1. This is a reference by the Tribunal under s. 256(1) of the I.T. Act, 1961, and the question which has been referred for the opinion of this court is as follows :
'Whether, on the facts and in the circumstances of the case, the following 3 funds can be included in the capital of the assessee-company for the purpose of ascertaining the standard deduction as defined under section 2(9) of the Super Profits Tax Act, 1963.
Rs. 38,86,145, provision for taxation. 15,49,700, proposed dividend. 2,35,000, provision for contingencies. ?'
2. The assessee, Oudh Sugar Mills Ltd., objected to the exclusion of the following funds from the computation of its capital under the Second Schedule to the Super Profits Tax Act, 1963 (hereinafter referred to as 'the Act'), for the purpose of ascertaining the standard deduction as defined in s. 2(9) of the Act :
Rs. (1) 38,86,145, being provision for taxation. (2) 15,49,700, being proposed dividend. (3) 2,35,000, being provision for contingencies.
3. The previous year for the assessee-company for the assessment year in question began on August 1, 1961, and ended on July 31, 1962. The aforesaid sums stood on the credit side of the respective accounts in the books of the company as on August 1, 1961. The company was assessed to super profits tax for the said previous year disallowing the said sums as being components of its capital under the aforesaid provision. It was the contention of the assessee-company that the aforesaid three sums constituted reserve and as such the said sums were part of its capital. The ITO rejected the assessee's claim on the ground that there was a difference between reserve and provision and that reserve was properly meant for appropriation of profits for no specific purpose, representing no known liability and inasmuch as according to the ITO the said sums were provided for known liabilities they were in the nature of provisions for specific purposes and hence they would not form reserve and could not be included in the computation of the assessee's capital.
4. Against the decision of the ITO disallowing the said sums as components of capital, the assessee preferred an appeal and the AAC disallowed the appeal by confirming the order of the ITO. According to the AAC the said sums were in the nature of a provision for a specific and known liability and, therefore, the ITO had acted properly in disallowing the said sums as reserve.
5. Against the said decision of the AAC, the assessee preferred a second appeal to the Tribunal. Before the Tribunal, it was argued on behalf of the assessee that the said amounts formed a reserve within the meaning of r. 1 of Sch. II to the Act, and were, therefore, liable to be included in the computation of its capital for the purpose of determining the standard deduction. As against this, it was the contention on behalf of the revenue that the form of the balance-sheet and r. 7, Pt. III of Sch. VI of the Companies Act, 1956, made a clear distinction between a reserve and provision and that none of the said three amounts was a reserve within the meaning of the said term as defined in the Companies Act. It was further contended on their behalf that any amount earmarked for an existing or a possible liability as in the present case, for tax and for payment of dividend would not be a reserve as the amount in question was intended to be used within a short time. It was also argued that on the shareholders' approval of the proposal of the board of directors to declare dividend at the the annual general meeting, the liability to pay dividend arose with retrospective effect from the closing day of the accounting year and hence the provision for dividend was a provision for a known and existing liability and would not be a reserve. The Tribunal, however, rejected these contentions advanced on behalf of the revenue and allowed the appeal of the assessee on the ground, firstly, that the said Act did not define reserve and that r. 2 of Sch. II to the Business Profits Tax Act, 1947, was comparable to r. 1 under consideration and the construction put on the term 'reserve' under the said r. 2 could be taken into consideration for determining the definition of reserve in r. 1 under consideration. For the said definition, the Tribunal relied on the decision of the Supreme Court in the case of the CIT v. Century Spg. and Mfg. Co. Ltd. : 24ITR499(Bom) . The Tribunal also further held that there was no authority to lend support to the revenue's contention that the reservation of a fund for meeting a known and existing liability in future could not constitute reserve. According to the Tribunal further, the sub-division of reserve into a provision made in the Companies Act, 1956, and the definition of reserve and the provision given in r. 7 in Pt. III of Sch. VI of the Companies Act, 1956, was not of an exhaustive nature and that they provided a rough and ready-made method for classifying certain funds for the limited purpose of presenting them in the balance-sheet for the convenience of and for giving a proper picture of the financial position of the company to its members. The said definitions did not hold good even for the purposes of the remaining provisions of the said Act and that there was no warrant or justification for importing those definitions of reserve and provision given therein into the SPT Act for construing the term as reserve as used in r. 1 of Sch. II to the Act. The Tribunal also held that there was no rigid rule or practice for the setting apart of reserves and provisions, and there was nothing to prevent the company from transferring its entire profit for the year before providing for tax and dividend, to specific or general reserve fund. On this view, the Tribunal held that all the said three funds satisfied the test of reserve laid down by the Supreme Court in Century Spg. Mills' case : 24ITR499(Bom) , and directed the SPT Officer to include all the said three funds in the computation of capital of the assessee-company. The revenue thereafter having made an application for stating the question for the opinion of this court, the Tribunal, as stated above, referred the aforesaid question for the opinion of this court under s. 256(1) of the I.T. Act, 1961.
