Brief Facts of the Case and Question of Law
For Assessment year 2006-07 the Tribunal while computing book profit under Section 115JB confirmed the addition of Rs. 9,80,00,000/- transferred to the special reserve pursuant to the provisions of Section 45-IC of the Reserve Bank of India Act, 1934 under Clause (b) of the Explanation to Section 115JB. And for the Assessment year 2007-08 Tribunal,while computing book profit under Section 115JB confirmed the additions of :- (a) Rs. 16,00,00,000/- transferred to the special reserve pursuant to the provisions of Section 45-IC of the Reserve Bank of India Act, 1934; and (b) Rs. 18,66,00,000/- transferred to the debt redemption reserve, both under Clause (b) of the Explanation to Section 115JB.
Question of Law
1. Whether reserve created as per the mandate of Section 45-IC of the Reserve Bank of India Act, 1934, is a liability or a reserve?
2. Whether the word “any reserve” as mentioned in clause (b) to Explanation 1 includes reserves includes reserves required to be made by other statues?
Contention of the Assessee
The contention of the appellant-assessee is two-fold.
Firstly, the reserve created as per the mandate of Section 45-IC of the Reserve Bank of India Act, 1934, is in fact a liability and not a reserve. Reliance is placed upon decision of:
- Supreme Court in National Rayon Corporation Vs. Commissioner of Income Tax (1997) 227 ITR 764 (SC)
- Vazir Sultan Tobacco Company Ltd. Vs. CIT (1981) 132 ITR 559 (SC).
Secondly, it was submitted that in terms of Section 45-IC of the Reserve Bank of India Act, 1934, the appellant-assessee does not have any title over the reserve and, therefore, it is a case of diversion of income at source. Reliance is placed upon several decisions:
- Molasses Storage Fund, namely, DCM Ltd. Vs. Commissioner of Income Tax  192 CTR 0408
- Commissioner of Income-tax Vs. Salem Co-operative Sugar Mills Ltd (1998) 229 ITR 285
- Commissioner of Income-tax Vs. Pandavapura Sahakara Sakkare Kharkane Ltd. (1992) 198 ITR 690
- Somaiya Orgeno Chemicals Ltd. Vs. Commissioner of Income-tax (1995) 216 ITR 291.
On the issue of Debt Redemption Reserve, again reliance is placed upon decision in National Rayon Corporation (supra) to the effect that the amount was neither a reserve nor a provision for unascertained liability so as to attract clause (b) or (c) of Explanation 1 to Section 115JB(2) of the Act. Revenue has contested and argued to the contrary. Decision of the Supreme Court in Southern Technologies Ltd. Vs. Joint Commissioner of Income Tax,  320 ITR 577 (SC), was referred.
Contention of the Revenue
The Department submitted that clause (b) to Explanation 1 which states that book profit prepared in accordance with Part II and III of Schedule VI of the Companies Act, 1956 will be increased by the amount carried to any reserve by whatever name called, other than a reserve specified under Section 33AC of the Act. The legislature in express, lucid and categorical terms has stipulated that the book profit shall be increased by the amounts carried to any reserve. The word ―”any”, it is obvious, refers to all kinds of reserves and encompasses all types and categories without exception. The legislature did not stop and has thereafter used the expression ―reserve by whatever name called. There could not have been more clarity and articulateness in the language of clause (b) to Explanation (1). The intention is unambiguous, i.e. profit would include all amounts carried to any reserve by whatever name called, except the reserve specified under Section 33AC of the Act. The nature and type of reserve or its character would not affect operation of clause (b) to Explanation (1). Only reserves specified in Section 33AC of the Act have to be excluded.
The Department further submitted that in respect of Debt Redemption Reserve of Rs. 18,66,00,000/-, no specific explanation was given; on what account and why the said reserve was created. Nothing has been shown or pointed out to us to show why the said reserve was created. Why and for what reasons the amount of Rs.18,66,00,000/- represented an ascertained and known liability, was not clarified. The nature and character of debt is not mentioned and adverted to. The Assessing Officer also noticed that in the earlier years, the Debt Redemption Reserve was offered or added by the assessee himself for computation of book profit. The assessment order records that the assessee had created a ―reserve‖ for meeting any kind of debt without specifying its details or particulars. 23. It is noticeable that under clause (c) of Explanation (1) to Section 115JB of the Act, amount set aside to provisions made for meeting liabilities, other than ascertained liabilities, have to be added back while computing book profit.
Thus, provisions for ascertained liabilities would be excluded and are not to be added to the book profit under Explanation (1) to Section 115JB of the Act. Unascertained provisions have to be added and included. It was for the appellant-assessee to explain and show that what was treated as a Debt Redemption Reserve was in fact a provision and that too for an ascertained liability. This explanation is missing and absent.
Held by the High Court
The reserve, which is required to be created under Section 45-IC, is out of the profits earned by a non-banking financial institution. It is not an amount diverted at source by overriding title. The Reserve Bank of India Act, 1934 can permit appropriation in respect of the said reserve. The assessee can also ask for specific directions from the Central Government subject to proviso to sub-section (3) of the said Section. The special reserve under Section 40IC of the Reserve Bank of India Act, 1934 of Rs. 9,80,00,000/- and Rs.16,00,00,000/- relating to Assessment Years 2006-07 and 2007-08, respectively was not on account of specific or known liability to repay. It is not the case of charge on profits. It was only appropriation of profits after they had been earned. It is not an expense.
In view of the aforesaid reasoning, the two substantial questions of law mentioned above have to be answered against the appellant assessee and in favour of the respondent-Revenue.