1. The Income-tax Appellate Tribunal has under Section 256(1) of the I.T. Act, 1961, read with Section 18 of the Companies (Profits) Surtax Act, 1964, referred the following question for the opinion of this court:
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that replanting, building and machinery reserve, tax contingency reserve and pension reserve are includible in the computation of capital under Rule 1 of Sch. II of the Companies (Profits) Surtax Act, 1964.'
2. The assessee is a non-resident foreign company incorporated in U.K. and engaged in the manufacture of tea from the estates owned by it in India. It filed a return under the above Act for the assessment-year 1964-65 admitting a net chargeable profit of Rs. 21,144. In the computation of capital under Rule 1 of Sch. II of the said Act, the assessee treated (1) replanting, building and machinery reserve, (2) tax contingency reserve and (3) pension reserve as part of its capital. The respective amounts are as follows:
(1)Replanting, building and machineryreserve 60,000(2)Tax contingency reserve 35,000(3)Pension reserve 10,000
1,05,000 or Rs. 14,00,00
3. The assessing officer rejected the assessee's claim that these were reserves qualifying for inclusion in capital. On appeal, the AAC upheld the assessee's contention that the reserves constituted free reserves and they: were includible in the capital computation. On appeal by the department, the Tribunal, following an earlier order of its, held that the three reserves were reserves which should be taken for capital computation under r. 1 of Sch. II of the Companies (Profits) Surtax Act, 1964. It is, this order of the Tribunal which is now challenged in the present reference in the form of the question set out already.
4. As the Tribunal has merely followed an earlier decision of its, we have to set out some facts as they appear in the order of the AAC with respect to these three reserves. As regards the reserve for replanting, building and machinery, the AAC has pointed out as follows :
'Taking a period of ten years, i.e., from 1953-64 assessment, I have ascertained that the replacements charges to revenue account added back for the purpose of Indian income-tax was Rs. 6,96,063 (sic) whereas the normal depreciation allowed by the department was Rs. 9,02,384. From the above figures it could be seen that only the replacements already charged could be treated as representing depreciation and not the reserve of Rs. 8 lakhs in dispute. From the beginning of the creation of this reserve in 1953, no amount has been debited to this account and every year additional sums have been added and ultimately for the year ended June, 1967, the entire amount of Rs. 8 lakhs ( 60,000) was transferred to the general reserve account.'
5. In dealing with the contingency reserve, the AAC has pointed out:
'I find from the balance-sheet that in respect of taxation there are: (a)tax contingency reserve, 25,000, (b) future taxation, 64,700 and (c) current taxation, 15,968. As explained by the appellant the quantified provisions created for the current taxation is at (c) above whereas the amount coming under (b) is in respect of the income of the year with a provision for increase in the rates as per the Finance Bill that would come up in February nextfollowing the close of the accounting year in June. As different from the above two, the taxation contingency reserve is meant to meet any contingency in future years in respect of the increased income and increased rates of taxation. From the perusal of this reserve account, I find that it has been created in the year ending June, 1961, and in the year ending June, 1964, it has been transferred to the general reserve account.'
6. Regarding the pension reserve this is what has been observed:
'The Surtax Officer has referred to this and has stated that this is earmarked for a specific liability and, therefore, not a free reserve but only provision for a liability. The appellant has objected to this view and has filed a copy of the pension reserve account which commences from 1954 and is ultimately transferred to the genera] reserve account in the year ended 30th June, 1963, and a special dividend has been declared from out of the same. There has been no debit to this reserve account from the very inception of the account till the transfer to the general reserve account. The representative has pointed out that it was only to meet an unascertained future contingency and cannot at all be termed as a provision for any liability. I agree with the views of the appellant and taking into account the above factors I shall consider this reserve also as a free reserve includible in the capital computation.'
7. With reference to this very assessee there was an earlier reference in T.C. No. 98 of 1971 [since reported in CIT v. Craigmore Land and Produce Co. Ltd. : 110ITR730(Mad) . That reference was concerned with the order of the the Tribunal in S.P.T.A. Nos. 16 and 17 of 1968-69 dated March 12,1970, which the Tribunal followed in the present case. In that reference, the following question was one of the two questions referred for the opinion of this court:
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that replanting, building and machinery reserve of Rs. 8,00,000 was a reserve includible in the computation of capital under r. 1 of the Second Schedule to the Super Profits Tax Act, 1963?'
8. The answer to this question was given in favour of the assessee. Following the answer given to that question, we hold that in the present case also the replanting, building and machinery reserve was rightly treated as a reserve by the Tribunal.
9. With reference to the tax contingency reserve from the extract from the order of the AAC it would be clear that it was not created for the purpose of meeting any tax liability as such. It would, therefore, follow that it would be in the category of a free reserve so as to qualify for inclusion in the computation of capital. The Tribunal's conclusion in this regard is correct. As regards the pension reserve it has been pointed out by the AACthat there has been no debit to this reserve account from the very inception and that it was ultimately transferred ,to the general reserve account and it was also used for declaration of dividends. Under these circumstances, it is clear that it was not for the purpose of meeting any liability as such. In the context of the above facts, it is clear that the decision of the Tribunal regarding this reserve also is correct. We, therefore, answer the question referred to this court in this reference in the affirmative and in favour of the assessee. The assessee will be entitled to its costs. Counsel's fee Rs. 500.