6. Before us, the parties agreed that in view of the decisions of this court, the answer to the said question in so far as the amount of Rs. 38,86,145, being provision for taxation, and the amount of Rs. 15,49,700, being the proposed dividend, are concerned, would have to be answered in favour of the revenue and against the assessee. As regards the provision for taxation, that question has been concluded by a decision of this court in Shree Ram Mills Ltd. v. CIT : 108ITR27(Bom) . As regards the provision for the proposed dividend, the question has been concluded so far as this court is concerned by the decision of this court in CIT v. Otis Elevator Co. (India) Ltd. : 107ITR241(Bom) . Hence, as regards the said two amounts, as stated earlier, the answer will have to be against the assessee.
7. The only dispute, therefore, that still subsists is with regard to the third amount, viz., 2,35,000, being the provision for contingencies. As regards this provision, Shri Joshi, the learned counsel for the revenue, relied upon the decision of this court in CIT v. Century Spg. & Mfg. Co. Ltd. : 108ITR431(Bom) and contended that the provision for contingency was in the nature of a provision for a known and specific liability and, therefore, was not includible in reserve so as to form a part of the capital of the company. According to us, the decision relied upon by Shri Joshi, far from supporting him, goes counter to his submission. In Century Spg. & Mfg. Co. Ltd.'s case : 108ITR431(Bom) the facts were that in the balance-sheet of the assessee-company as on December 31, 1961, under the column 'liabilities' and below the heading 'Current liabilities and provisions' a sum of Rs. 40 lakhs had been shown as ' provision for contingencies ' and in the profit and loss account for the year ended December 31, 1961, also the said sum of Rs. 40 lakhs had been debited as ' provision for contingencies.' Therefore, on the relevant date, being the first day of the previous year, i.e., January 1, 1962, the said sum of Rs. 40 lakhs stood appropriated as provision for contingencies. In the directors' report which was submitted to the shareholders of the assessee-company for the year ended December 31, 1962, it was stated that out of the gross profit of Rs. 3,77,93,273, a sum of Rs. 77,00,425 had been set apart towards payment of bonus to the employees of the textile section for the years 1958, 1959, 1960 and 1961. The directors' report further stated that for the purpose of making this payment the amount of 40,00,000 which had been set part as provision for contingencies had been drawn upon. The ITO excluded this sum of Rs. 40,00,000 while computing the capital base of the assessee-company for the assessment year 1963-64. In the appeal before the AAC, the Commissioner held relying on the decision in CIT v. Security Printers of India (P.) Ltd. : 86ITR210(All) , that the ITO was not justified in excluding the said amount from the capital computation. The matter was carried in further appeal to the Tribunal, where the revenue tried to support the ITO's order. On behalf of the assessee, it was stated that the said sum of Rs. 40,00,000, which was a provision for contingencies, had been created in 1961, in view of the pending disputes between the textile mills and workers regarding the bonus payments for earlier years, that the dispute was settled in October 1962, and that the said provision was adjusted in 1962 towards the payment of bonus of Rs. 77,00,425 for the years 1958 to 1961 which became due as result of settlement. The Tribunal took the view that the provision for contingencies made by the assessee was not for an existing liability, inasmuch as the settlement regarding bonus was arrived at only in October, 1962, i.e., after the end of 1961, and since the said sum was not set apart to meet any known liability and could not be ascertained with certainty, it should be treated only as a reserve and not as a provision. The Tribunal, therefore, directed that the said amount should be included while computing the capital base of the assessee. It is in these circumstances that at the instance of the Commissioner, the relevant question with regard to the nature of the said provision for contingencies of Rs. 40,00,000 had come up for consideration before this court in that case. This court on the said facts held that in view of the statement which was made on behalf of the assessee-company before the Tribunal that the said amount had been set apart in view of the dispute which was pending before the adjudicating machinery in the matter of claim for bonus which had been made by