Sabyasachi Mukharji, J.
1. In this reference under Section 256(1) of the I.T. Act, 1961, we are concerned with the following question:
' Whether, on the facts and in the circumstances of the case, andon a correct interpretation of the Explanation to Rule 1 of the SecondSchedule to the Companies (Profits) Surtax Act, 1964, and of Part III ofSch. VI to the Companies Act, 1956, the Tribunal was right in holdingthat the amount of Rs. 8,30,716 shown as the additional depreciationreserve and Rs. 7,24,507 shown as included in the additional taxationreserve in the balance-sheet of the assessee-company should be regarded asreserves for the purposes of computation of the capital of the assesseeunder the provisions of the Second Schedule to the Companies (Profits)Surtax Act, 1964 ?'
2. The assessment year involved is the assessment year 1964-65. The assessee is a company. It used to provide for, on cash basis, depreciation at the rate of 15 per cent. on the plant and machinery, 25 per cent. on motor vehicles and 5 per cent. on buildings from year to year. The assets were re-valued by the assessee in 1962 as it thought it was desirable to provide for additional depreciation reserve over and above the normal depreciation. The additional depreciation reserve was worked out by adopting a certain percentage of the basic depreciation with reference to the year of purchase of those assets. The additional depreciation reserve was in a way provided for to meet the replacement cost which might be found necessary for the machinery and plant becoming too old and being rendered useless. In other words, the additional reserve was more or less like development rebate reserve intended to be utilised by the replacement of the machinery either by way of modernisation or by way of rehabilitation. At the beginning of the previous year relevant to the assessment year 1964-65, the additional depreciation reserve thus came to Rs. 8,30,716. The first part of the question relates to the decision of the Tribunal holding that the amount of Rs. 8,30,716 should be regarded as reserve for the purpose of computation of the capital of the assessee under the provisions of Schedule II to the C. (P.) S.T. Act, 1964. In view of the actual facts, as found by the Tribunal, as indicated hereinbefore and in view of the well settled principle on this aspect of the matter, it must be held that the Tribunal was right in its conclusion. This point was not seriously disputed before us on behalf of the revenue. Therefore, the first part of the question, that is to say, whether the Tribunal was right in treating the sum of Rs. 8,30,716 as reserve for the purpose of the computation of capital of the assessee-company under the relevant provision, must be answered in the affirmative and in favour of the assessee.
3. So far as the second aspect of the question is concerned, it relates to the additional taxation reserve of Rs. 13 lakhs. On this account, the directors had set aside a sum of Rs. 13 lakhs on 30th April, 1963, by way of additional taxation reserve in view of the impending levy of super profits tax proposed in the Budget of 1963. This is borne out by the directors' report to the shareholders dated 30th April, 1963, and is in relation to the account for the 52 weeks ending on 29th December, 1962. It may be mentioned here that the Super Profits Tax Act received the assent of the President on the 4th May, 1963, and was published in the Gazette of India on the 6th May, 1963. It was made clear from the directors' report that the directors thought that the company's liability in respect of the super profits tax would be approximately Rs. 81/2 lakhs in view of the reliefs announced, by the Finance Minister though they otherwise made a provision for Rs. 13 lakhs. It may not be inappropriate at this stage to referto the report of the directors to the shareholders dated 30th April, 1963. In submitting the annual report with the accounts for the 52 weeks ending on 29th December, 1962, the directors had stated as follows :
' Your directors have considered it prudent to make a transfer to Additional Taxation Reserve of a sum of Rs. 13 lakhs to provide for the levy of super profits tax proposed in the Budget. However, in view of the ' relief ' since announced by the Finance Minister, it is now estimated that the company's liability for this tax will be approximately Rs. 8 1/2 lakhs.'
