Messrs. Amalgamations (P.) Ltd., Madras v. The Commissioner Of Income-Tax, Madras.

(Delivered by Veeraswami J.)

The facts in this reference are the same and the questions are:

“1. Whether on the facts and circumstances of the case the provisions of S. 23-A of the Income-tax Act of 1922 are attracted?

2. Whether on the facts and in the circumstances of the case, the Tribunal is right in holding that the commercial profits to be considered is Rs. 84.050 and the tax to be taken into account is Rs. 39,000?

3. Whether on the facts and in the circumstances of the case, tax under S. 23-A can be levied on profits exempt under S. 15-C?

So far as the third question is concerned, counsel for the assessee at whose instance this reference has been made does not press it. It is, therefore, not necessary to answer this question. As regards the first two questions, they turn on the propriety of including the two sums in the computation of commercial profits for the purpose of S. 23-A. So far as the loss claimed on account of the farm said to be conducted by the assessee is concerned, there are no facts before us to conclude that this is a legitimately permitted business loss. We do not even know whether the farm is within the objects of the assessee company. In such circumstances, we are of opinion that the Tribunal was right in taking this amount into account in computing the commercial profits.

The other amount, in our view, stands on a different footing. The assessee's business is peculiar which includes furnishing guarantee to debts borrowed by subsidiary companies. One of such companies having gone into liquidation, the assessee anticipated that a guarantee furnished by it for the equivalent sum of Rs. 60,000 would in all probability be enforced. In that anticipation the assessee created a liability reserve in that sum. The Tribunal's view was that this is not an ascertained loss or liability against which a reserve like that could be created. We are unable to agree with this approach.

The question always in such case is whether the payment of dividend or a large dividend than that declared would be unreasonable. This question will have to be eventually decided in the light of commercial considerations and not on any technical view of the provisions made for liabilities likely to be enforced against the assessee. We cannot say that In the particular circumstance we have mentioned, the Board of Directors conducted themselves without reference to business considerations or are unreasonable in setting apart the reserve to meet the possible liability. In our opinion, it is not necessary that in order to exclude from computation of commercial profits the reservation should always be in repect of a definite ascertained less or liability. There may be circumstances which may warrant a reserve against possible liability which will have to be excluded in the computation of commercial profits for the purpose of S. 23-A. We consider this as one such case. On that view we think the Tribunal was not justified in directing that the sum of Rs. 60,000 should be included in the commercial profits.

Questions 1 and 2 are answered in favour of the assessee but only in part in so far as they relate to the sum of Rs. 60,000, and they are answered against the assessee in other respects. There will be no order as to costs.

V.C.S