1. The assessee is a public limited company under the management of a private limited company called ' S. S. Pillai and Sons Private Ltd.' The profits of the company for the year ending December 31, 1961, was Rs. 6,26,772.64 and there was a brought forward profit of Rs. 6,227.94 from the earlier year. The accounts for the said year were considered by the board of directors on May 31, 1962, and the following appropriations had been made before declaring the dividends :
Rs.Provision for tax3,60,000Proposed dividends2,31.470
2. For the purpose of computation of capital as on January 1, 1962, the assessee claimed that the above sums as also a sum of Rs. 2,60,000 set apart for payment of advance tax for the earlier year should be taken as ' other reserves ' occurring in Rule 1 of Schedule 2 to the Super Profits Tax Act, 1963 (hereinafter referred to as ' the Act '). The Super Profits Tax Officer, however, held that the above sums were not includible in the capital as on January 1, 1962, on the ground that they did not represent 'reserves' on that date.
3. The assessee appealed to the Appellate Assistant Commissioner. He held, following the ratio of the decision of the Supreme Court in Commissioner of Income-tax v. Century Spinning and ., : 24ITR499(SC) that the sum of Rs. 2,60,000 set apart as provision for tax in the earlier year by a resolution of the board of directors on May 31, 1961, should be considered as 'reserve' on May 1, 1962, but as the tax paid up to December 31, 1961, was more than that sum, there is no amount to be considered as a reserve out of that sum. As regards the sums of Rs. 3,60,000 and Rs. 2,31,470 he held that the appropriation was made only on May 31, 1962, and that the said items remained a mass of undistributed profits as on January 1, 1962, and, therefore, they cannot be considered as 'reserves'. In that view it affirmed the computation of capital made by the Super Profits Tax Officer.
4. Thereafter, the assessee appealed to the Appellate Tribunal. It was contended before the Tribunal that as the necessary appropriation having been made by the managing agents issuing a direction on December 31, 1961, they were not mass of undistributed profits as on January 1, 1962. The Tribunal, however, held that the direction of the managing agents given on December 31, 1961, was only an administrative direction, that the managing agents acted under the authority of the board of directors, that the authority to make the appropriation was only with the board of directors and that in view of the decision in Century Spinning and . v. Commissioner of Wealth-tax, : 59ITR767(SC) held that the sum represented the present liability and a provision to discharge that liability cannot be a reserve. At the instance of the assessee the following question has been referred to this court :
' Whether, on the facts and in the circumstances of the case, the two sums of Rs. 6,20,000 and Rs. 2,31,470 represented reserve for the purpose oi inclusion as capital under the Schedule to the Super Profits Tax Act '
5. The Tribunal has rejected the assessee's contention that the said sums represented 'reserves' created by the company on the only ground that the appropriation of these sums for the respective purposes came to be made only on May 31, 1962, and that on January 1, 1962, the sums were part of undistributed profits. It has purported to follow the decision of the Supreme Court in Century Spinning and ., : 80ITR566(SC) , the Supreme Court has specifically considered that question and expressed the view that as the accounts of the company have to be made up for a year upto a particular day, it was not practicable to make up the accounts upto the close of the year even on the next day and, therefore, the appropriation made by the appropriate authority on a later date must relate to the first day of the accounting year and must be treated as effective from that day. Their Lordships said :
' In our view, although such allocation was factually not possible on the very first day of a year but allocation on a later day should be treated as effective from that day in view of the fact that the division of undistributed profits became effective from that day.'
6. In our view the said decision of the Supreme Court which directly dealt with Rule 1 of Schedule 2 of the Companies (Profits) Surtax Act, 1964, which is somewhat similar to Rule 1 of Schedule 2 of the Act and uses the words 'as on the first day of the previous year ' as distinguished from the words 'on the first day of the previous year' used in Rule 2(1) of Schedule 2 of the Business Profits Tax Act, 1947, which was considered by the Supreme Court in Century Spinning and Manufacturing Co.'s case, the reasoning of the Tribunal that the sum in question represented mass of undistributed profits on January 1, 1962, cannot be accepted.
7. As already stated, the sum of Rs. 6,20,000 represents two items consisting of Rs. 2,60,000 set apart for payment of taxes in the earlier year and Rs. 3,60,000 set apart for payment of taxes in the accounting year. The sum of Rs. 2,31,470 represents the sum set apart for payment of the proposed dividends. We have held in T.C. Nos. 260 and 261 of 1967, Nagammal Mills Ltd. v. Commissioner of. Income-tax : 94ITR387(Mad) that the amounts set apart for discharging a specific liability and which are actually paid out by the company cannot be treated as a 'reserve' for the reason that the sums so set apart are not available for the future use of the company. Therefore, we have to hold that the amounts set apart for payment of proposed dividend are for discharging a specific liability of the company which has been created by a resolution of the board of directors declaring the dividends. Therefore, it will cease to be a reserve under Rule 1 of Schedule 2.
8. As regards the provision for taxation, it is not known as to what is the exact amount which has been paid as tax during the year. The Appellate Assistant Commissioner merely states that the advance tax paid up to December 31, 1961, was more than Rs. 2,60,000 and the Tribunal has not gone into the question as to how much was the actual liability towards taxes. As we have held that the actual amount paid towards taxes out of the amount set apart for taxes cannot be treated as reserve and only the excess provision can be treated as a reserve, it has to be found out as to what is the actual liability of the company for taxes. The Tribunal has to, therefore, go into the question as to what is the exact quantum of tax liability of the company for finding out the excess amount available under that head as a reserve.
9. The question is, therefore, answered technically in favour of the assessee. The assessee will have its costs from the revenue. Counsel's fee Rs. 250.