: S. Ranganathan, J. - This is a reference under the Super Profit Tax Act. The assessed Paper Products Ltd. is a limited company doing business in paper products. The assessment year in question is 1963-64, the corresponding previous year being the period from 1.8.1961 to 31.7.1962. The only point in dispute is in regard to the determination of the standard deduction for the purpose of determining the chargeable profits of the company liable to super profits-tax. Sec. 2(a) of the Super Profits Tax Act, 1963 (hereinafter referred to as 'the Act') defines standard deduction as an amount equal to 6% of the capital of the company as computed in accordance with the provisions of the Second Schedule or an amount of Rs. 50,000 - whichever the capital of a company is the sum of the amounts, as on the first day of the previous year relevant to the assessment year, of its paid up share capital and if its reserve, if any created under the Proviso (b) to cl. (vib) of sub-s 2 of s. 10 of the Indian IT Act, 1922 or u/s 34(3) of the It Act, 1961 and of its other reserves in so far as the amounts credited to such other reserved had not been allowed in computing its profits for the purpose of the IT Act. The assessed claimed that two amounts shown in the assesseds balance-sheet as on 1.8.1961 under the heading 'current liabilities and provisions' should be treated as 'reserves'. One of these was Rs. 10,19,573 described as reserve for taxation. This included a sum of Rs. 5,21,573 brought forward from the earlier years and an amount of Rs. 4,98000 - being the purposed addition out of the profits of the year ended on 31.7.1961. The other item was shown as provision in regard to the proposed dividend and was of an amount of Rs. 3,83,965. The ITO and the AAC rejected the assesseds claim that these two amounts should be treated as reserves and hence taken into account in calculating the standard deduction available to the assessed. An appeal to the Appl. Tribunal by the assessed was also unsuccessful. The Tribunal observed that in the absence of a statutory definition, the expression 'reserve' should be understood in contra distinction to the term 'provisions'. These two expressions had a clear meaning and connotation both according to the Companies Act, 1956 and in established commercial practice. Applying these principles, the Tribunal was of opinion that there could be no doubt that the amount set apart for discharging a tax liability can only be provision and not a reserve. After the decision of the Supreme Court in the case of Kesoram Industries and Cotton Mills Ltd. v. CWT the tax liability in respect of the accounting year is not a continent liability but is a real accrued liability. The estimated or anticipated tax liability is a deduction before the profits can be determined and not an appropriation of profits. The Tribunal was of opinion that the decision of the Madras High Court in the case of CIT V. Vasantha Mills must be considered to have been over-ruled by the decision of the Supreme Court in the case of Metal Box Company of India Ltd. v. Their Workmen . In regard to proposed dividend also, the Tribunal observed that ipso facto it was an amount not available for reserve. It was an amount not meant to be ploughed back for the use of the company but was meant for distribution to the shareholders immediately after the general meeting was held. It could thereforee, not be treated as a reserve.
2. The assessed aggrieved by the decision of the Tribunal has had the following question referred to this Court for its opinion :-
'Whether to this Court for its in the circumstances of the case, the assessed company is entitled to include two items, viz. reserve for taxation of Rs. 10,19,572 and proposed dividend of Rs. 3,83,965 in the computation of reserves by reference to which the standard deduction is to be computed.'
The question whether the amounts set apart to meet the tax liability or for proposed dividends could be treated as a reserve has been considered in a large number of decisions. Practically all the courts have held that these would be only provisions and not reserves within the meaning either of the Super Profits Tax Act, 1963 or the Companies (Profits) Surtax Act, 1964. Ld. counsel for the department has drawn our attention to the following decisions :
CIT v. Hind Lamps Ltd. , Nagammal Mills Ltd. v. CIT , Vazir Sultan Tobacco Co. Ltd. v. CIT , United Nilgiri Tea Estates Co. Ltd. v. CIT v. Hindustan Milk Food Mfg. Ltd. , Hotz Hotels Pvt. Ltd. v. CIT , Hyderabad Asbestos Cement Products Ltd. v. CIT , Shree Ram Mills Ltd. v. CIT , Braithwaite and Co. (India) Ltd. v. CIT , Ducan Brother and Co. Ltd. v. CIT (1978) 111 ITR 888 , United Breweries Ltd. v. Addl. CIT , Madras Motor and General Insurance Co. Ltd. v. CIT and A.P.V. Engineering Co. Ltd. v. CIT .