4. We may incidentally, point out that this report of the directors which had been referred to by the Tribunal and by the authorities below was not annexed to the statement of case but learned advocate for the revenue drew our attention to the actual report and this was not objected to by the learned advocate for the assessee to treat it as a part of the report before us. The directors finally recommended the payment ' towards reserve for additional taxation to cover super profits tax ' a sum of Rs. 13 lakhs. Though we have not got the actual date of holding of the annual general meeting and the passing of the accounts, as recommended by the directors to the shareholders, yet in accordance with the provisions of the Companies Act it could not have been earlier than the expiry of three weeks from 30th April, 1963. In this connection, it is important to bear in mind the date, as we have mentioned before, that the S.P.T. Act with which we are concerned, received the assent of the President on the 4th May, 1963. To continue with the narration of events it must be stated that the ultimate liability for the super profits tax turned out to be Rs. 5,75,493. The company wrote off Rs. 2,24,000 out of Rs. 13 lakhs kept reserved for the relevant year. Thus, out of Rs. 13 lakhs, Rs. 5,24,000 was transferred to the general reserve fund of the company while finalising the accounts for the year ended on 29th December, 1963. Similarly, the assessee also transferred a sum of Rs. 2,00,507 to the general reserve account while finalising the accounts for the year ended on 31st December, 1971. In 1964, the company had actually paid Rs. 5,75,493 under the S.P.T. Act as mentioned hereinbefore. Thus, it appeared that out of the amount of Rs. 13 lakhs treated as reserve for the super profits tax liability as appearing at the beginning of the previous year under appeal before the Tribunal, the amount of Rs. 7,24,507 actually represented an excess provision which was ultimately ploughed back into the reserves of the company. In those circumstances, the ITO had computed the capital base of the company for the assessment year 1964-65 by treating the additional depreciation reserve and additional taxation reserve as appearing at the beginning of the relevant previous year under appeal as provisions not eligible for inclusion in the capital base of the company. The ITO was ofthe opinion that these provisions were retained by the company for meeting a known liability and it could not be treated as reserve within the meaning of the Second Schedule to the Surtax Act.
5. There was an appeal from the said decision of the ITO to the AAC. The AAC relied on the observations of the Calcutta High Court in the case of Indian Steel & Wire Products Ltd. v. CIT : 33ITR579(Cal) and upheld the ITO's order.
6. There was a further appeal to the Tribunal. It was contended on behalf of the assessee that so far as the additional taxation reserve was concerned, a reserve of Rs. 13 lakhs was created only to meet the liability as it was not known at that time whether the super profits tax would definitely be put into effect. It was, therefore, urged that the reserve was made for a liability which was not existing at that time and the entire amount of Rs. 13 lakhs should be treated as reserve and included in the capital base. In the alternative it was pointed out that at least the balance left out of the amount of Rs. 13 lakhs after discharging the liability of the super profits tax, viz., the amount of Rs. 7,24,507, be treated as reserve and included in the capital base. It was pointed out on behalf of the assessee that the Explanation to Rule 1 of Schedule II to the C. (P.) S.T. Act, 1964, referred to certain provisions in Schedule VI of the Companies Act, 1956, which enjoins to go by the definition of the provision and reserve as given in Schedule VI to the Companies Act, 1956. It was pointed out that Pt. III of Schedule VI to the Companies Act, 1956, strengthened this position. On behalf of the revenue, however, it was urged that the S.P.T. Act, 1963, had received the assent of the President in the first week of May, 1963, while the directors' report to the shareholders for the year under appeal was signed on 30th April, 1963, by which time the Bill had already been passed by Parliament. It was, not, therefore, true, according to the learned advocate for the revenue, to contend that there was no existing liability as on the 30th April, 1963. It was, further, urged that at any rate the provision was made for a definitely known liability though the exact quantum was ascertainable only at a future date. It was, therefore, urged that the entire amount of Rs. 13 lakhs should be treated as provision and not as reserve and was rightly excluded from the capital base. It was secondly argued that even if for the sake of argument it was held that the excess payment of Rs. 7,24,507 was a reserve and not a provision, this was not so in the beginning of the relevant previous year. Dealing with this question of additional taxation reserve which relates to the second aspect of the question referred to us, the Tribunal was of the view that the entire amount could not be treated as reserve. At the time when the directors signed the report, according to the Tribunal, the S.P.T. Act, 1963, had already been passed by Parliament and, therefore, the provision was really madeto meet the known liability. However, the liability of the assessee turned out to be only Rs. 5,75,493. The Tribunal found that the balance had actually been ploughed back into the reserve as pointed out before in the subsequent year. Therefore, the Tribunal was of the view that as regards the excess provision it was in the nature of a reserve. In so doing the Tribunal took into account the relevant provision of Schedule VI of the Companies Act, the Explanation to r. 1 of Schedule II of the C. (P.) S.T. Act and the observations of the Supreme Court in the case of Metal Box Co. of India Ltd. : (1969)ILLJ785SC . The amount of Rs. 13 lakhs, according to the Tribunal, was there at the beginning of the relevant previous year under appeal and the amount of Rs. 7,24,507 therefrom should, therefore, be treated as reserve. Upon these, the question as indicated before has been referred to us.
