D.K. Kapoor, J.
1. The following questions have been referred to us by the Income-tax Appellate Tribunal in relating to the super profits tax assessment of the respondent-assessed for the assessment year 1963-64 :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in laws in holding that the amount of Rs. 7,50,000 transferred to an account styled as contingency reserve was deductible from chargeable profits under the Super Profits Tax Act, 1963
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the amount of Rs. 56,62,050 credit balance in an account styled as contingency reserve should be taken into consideration for computing the capital under the Super Profits Tax Act, 1963
(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the amount of Rs. 1,20,956 credit balance in an account styled as charity reserve should be taken into consideration for computing the capital under the Super Profits Tax Act, 1963 ?'
2. The facts of the case as set out in the statement of the case show that in the year ending 31st December, 1962, the company had transferred an amount of Rs. 7,50,000 to the contingency reserve account and an amount of Rs. 1,20,956 to the charity reserve account. The company had filed a return showing a deficiency of Rs. 8,08,101, but the ITO determined the chargeable profits as being Rs. 23,51,115. The ITO did not allow a deduction in respect of the two aforementioned sums of Rs. 7,50,000 and Rs. 1,20,956 and he also did not take into account the amount of Rs. 56,62,087 which was the total balance in the contingency reserve account for the purpose of computing the capital of the company.
3. The assessed appealed to the AAC who allowed the deduction of Rs. 50,000 from the chargeable profits and also directed the ITO to include a sum or Rs. 56,62,087 in the capital for the purpose of calculating the standard deduction. He did not, however, accept the assessed's claim regarding the amount transferred to the charity reserve.
4. There was an appeal to the Tribunal by the Department and cross objections by the assessed. The Tribunal rejected the Department's appeal, but upheld the claim of the assessed. Consequently, all the claims of the assessed were accepted by the Tribunal.
5. In reaching its conclusion the Tribunal relied strongly on the judgment of the Supreme Court in Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC . In that case, the court drew a distinction between 'reserves' and 'provisions'. Though it is not a case under the I.T. Act, the important part of that decision can be quoted here immediately (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.'
6. Applying this test, the Tribunal had held that the sum of Rs. 7,50,000 mentioned earlier is a reserve. It did not related to any liability which could be ascertained with any degree of accuracy. It was not an amount which related to any deductions which were to be made before the profits could be determined. It was an amount appropriated after the profits were determined. The Tribunal also noted that this amount was not shown as a reserve in the balance-sheet but was included in liabilities under current account, etc.
7. It was further held by the Tribunal that the AAC was fully justified in treating the entire contingency reserves as a reserve and, thereforee, is not an integral part of the company's capital, for the same reason as the sum of Rs. 7,50,000. This was the reasoning of the Tribunal with regard to the first two questions which have been framed for our opinion.
8. As regards the sum of Rs. 1,20,956 it was also held that this did not represent any liability which existed prior to the determination of profits. It was essentially a reserve, being an amount appropriated out of profits. The ultimate idea of using this amount or the ultimate manner of use, in the view of the Tribunal, did not change its nature. It was, thereforee, a reserve.
9. Learned counsel in support of the reference has referred to a number of other decisions to show that the Tribunal had not rightly dealt with the three items under consideration. In CIT v. Burn and Co. Ltd. : 114ITR565(Cal) , which is a decision of the Calcutta High Court. The decision in Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC was referred to as well as another judgment of the Supreme Court in CIT v. Century Spinning and . : 24ITR499(SC) . Reference was also made to the decision of the Supreme Court in First National City Bank v. CIT : 42ITR17(SC) and CIT v. Standard Vacuum Oil Co. Ltd. : 59ITR685(SC) .
10. Another judgment of the Calcutta High Court in CIT v. Jugantar P. Ltd. : 128ITR619(Cal) , held that a provision made for anticipatory contingency and to med anticipatory diminution in value was a known contingency and anticipated, thought not determined with accuracy. This was thereforee, not a reserve includible in computing the capital.
11. In another judgment of the Madras High Court in India Motor Parts and Accessories Ltd. v. CIT : 130ITR311(Mad) , it was held that a provision for taxation could not be a reserve but a provision for proposed dividends could be considered as reserves.
12. We have examined these judgments carefully and find they are based on the analysis of the facts of each case. We are dealing here with three separate amounts. They are : a sum of Rs. 7,50,000 placed in a contingency reserve and transferred out of the profits. There is also a sum of Rs. 56,62,038 standing as a credit balance in the contingency reserve and, lastly, there is a sum of Rs. 1,20,956 shown as a charity reserve. The question that has to be ascertained from the analysis of the balance-sheet is whether these sums form part of the capital of the company or whether they are just deferred liabilities. If they are deferred liabilities then they are provisions. They are reserves if they are used in the capital of the company with a view to earning profits.
13. The balance-sheet shows that the contingency reserves as on January 1, 1962, stood at Rs. 56,62,087.91 to which a further sum of Rs. 1,20,956 was transferred. These two sums form the subject-matter of questions Nos. 1 and 2. We have been unable to relate any contingency from the balance-sheet to this reserve. It appears that out of prudence the company wanted to treat this reserve as separate from the other reserves of the company. It appears that the Tribunal was justified in treating this amount as being, just as much, a reserve of the company, as the other reserves.
14. It is now necessary to examine the reason the ITO gave for treating these amounts as not part of the reserves of the company. As far as the sum of Rs. 7,50,000 was concerned, it was said as follows :
'The claim of the assessed is not correct as, in accordance with the principles of accountancy, reserve consists of appropriation from profits and other surpluses which have been earned in the past, being amounts which are not designed to meet any liability, contingency, commitment or at the date of the balance-sheet.'
15. It appears that the ITO thought that the use of the terms contingency reserve established that this reserve was being made for an existing contingency, but this is not apparent from the balance-sheet. It appears that the assessed merely described the reserve as being a contingency reserve without any real existing contingency. Similarly, as regards the existing balance, the ITO used extremely cryptic language and stated as follows :
'assessed has claimed inclusion of contingency reserve, charity reserve and reserve for taxation. These claims are not allowed as they are not reserves for the purpose of capital computation.'
16. When the matter came up before the AAC on appeal, he observed that this question of contingency reserve had been considered by the ITO in the following year and in that year he had himself included it as capital.
17. Though the actual details of the balance-sheet are difficult to determine from the circumstances or material included in the statement of case, we find that no contingency can be located which existed at the time which would make us feel that the contingency reserve was meant to be a provision for existing liability. On the other hand, it appears to us that it is merely a description of the reserve. It was not in respect of a contingency but in respect of a possible contingency that may arise in the future. In other words, it was a reserve, properly speaking.
18. Turning to the charity reserve, it is clearly apparent that there was no existing liability and, thereforee, this was a reserve properly speaking. As long as the amount remained with the company it would be a part of the capital of the company.
19. We would, accordingly, answer all the three questions in the affirmative, in favor of the assessed and against the Department, but leave the parties to bear their own costs.