All these decisions have, in the absence of a statutory definition, applied the well established accountancy meaning of the expression 'reserve' and come to the conclusion that where amounts are set as apart to meet known accrued liability, the amount of which cannot be determined with substantial accuracy, they would only be in the nature of provisions and not reserves. So far as an amount set apart for meeting tax liability is concerned, it is clear that the amounts is being apart only to meet a liability which has already attached itself, on the last day of the accounting year, to the profits earned by the company as laid down by the Supreme Court in the case of Kesoram Industries & Cotton Mills Ltd. v. CWT (1966) 59 767 (SC). In the case of dividend again the amounts set apart are being set apart only for being distributed as soon as the general meeting is over unless the shareholders decide that the dividends should not be the extent recommended by the directors. Moreover, as pointed out by the Supreme Court in the case of Mysore Electrical industries, once the share-holders decide in the annual general meeting to the accept the recommendations of the directors, their ratification of the directors recommendation takes respective effect from the date up to which the balance-sheet is drawn up. thereforee, where the recommendations of the directors are accepted at the general meeting, though subsequently, the amount set apart at the time of the preparation of the balance-sheet is to be considered as allocated only with a view to distribute it to the share-holders. We are, thereforee, of the view, in entire agreement with the large number of judicial decisions, referred to above, that the amounts in question do not constitute 'reserves'.
3. Mr. Ram Panjwani, the ld. counsel for the assessed company, vehemently contended that there is a basic misconception underlying these decisions viz. their attempt to import concepts, notions or definitions is company law or commercial accountancy into the task of interpretation of the provisions of the Act, Referring to certain passages from Palmer (21st Edn. pages 602, 1160 and 1251), Pennington (2nd pp. End., 331, 332) and Gower (3rd Edn. p. 463), he contends that the definition of reserve introduced for the first time by the English Companies Act of 1948 (and subsequently amended in 1967) had a totally different purpose and was intended to ensure that companies did not keep secret reserves and withhold information regarding them from the share-holders. He says that the contra-distinction between a reserve and a provisions is a pure creation of the Companies Acts and should not be taken into accounts at all in the present context. Ld. counsel points out that the Supreme Court, in the case of Century Spinning and Weaving . resorted to the dictionary meaning of the expression 'reserves' in the absence of a statutory definition and says that we should also do likewise. Placing great reliance on the definition of these expressions 'reserves' and 'provisions' in the Oxford Dictionary (Vol 2, P. 1805 & 1696), Ld. counsel contends that, in order to create a reserve, all that was necessary was that some person with the requisite authority should decide to keep back or set apart certain funds. Such setting apart may be for present use or future use and in the latter case, the further use may be within a short time or even after a long interval of time. Considering that the object of the Super Profits Tax Act is to allow a deduction of funds available for use in a business as on the relevant date, the assessed should be entitled to treat as a reserve any sum which has been set apart for some purpose and which remains in the hands of the assessed on such date. Ld. counsel urged that perhaps where such funds are frittered away within an unreasonably short time after the relevant date, they may not qualify for being considered as reserved and suggested that perhaps a period of three months could be considered to be reasonable for this purpose. In support of his contentions, Sri Panjwani relied upon the judgment of the Calcutta High Court in CIT v. Burn & Co. Ltd, , of the Allahabad High Court in CIT v. Security Printers of India (P) Ltd. and on some observations made by a bench of this Court in the Orissa Cement Case . He also sought to make a point on the basis of a small difference in phraseology between the provisions of r. 1 of the Second Schedule as contained in the Super Profits Tax bill and the rule as finally made.