7. Now, so far as the question of provision for taxation was concerned, whether it should be included in the reserve or not is the relevant question. It must, however, be pointed out that the frame of the question on this aspect indicates that the assessee was no longer contending that inasmuch as the Act had not received the assent of the President, the entire provision should be treated as reserve because there was no known liability and the question connected therewith is no longer before us but the question is only confined as to whether the additional taxation liability to the extent of Rs. 7,24,507 should be taken as reserve for the purpose of computation of the capital of the assessee-company under the provision of Schedule II to the C. (P.) S.T. Act, 1964. Therefore, we are really concerned with the question whether the excess provision for taxation under the S.P.T. Act should be treated as a provision or a reserve. It is well settled by numerous decisions which had been referred to us on this aspect that excess provision even for a known liability should properly be regarded as a reserve. Though the question of reserve and provision and the effect of the decision of the Supreme Court in the case of Metal Box Co. of India Ltd. : (1969)ILLJ785SC have been analysed in several decisions of the several High Courts including the numerous decisions of this court, we are of the opinion that it is indisputable that an excess provision even for a known liability should be treated as a reserve and not merely as a provision. Certain basic facts will have to be borne in mind in this case and we must consider the position prevailing as on 1st January, 1963. The directors of the company recommended in their report to the shareholders that Rs. 13 lakhs should be treated as reserve for taxation. That recommendation was made on the 30th April, 1963, and by that time the S.P.T. Act had been passed by Parliament. It received the assent of the President on the 4th May, 1963. The directors' recommendation or the report could not have been accepted by the shareholders for at least threeweeks after 30th April, 1963. Upon these basis, we have to decide whether this was a provision or a reserve.
8. Reliance was placed on behalf of the assessee on the decision of this court in the case of Braithwaite & Co. (India) Ltd. v. CIT : 111ITR825(Cal) . It is not necessary for us to set out in extenso the ratio and the facts of the said decision. It was stated by the Division Bench of this court that basically in computing the capital of the company for the purpose of surtax, and incidentally we may mention that the court was dealing with the C. (P.) S.T. Act, 1964, the true nature and character of a sum designated as a reserve was to be determined with reference to the substance of the matter. A reserve created in regard to a payment to be made on account of liabilities which had already arisen could not be properly termed as a ' reserve '. Now, our attention was drawn to p. 827 of the report, where the facts have been set out. There, on 2nd May, 1964, the C. (P.) S.T. Act, 1964, received the assent of the President. The directors had made their recommendations on the 15th May, 1964, and the directors' recommendations were accepted at the annual general meeting held on 18th June, 1964. Learned advocate for the assessee asked us to bear these facts in mind in considering the observations of the court at p. 834 and at p. 837 as well as at p. 839.
9. On the other hand, learned advocate for the assessee drew our attention and relied strongly on the observations of this court in the case of CIT v. Avery India Ltd. : 124ITR856(Cal) , where at p. 861, the learned judge delivering the judgment, Mr. Justice Basak, observed that the admitted position in that case was that if that amount could not be treated as a reserve, then it had got to be excluded for the purpose of computation of capital base for the purpose of ascertaining the standard deduction, and the learned judge posed the question whether it was to be treated as a reserve. What was known as reserve was discussed, the learned judge noted, in various decisions of this court and also the Supreme Court and in the case before their Lordships, the learned judge noted, it was not possible to accept the position on the relevant date, that is to say, 3rd April, 1963, there was any known liability, whether contingent or otherwise. The learned judge was of the view that there was no Act at that point of time. Merely there was a Bill. A Bill might or might not be passed into an Act. His Lordship was, therefore, unable to accept the contention of the revenue that the Bill should be treated as (creating) a contingent liability. And as in this case when the amount was earmarked on 3-4-63, there was no liability at all, learned advocate for the revenue sought to urge before us that though the recommendation was made on the 3rd April, 1963, actually, the recommendations were accepted some time in June of that year after the passing of the Act. Therefore, learned advocate forthe revenue sought to urge that the basic assumption made by the learned judge delivering the judgment in the said Division Bench was not correct. We are, however, not concerned in this case with this controversy. Here the facts are quite clear. The Act of Parliament has been passed by the 30th April, 1963, and that had been found by the Tribunal. So the contingency or the situation, which Mr. Justice Basak spoke of, that the Bill might or might not be passed into an Act by Parliament, arising before passing it, no longer Was open in practical possibility, as the bill was passed by Parliament in the instant ease. Furthermore, under the provisions of the I.T. Act, the directors' recommendations could not have become the decision of the company until it was accepted by the shareholders and that was done after 4th May, 1963.
