Ajit K. Sengupta, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, read with Section 18 of the Companies (Profits) Surtax Act, 1964, the following question of law has been referred to this court for the assessment year 1972-73 :
' Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding Reserve for Contingencies of Rs. 2,26,610 and the Reserve for Debenture Reduction of Rs. 11,00,000 should be taken into account for the purpose of computation of capital according to the Second Schedule to the Companies (Profits) Surtax Act, 1964, for the assessment year 1972-73?'
The Income-tax Officer excluded the reserve for contingencies in the computation of capital under the Second Schedule to Companies (Profits) Sur-tax Act, 1964. The Appellate Assistant Commissioner supported the view taken by the Income-tax Officer without reasons.
2. Before the Tribunal, it was contended by the assessee that the company had to statutorily create the reserve for contingencies according to the provisions of the Electricity (Supply) Act, 1948, and that the assessee was required to make specific appropriation from profit for the purpose of creating reserve known as ' reserve for contingencies ' in terms of the Sixth Schedule to the Electricity (Supply) Act, 1948. It was also contended that under Rule V of the Sixth Schedule to the Electricity (Supply) Act, 1948, the assessee-company could draw on the said reserve only on occasions as provided by the State Government. Occasions referred to are, e.g., (I) Expenses or loss of profits arising out of accidents, strike or circumstances which the management could not have prevented; (II) Expenses on replacement or removal of plant or works other than expenses requisite for normal maintenance or renewal; and (III) Compensation payable under any law for the time being in force and for which no other provision is made.
3. It was contended that the above occasions are general in nature and it cannot be concluded that the reserve was created was for any specific purpose. On the other hand, it was contended by the Revenue that this reserve wasmade for certain specific expenditure as provided in rule V of the Sixth Schedule to the Electricity (Supply) Act, 1948. The Tribunal, however, reversed the view taken by the Income-tax Officer. The Tribunal held that the assessee had to create certain reserves according to Sixth Schedule of the Electricity (Supply) Act. Contingencies provided in rule V of the Sixth Schedule are general in nature and this reserve was not created for certain specific contingencies. Rule V of the Sixth Schedule, according to the Tribunal, refers only to certain general contingencies under which the company was directed by the State Government to draw from this fund.
4. At the hearing before us, it has been contended by Mr. A.C. Moitra, learned advocate for the Revenue, that having regard to the decision of the Kerala High Court in the case of Cochin State Power and Light Corporation Ltd. v. CIT : 93ITR582(Ker) , the decision of the Bombay High Court in the case of Amalgamated Electricity Co. Ltd. v. CTT : 97ITR334(Bom) and the decision of the Patna High Court in Darbhanga Laheriasari Electric Supply Corporation Ltd. v. CIT : 117ITR516(Patna) , the contingency reserve under the Electricity (Supply) Act should be taken as provision and not reserve. Mr. Moitra, learned counsel for the Revenue, has also submitted that the Supreme Court in the case of Vazir Sultan Tobacco Co, Ltd. v. CIT : 132ITR559(SC) , considered almost all the relevant decisions of the different High Courts and laid down the principles to find out whether the appropriation is a provision or a reserve. He has relied on the following observations of the Supreme Court at pages 570-571 of the report:' On a plain reading of Clause 7(1)(a) and (b) and Clause 7(2) above (Sixth Schedule of the Companies Act) it will appear clear that though the term 'provision' is defined positively by specifying what it means, the definition of 'reserve' is negative in form and not exhaustive in the sense that it only specifies certain amounts which are not to be included in the term 'reserve'. In other words, the effect of reading the two definitions together is. that if any retention or appropriation of a sum falls within the definition of 'provision ', it can never be a reserve but it does not follow that if the retention or appropriation is not a provision, it is automatically a reserve and the question will have to be decided having regard to the true nature and character of the sum so retained or appropriated depending on several factors including the intention with which and the purpose for which such retention or appropriation has been made because the substance of the matter is to be regarded and, in this context, the primary dictionary meaning of the term 'reserve' may have to be availed of. But it is clear beyond doubt that if any retention or appropriation of a sum is not a provision, that is to say, if it is not designated to meet depreciation, renewals or diminution in value of assets or any known liability, the same isnot necessarily a reserve. We are emphasising this aspect of the matter because during the hearing almost all counsel for the assessees strenuously contended before us that once it was shown or became clear that the retention or appropriation of a sum out of profits and surpluses was for an unknown liability or for a liability which did not exist on the relevant date, it must be regarded as a reserve. The fallacy underlying the contention becomes apparent if the negative and non-exhaustive aspects of the definition of reserve are borne in mind. Having regard to the type of definitions of the two concepts which are to be found in Clause 7 of Part III, the proper approach, in our view, would be first to ascertain whether the particular retention or appropriation of a sum falls within the expression 'provision' and if it does, then clearly the concerned sum will have to be excluded from the computation of capital, but in case the retention or appropriation of the sum is not a provision as defined, the question will have to be decided by reference to the true nature and character of the sum so retained or appropriated having regard to the several factors as mentioned above and if the concerned sum is in fact a reserve, then it will be taken into account for the computation of capital .'