4. We do not consider it necessary to discuss at great length the contentions raised by the ld. Counsel, for practically, all these contentions have been considered in the various decisions to which reference has already been made. So far as the decision of the Calcutta High Court in CIT v. Burn & CO. Ltd. is concerned the arguments addressed by the counsel on the basis of this decision have been fully answered in the latter decision of the Calcutta High Court in A.P.V. Engineering Co. Ltd. CIT . We, thereforee, refrain from discussing the matter in detail and shall only refer to some of the points made by the ld counsel which, in our opinion, invite our consideration.
5. At the outset, we would like to refer to the arguments of counsel, based on the Century case, that the word 'reserved' should be interpreted according to its ordinary dictionary meaning and with reference to its definition in the Companies Act or its connotation in commercial practice. There are two reasons why it is said that this should be done. One is that the Act contain no definition as was the case under the Business Tax Act considered by the Supreme Court. The second is that, though it is an enactment of 1963 applicable only to companies, it does not incorporate or even refer to the definitions of reserve and provision in Schedule VI to the Companies Act, 1956 while its successor, the Companies Profits (Surtax) Act, 1964, specifically does so. But these very reasons can also be urged in support of a contrary line of reasoning. It can be said that the Business Profits Tax Act, was, unlike the present Act, applicable to all assesseds including assesseds other than companies and that is why the Supreme Court had to fall back on the dictionary meaning and could not narrow down the meaning of an expression used in reference to several categories of assesseds to the definition contained in an Act which applied only to one of them. On the other hand, the present Act being one applicable only companies and companies being bound to maintain their accounts only in the manner prescribed by the Companies Act, the terms have to be understood only in the sense in which they have been used in that Act. No specific reference to the Companies Act is, in this view, necessary at all and there is no justification to resort to the dictionary meaning of expressions which have such clear connotations under that Act. The specific reference to Schedule VI of the Companies Act in the 1964 Act is also not inconsistent with this position. The argument based on the 1964 Act may have had some force if that Act had defined these two expressions in the same way as the Companies Act for, than, the absence of a similar provisions in the 1963 Act could be said to be significant and indicative to the contrary. But actually, what the 1964 Act, by its Explanationn, seeks to do is to proceed on the basis that the Companies Act would apply but still to deny the characteristic of reserves (not only to items shown under current liabilities and provisions but) even to items which, under the Companies Act, would be reserve Act, would be reserves. So, it can be said, the absence of such a definition in the 1963 Act only avoids this further consequence but the contract of its language with the language of the 1964 Act does not preclude the understanding of the expressions provision and reserved in the sense in which they are defined under the Companies ACT.
6. We find that this point has been touched upon in the decision of this Court in the case of CIT v. Orissa Cement Ltd. . There are, at pages 266 and 267, some observations which support referred to above. However, these observations were not the basis of the decision in that case, for, both the parties in that case had proceeded on the footing (vide the observations at page 265) that the words 'reserve' and 'provisions' had to be understood in the light of the definition of those expressions in the Metal Box case . It was a case referred to this Court at the instance of the department and this Court ultimately held that, even giving the above restricted meaning to the expression, the amounts there in question did not constitute 'reserves'. The observations regarding the dictionary meaning being applicable of the definition in the Companies Act being in applicable were made in passing and cannot be taken as constituting the ratio of that decision. However, we think, for the purpose of the present case, it may not be necessary to go into that question for the assessed in the present case is not, in our opinion, entitled to succeed irrespective of whether we give the ordinary dictionary meaning to the expression or adopt the meaning which it has acquired in commercial accountancy and was enunciated in the Metal Box case (supra) or apply the still narrow definition under the Companies Act.
7. So far as the dictionary meaning is concerned the various meaning of the word 'reserve' has been set out in the decision of the Supreme Court in the Century case (supra). There is a common idea underlining all these meaning, namely, that the amount should be kept back or held over for use, enjoyment or treatment at a future time or occasion. One of the meaning given in the Oxford Dictionary also carries the connotation that the person setting the amount apart intends to refrain from using or enjoying it as once. These dictionary meanings clearly show that the term reserve carries in itself two implications (a) that the person withholding it has the amount available at his disposal for being kept back and (b) that he proposes to keep it back and not to use or spend it away immediately. Of the two items before us, one fails to fulfilll test (a) and the other does not answer requirement (b).