10. Learned advocate for the assessee drew our attention and relied heavily on certain observations of mine in the decision in the case of C1T v. Burn and Co. : 114ITR565(Cal) . Itis not necessary, in our opinion, to discuss in extenso the said decision. There, we had formulated that in order to find out whether a particular amount was a reserve or not we must first see the substance of the matter. Secondly, it was necessary to determine whether the amount in question represented any profit earned by the company and any other amount available to the assessee-company and not distributed as dividend, and thirdly, whether a decision by the authorities competent to take a decision to keep the amount in question intact for any purpose to which it might be put in future. We have also referred to the observations of Mr. Justice Tulzapurkar, speaking for the Division Bench of the Bombay High Court in the case of Shree Ram Mills Ltd. v. CIT : 108ITR27(Bom) , and the learned advocate for the assessee strongly relied on the following observations in the said judgment at p. 582 of 114 ITR:
' A contingent liability which cannot be ascertained with any substantial accuracy may be considered to be a provision in contradistinction to ' reserve ' but not mere possibility of an obligation which has not matured into a liability. See the observation in the case of Commissioner of Income-tax v. Forbes Forbes Campbell & Co. Ltd. : 107ITR38(Bom) . Now, here one item is taxation contingency reserve. This is not a provision for taxation of the year in question but following prudent financial policy the estimated tax saving for claiming the initial and double depreciation have been set aside in this reserve. There was no known liability for this account,'
11. Learned advocate for the assessee urged that the mere possibility of an obligation which had not been matured into a liability could not be treated as a provision. Now, according to him, logically, unless an Act of Parliament had received the assent of the President, it did not become effectiveand as such no liability had been fastened by the S.P.T. Act. It was merely estimating the possibility. If, of course, logically, this argument has to be carried into effect, then the entirety of the sum of Rs. 13 lakhs had to be excluded. But, as we have mentioned before, the assessee also admitted the position that it was only the excess provision that has to be considered. Now, in considering the excess provision, we must take the reality of the situation. After the Act of Parliament had been passed it was not in the realm of a mere possibility even if it had not received the assent of the President. Furthermore, the directors in their recommendations had not finally decided the matter on the 30th April, 1963, but they had expressed that they had calculated that the tax liability under the Super Profits Tax Act would be Rs. 81/2 lakhs, but they recommended the provision for Rs. 13 lakhs. Therefore, the reasonable estimate of a reasonable liability was Rs. 81/2 lakhs and, in matters of this nature, as we have observed in the case of Bridge & Roof Co. (India) Ltd. v. CIT : 132ITR279(Cal) , the reality of the nature of the passing of the accounts of a company should be considered in considering a question of this nature, and this aspect should be viewed in a pragmatic business-like manner. In this case, as the estimated provision of a liability, which was no longer a mere possibility, though it had not become an actual legal liability before the assent of the President, of Rs. 81/2 lakhs was there and the recommendations of the directors which really became the decision of the company' to set apart a certain amount to meet the liability became effective on the acceptance of the recommendations in a meeting held (more than) three weeks after 30th April, 1963, in our opinion, the proper answer to the second aspect of the question should be that anything in excess of Rs. 81/2 lakhs from Rs. 13 lakhs should be treated as reserve. We may incidentally point out that the Tribunal has considered the actual fact that Rs. 5,75,493 was the actual liability and the balance sum of Rs. 7,24,507 out of this Rs. 13 lakhs was ploughed back into general reserve in subsequent years. Though this main plea would be the real factor to be considered, yet, in our opinion, this cannot be the decisive and the main factor. We must try as far as practicable having the reality of the situation, to judge the situation, as far as possible at the beginning of the relevant accounting year. If that is the position, then excess provision for a known liability should to a certain extent be considered as a reserve. In that -view of the matter, it is not necessary, in our opinion, to refer to the several decisions to which our attention was drawn, viz., the decision of the Madras High Court in the case of Nagammal Mills Ltd. v. CIT : 94ITR387(Mad) , in respect of which our attention was drawn to the observations at p. 391, the decision of the Bombay High Court in the case of CIT v. Century Spg. & Mfg. Co. Ltd. : 108ITR431(Bom) , the decision in the case of CIT v. Indian Steel Rolling Mills Ltd. : 92ITR78(Mad) at p. 86 and the decision in the case of CIT v. Braith-waite, Burn and Jessop Construction Co. Ltd. : 113ITR577(Cal) and at p. 583.
12. In the view we have taken, we will answer the second aspect of the question dealing with additional taxation reserve by saying that any excess provision over and above Rs. 81/2 lakhs out of Rs. 13 lakhs should be treated as reserve.
13. The question is, therefore, answered by saying that the Tribunal was right in holding that the sum of Rs. 8,30,716 should be treated as reserve and the Tribunal was right in holding pat the excess provision for taxation liability should be treated as reserve, put the excess provision should be the difference between Rs. 81/2 lakhs and Rs. 13 lakhs which works out to be Rs, 4,50,000. The question is answered accordingly.
14. Each party will pay and bear its own costs.
Sudhindra Mohan Guha, J.
15. I agree.