5. Dr. Debi Pal, learned counsel for the assessee, has submitted that in view of the decision of this court in the case of CIT v. Calcutta Electric Supply Corporation : 138ITR111(Cal) , a question regarding reserve for contingencies has to be answered in favour of the assessee. The learned counsel has also referred to the decision of the Madras High Court in CIT v. Palani Andavar Mills Private Ltd. : 144ITR138(Mad) , wherein the Supreme Court dismissed the Special Leave Petition filed by the Commissioner relating to contingency reserve. In the case before the Madras High Court, the Commissioner applied for reference on two questions, one of which related to the rectification of a mistake under Section 13 of the Companies (Profits) Surtax Act, 1964. There, however, the Madras High Court considered that whether a contingency reserve was in the nature of general reserve and was includible in computing the capital of the company for the purpose of surtax was concluded by the various decisions of the Madras High Court and, as such, the reference application was rejected. The Supreme Court dismissed the Special Leave Petition filed by the Department in CIT v. Calcutta Electric Supply Corporation : 138ITR111(Cal) . This court at page 135 observed :
'It, therefore, appears to us that contingencies reserve must have been created either out of the reserves or other sums or amounts available to the assessee. The said reserve had to be earmarked and set apart to meet the contingencies which are not known to exist at the time when the reserve wascreated and the reserve having been created by the authorities who were competent to take the decision and set apart for future purposes to which it may be put. By the principles which we have discussed in the previous decisions, the Tribunal was also right in treating the said contingencies reserve to be a reserve for the computation of the capital under the relevant provisions.'
In that view of the matter, we have to hold that the reserve for contingencies should be taken into consideration for the purpose of computation of the capital.
6. The second limb of the question referred to us is whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that Rs. 11,00,000 should be taken into account as reserve for the purpose of computation of the capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964. No facts could be ascertained from the order of the Income-tax Officer or the Appellate Assistant Commissioner. It was submitted by the assessee before the Tribunal that the assessee company had issued 1,500 debentures of Rs. 100 each during the year 1951. According to the terms of the debenture issue, the company was required to redeem 60 debentures of the total of Rs. 60,000 every year. According to the Second Schedule to the debenture trust deed dated July 26, 1951, the assessee was required to credit an amount of Rs. 60,000 every year to the debenture redemption account. It was explained that every year, an amount of Rs. 60,000 was debited to the profit and loss account and credited to the debenture redemption reserve account. A certificate signed by one of the directors had been furnished to state that payment of Rs. 60,000 every year to the debenture-holders was being directly made by debiting the debenture account and crediting bank. The certificate is also not made an annexure to the statement of the case. The Tribunal in the operative part of its order held that it accepted the evidence produced before it and that the reserve was not created for the purpose of paying debenture-holders and that the reserve was created to preserve the working capital.
7. Before us, the Revenue strongly contended that, on the facts of the case, the Tribunal was in error in coming to the conclusion that the impugned amount was a reserve. It was submitted that an ad hoc figure of Rs. 50,000 was being debited to debenture account and an ad hoc amount cannot be said to be a reserve. Reliance was placed on the decision of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT : 132ITR559(SC) , in support of the contention that in this case, an ad hoc appropriation has been made which cannot be termed as reserve. The Supreme Court observed; 'If, however, an ad hoc sum is appropriatedwithout resorting to any scientific basis, such appropriation would be provision intended to meet a known liability, though a contingent one, for the expression 'liability' occurring in Clause 7(1)(a) of Part III of the Sixth Schedule to the Companies Act includes any expenditure contracted for and arising under a contingent liability.' It was further held by the Supreme Court that if the sum so appropriated is shown to be in excess of the sum required to meet the estimated liability, it is only the excess that will have to be regarded as a reserve under Clause 7(2) of Part III of the Sixth Schedule.
8. Revenue also relied on the decision of the Madras High Court in the case of C2T v. Grampion Engineering Co. : 147ITR704(Mad) , wherein the Madras High Court, following the decision of the Supreme Court in Vazir Sultan Tobacco's case : 132ITR559(SC) , held that ad hoc provision for gratuity cannot be regarded either as provision or reserve and that reserve must be consciously created and a mere appropriation of accumulated profits, without more, would not answer the description of reserve.
9. The debenture trust deed dated July 26, 1951, is not available before us. It has not been annexed to the statement of the case. It is not known what was the scientific basis of payment of Rs. 60,000 every year to debenture-holders and whether any excess provision is made every year. In the absence of proper material touching on this crucial aspect, we are unable to decide the controversy. The matter has to be remanded to the Tribunal who shall decide this controversy in the light of the principles laid down by the Supreme Court in Vazir Sultan's case : 132ITR559(SC) after ascertaining the necessary facts.
10. In the premises, we answer the question as follows :
On the facts and in the circumstances of the case, the Tribunal was justified in including the Reserve for contingencies for Rs. 2,26,610 as reserve in the computation of capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964, for the assessment year 1972-73.
For the reasons indicated above, we decline to answer the question whether, on the facts and in the circumstances of the case, the Tribunal was justified in including the Reserve for Debenture Redemption of Rs. 11,00,000 as reserve for computation of capital according to the Second Schedule to the Companies (Profits) Surtax Act, 1964, for the assessment year 1972-73.
11. In the facts and circumstances of the case, the parties will pay and bear their own costs.
Dipak Kumar Sen, J.
12. I agree.