8. It is now settled that the liability for taxation is an accrued liability as at the end of the relevant previous year. The amount thereof is a charge against the Profits of the company and is not, in a true legal sense, available for allocation out of the profits for such use as the directors may consider appropriate. Condition (a) above necessarily imports, even in the ordinary meaning of the word; reserves, the test whether the amount is truly a charge on the profits or an appropriation or application of profits. It may, however, be that, in a case where the provision, though made in respect of tax liability, is found to be considerably in excess of the needs of the situation, the excess provision can be treated as a reserve see for e.g. CIT v. Indian Steel Rolling Mills Ltd Nagammal Mills v. CIT (1974) 94 ITR 38 and Hotz Hotels Pvt. Ltd. v. CIT . There has been no specific plea in this case at any of the earlier stages. However, Shri Panjwani made a reference to it and requested that he matter may be directed to be examined on this aspect. This is an aspect which has not been considered but it has arisen only in the light of the several cases decided subsequently by the High Courts and, as was done by the Himachal Pradesh High Court in the Hotz Hotels case (supra), we think it fair that the assessed should have an opportunity to show, if it can, that the allocation in this respect was in excess of the anticipated requirements and to have such excess, if any, treated as a reserve. Hence, while answering the question referred to us in general terms against the assessed, we leave it open to the assessed to urge this aspect, if sustainable on the facts, when the matter goes back to the Tribunal for disposal in confirmity with this judgment.
9. In the case of the provision for dividend, the amount is intended not for being kept back but for being distributed and so it can hardly be said to be a reserve. In fact in regard to an amount set apart for distribution of dividend, the Supreme Court observed in the Century case
'....... the directors clearly earmarked it for distribution as dividend and did not choose to make it as a reserve.'
'The recommendation was accepted and the dividend was actually distributed; it is, thereforee, not correct to say that the amount was kept back.'
These observations clearly show that the mere fact that the amount is in a loose sense, intended for some purpose is not sufficient of make an item a reserve. If that very wide meaning is accepted them none of items appearing in the balance sheet of a company would be a reserve (except only the mass of undistributed profits that came up for consideration in the Century case. We do not think that such a wide meaning which will render the whole provision in r. 1 meaning-less, is warranted even on the basis of the dictionary meaning of the word 'reserve'.
10. The assesseds case also fails if one were to understand the expression as it is understood in commercial accountancy, and as was done by the Supreme Court in the Metal Box case . Though that was a decision under the Bonus Act, there was no definition of the word reserve and the Supreme Court considered it appropriate to import into expression its connotation in commercial accounting as the expression used in contra-distinction to the term provision. A company in India is bound to keep its accounts on the basis of the mercantile system of accounting. Indeed its balance sheet has to be drawn up only in accordance with the provisions of the Companies Act and that is why, in the present case, the company has set out the two items in dispute under the head cur rent liabilities and provisions and not under the head reserves and surplus. Even if, on a technical approach the definition given in part III, of the Sixth Schedule to the Companies Act is excluded, it is difficult to accept the contention of Shri Panjwani that even the principles of commercial accounting should be completely disregarded. This aspect based on the commercial meaning has been fully explained in the earlier decision of this Court in the Orissa Cement case (supra) where it is pointed out, at page 267, that if this commercial interpretation is accepted, the expression known liability in the working definition outlined in the Metal Box case (supra) should be understood as meaning accrued liability. It has also been pointed out that where amounts are set apart for income tax which is a liability is present they would be only in the nature of a provision for a liability which has already arisen and the amount of which would have been charged straight away to the Profit and Loss account but for the fact that the exact amount is not definitely known. Again referring to the decision of the Punjab and Haryana High Court in Hindustan Milk Food case and the Century case , it has been pointed out that an amount which is earmarked to be distributed within a short time as dividend cannot be treated as a reserve. We are unable to draw a distinction based on an arbitrary period of time and to say, as Mr. Panjwani urges, that if an amount is retained for a reasonable length of time it could be treated as reserve but not otherwise. That would be to introduce a concept and several words which are not in the statutes. We think that the correct principle is not whether these amounts will be held back for a month, six months or ten months or for an indefinite period but on whether (a) they can be kept back (b) they are really intended to be kept back, as explained already, or to be distributed as dividends for the year in question. If the correct position be as stated above, the amount would clearly be only provision in the light of the extended definition in part III of Schedule VI of the Companies Act. Thus in any view of the matter neither the provision for taxation nor that for proposed dividends could be said to be reserves.
