. After completion of surtax assessment, Income-tax Officer initiated proceedings for rectification of his earlier order under section 13 of Act of 1964 and held that amounts kept apart by company as reserves for redemption of debentures and for meeting bad and doubtful debts could not be treated as reserves, as these were provisions made by company for meeting its liabilities. Income-tax Officer was of view that mistake of law apparent on face of record was committed by him while computing surtax assessment and as such he proceeded to rectify same under section 13 of Act of 1964. On appeal, Commissioner of Income-tax (Appeals) Jaipur, affirmed order passed by Income-tax Officer on ground that company intended to create fund out of profits so as to enable it to redeem debentures out of such fund when debentures become due for repayment and that it was provision made by company for meeting known liability in future. Similarly in respect of reserves for bad and doubtful debts, it was held that it was provision made by company for anticipated liability in future. On further appeal by company, Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, was of view that amounts set apart by company out of its profits during relevant assessment year as reserves were in substance reserves and not provisions made to meet known liability. As such, Income-tax Officer has no jurisdiction to pass order under section 13 of Act of 1964, because it could not be held that there was any mistake apparent on record. Appellate Tribunal was of view that since matter was highly debatable and there was no mistake apparent on record, Income-tax Officer held that aforesaid reserves were actually no reserves but were provisions. application made by Commissioner of Income-tax, Jaipur, under section 256(1) of Act was dismissed by Tribunal on ground that no question of law arose out of order of Tribunal, as in view of Tribunal, question as to whether there was any mistake apparent on record was one of fact. Income-tax Officer in first instance had accepted that company had made reserves for redemption of debentures and for bad and doubtful debts and thereafter initiated proceedings under section 13 of Act of 1964, which could have been taken only when Income-tax Officer would have found that there was mistake apparent from record in earlier assessment order. provisions of section 13 of Act of 1964 could not have been resorted to merely because of change of opinion on debatable question as to whether reserves for redemption of debentures and for bad and doubtful debts were really of nature of reserves or were provisions made by company for purpose of meeting known liabilities. Tribunal relied upon decision of Karnataka High Court in Addl. CIT v. Indian Telephone Industries [1979] 118 ITR 291, wherein it was held that amount appropriated to reserves created for bad and doubtful debts was not one set apart to meet known liabilities and that it was reserve and not provision as was sought includible in capital base of company. It was held in aforesaid case that since sums were set apart as reserves for bad and doubtful debts and they were not with reference to any known liability on date of balance-sheet, it could not be held to be in nature of provision. Their Lordships of Supreme Court in Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53, while dealing with question as to v. Their Workmen [1969] 73 ITR 53, while dealing with question as to whether particular amount set apart was reserve or provision, observed as under (at pages 67 and 68): " next question is whether amount so provided is provision or reserve. distinction between provision and 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 P & L account and balance-sheet. On other hand, reserves are appropriations of profits, assets by which they are represented being retained to form part of capital employed in business. Provisions are usually shown in balance-sheet by way of deductions from assets in respect of which they are made whereas general reserves and reserve funds are shown as part of proprietor's interest (see Spicer and Pegler's Book-keeping and Accounts, 15th edition, page 42). amount set aside out of Profits and other surpluses, not designed to meet liability, contingency, commitment or diminution in value of assets known to exist at date of balance-sheet is reserve but amount set aside out of Profits and other surpluses to Provide for any known liability of which amount cannot be determined with substantial accuracy is provision:" (Emphasis added). In ClT v.Standard Vacuum Oil Co.[1966] 59 ITR 685,the in Lordships of Supreme Court gave examples of different types of reserves maintained by companies in India, such as capital reserve, reserve for redemption of debentures, reserve for replacement of plant and machineries, reserve for buying new plant to be added to existing ones, reserve for bad and doubtful debts, reserve for payment of dividends and general reserves. Thus, it appears that it is usual for companies in this country to set apart funds by way of reserves for redemption of debentures and for bad and doubtful debts. In this view of matter, it cannot be held that Income-tax Officer was rectifying mistake apparent on record while he proceeded to hold that what he considered to be reserves at time of passing of surtax assessment order were not actually reserves but were provisions. Tribunal was justified in observing that it was highly debatable matter and if Income-tax Officer took one view at time of passing of order of assessment and held that amounts set apart by company were reserves for redemption of debentures and for bad and doubtful debts, it could not be said that apparent mistake has been committed by him. If that was so, Income-tax Officer has no jurisdiction to take proceedings under section 13 of Act of 1964, but he could have initiated proceedings only for purpose of rectification of mistake committed by him. Whether there was mistake or not committed by Income-tax Officer on earlier occasion was question which could not be said to be one of law, but it appears that it was merely change of opinion by Income-tax Officer while he proceeded to pass order under section 13 of Act of 1964, which was not permissible under law. In this view of matter, this reference application is dismissed. Here printed in italics. *** COMMISSIONER OF INCOME TAX v. GANGANAGAR SUGAR MILLS LTD.
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