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Tax Case No. 140 of 1965 (Reference No.71 of 1965), decided on 19th February 1969.

Company‑Computation of commercial profits‑ Deduction of reserves‑‑‑ Reserve against possible liability-- Whether can be excluded‑Assessee guaranteeing debts of subsidiary company‑Subsidiary company going into liquidation ‑ Reserve for meeting possible enforcement of guarantee‑Whether excludible Indian Income‑tax Act, 1922, S. 23‑A.

It is not necessary that, in order to exclude from computa tion of commercial profits, the reservation should always be in respect of a definite ascertained loss 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 section 23‑A.

In the instant case, the High Court held that, in order to determine the commercial profits of the assessee‑company whose business included furnishing guarantees for debts borrowed by subsidiary companies, a liability reserve of Rs. 60,000 created in order to meet a guarantee furnished to one of such companies, which had gone into liquidation, had to be excluded.

K. R. Ramamani and S. V. Subramaniarn for Subbaraya Iyer, Sethuraman and Padmanabhan for the Assessee.

V. Balasubrahmanyan and J. Jayaraman for the Commis sioner.

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 section 43‑A of the Income‑tax Act, 1922 are attracted

(2) Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the commercial profit to be considered is Rs. 54,050 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 section 23-A can be levied on profits exempt under section 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 ques tion. 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 section 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 larger 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 were 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 respect of a definite ascertained loss 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 section 23‑A. We consider this as one such case. On that view, we think the Tribunal was not justified to directing that the sum of Rso 60,000 should be included in the commercial profits.

Questions Nos. 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.

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