the textile workers under a statute, it was clear that it was a case of a known contingent liability for which a provision was made. The court, therefore, held that the setting apart of the said amount in the circumstances, being in the nature of a provision, would not be includible in the capital computation of the assessee-company for the purpose of the S. P. T. Act, 1963,viz.,the Act. Thus, it would be clear that in that case on the assessee's own admission that the amount of Rs. 40,00,000 had been set apart for meeting the claim of bonus of the workers, the court had held that the said provision for contingency was a provision for a known liability. It is for this reason that this court held that the said amount was in the nature of a provision and was not in the nature of reserve for being included in the capital base of the assessee. For its said conclusion this court relief upon the decision of the Supreme Court in the case of Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC . The relevant observations of the Supreme Court in that case may be cited with benefit here. The Supreme Court in that case on the point stated as follows (p. 68) :
'An amount set aside out of profits and other surpluses, not designed to meet a liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance-sheet is a reserve but an amount set aside out of profits and other surpluses to provide for any known liability of which the amount cannot be determined with substantial accuracy is a provision.'
8. The facts in our case are materially different from the facts in the Century Spg. & Mfg. Co. Ltd.'s case : 108ITR431(Bom) decided by this court and satisfies the test of reserve laid down by the Supreme Court in the Metal Box Company's case : (1969)ILLJ785SC . In the balance-sheet for the year ending July 31, 1961, the aforesaid amount of Rs. 2,35,000 had been shown under the heading 'Provision for contingencies'. It may be mentioned here that the said amount of Rs. 2,35,000 was shown under a similar heading also in the balance-sheet for the year ending July 31, 1960. This amount was not shown as being earmarked for any particular known contingent liability. On the other hand, we find from the balance-sheet for the year ending July 31, 1962, that as on July 31, 1962, the said amount was reduced to Rs. 1,85,000, the amount of Rs. 50,000 having been appropriated to the profit and loss account in the said year. It is true, as contended by Shri Joshi, that no details of the so-called contingencies have been given anywhere in the balance-sheet. However, it was for the revenue which wanted this amount to be appropriated to specific contingent liabilities to get the said details. The revenue having failed to do so, it could not argue for the first time in this court that in the absence of such details it should be held that the amount was kept apart for any specific known contingent liability. Thus, we find from the facts in our case that it cannot be said that the said amount of Rs. 2,35,000 was kept apart as a provision to meet any specific known liability. This being the case, the facts in our case are clearly distinguishable from the facts in the Century Spg. & Mfg. Co. Ltd.'s case : 108ITR431(Bom) decided by this court and discussed hereinabove. The aforesaid provision of Rs. 2,35,000 also meets the test of reserve laid down by the Supreme Court in the Metal Box Company's case : (1969)ILLJ785SC inasmuch as, as held therein, it cannot be said that the said amount was designed to meet any liability, contingency, commitment or diminution in value of assets, known to exit at the date of the balance-sheet. We are, therefore, more than satisfied that the said amount will meet the description of a reserve in the circumstances of the case and hence it is includible in the computation of the capital of the assessee-company for the purpose of ascertaining the standard deduction as defined under s. 2 (9) of the Act, viz., the Super Profits Tax Act, 1963.
9. In the result, the question referred to us for opinion will have to be answered as follows :
The amounts of Rs. 38,86,145, i.e., provision for taxation, and of Rs. 15,49,700, i.e., provision for proposed dividend, are not includible in the capital of the assessee-company for the purpose of ascertaining the standard deduction as defined under s. 2 (9) of the S. P. T. Act, 1963. The amount of Rs. 2,35,000, i.e., provision for contingencies, is includible in the capital of the assessee-company for the purpose of ascertaining the standard deduction as defined under s. 2 (9) of the S. P. T. Act, 1963.
10. No order as to costs.