11. Mr. Panjwani relied very strongly on the decision of the Patna High Court in Heckett Engineering Co. v. CIT . This decision has been discussed in the Orissa Cement case (supra) and it has been pointed out that the observations in that case travel much further than the understanding of the concept by the various High Courts. We are unable to accept the interpretation placed by the Patna High Court that only an amount set apart to meet an existing demand will be a provision and not even one to meet an existing liability for the reasons already discussed. It will also be appreciated in this context that where there is an existing demand for a particular amount, in the books of the company adopting the mercantile basis, it will be debited straight away to the Profit and Loss Account and no question of setting it apart while appropriating the years profits would at all arise.
12. It only remains to touch upon the point made by Mr. Panjwani on the basis of the language of the rule in the bill as contrasted with that in the Act. It will be convenient to set out these two provisions side by side :-
'1 Subject to the other Provisions contained in this Schedule, the capital of a company shall be the sum of the amount, as on the first day of the Previous year relevant to the assessment year, of its paid up share capital and of its reserve if any created under the proviso (b) to clause (vib) of sub section (2) of Section 10 of the Indian Income-tax Act, 1922 (11 of 1922), or under sub-section (3) of Section 34 of the Income-tax Act of its other reserves in so far as the amounts credited to such other reserves have not been allowed in computing its profits for the purposes of the Indian Income-tax Act, 1922 (11 of 1922) or the Income-tax Act, 1961 (43 of 1961)
1. Subject to the other provisions contained in this Schedule, the capital of a company shall be the sum of the amount, as on the first day of the previous year relevant to the assessment year of its paid up shares capital and of its reserves in so far as the amounts credited thereto have not been allowed in computing its profits for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or the Income-tax Act, 1961 (43 of 1961)
The point made by Shri Panjwani is that the word 'other' qualifying 'reserves', which was not in the Bill has been introduced in the Act with the intention that the expressions should cover all categories of appropriations and are not to be confined to a reserve in the technical sense of the term. We are, however, unable to attach much significance to this difference between the text of the Bill and the language of the Act. The Act only incorporates a bifurcation between a development rebate reserve and other reserves. The basic principle in the provision contained in the Bill was that an item could be treated as a reserve only to be extent it was not allowed as a deduction for purposes of computing the total income of the assessed under the IT Act. This was for the simple reason that something which has been considered as an outgoing and deducted in the computation of the companys income cannot consistently be treated as part of the companys capital. However, the legislature wanted to make an exception in the case of development rebate reserve which is statutorily required to be kept apart by the company and kept employed in the business for a period of ten years. In view of this restriction regarding the amounts credited to the development rebate reserve the legislature wanted to except this and treat it as a reserve, not withstanding that an amount corresponding to the amount set apart would have been allowed as a deduction in the computation of the business income. That is why the Act refers to the development rebate reserves int eh first instance and then talks of other reserves not allowed to be deducted in the computation of the income of the company. We are, thereforee of opinion that there is no basic difference in principle between the Bill and the Act and that the words of the Act do not in any manner have the effect of broadening or enlarging the scope of the word reserves in the manner suggested by the ld. counsel.
13. For the above reasons we are of opinion that the Tribunal was right in treating both the items in question as provisions and not as reserves. The question referred to us is, thereforee, answered in the negative and against the assessed, subject, however one aspect which has been left open by us for consideration by the Tribunal. However, as the assessed has substantially failed, it will pay the costs of the Commr : Counsels fee Rs. 500.