Sabyasachi Mukharji, J.
1. In this reference under Section 256(1) of the I.T. Act, 1961, the following question has been referred to this court:
'Whether, on the facts and in the circumstances of the case, the order of the Tribunal holding that the sum of Rs. 58,85,850, being the excess of the amount of depreciation reserve over the amount of depreciation allowed under the Income-tax Act, was a reserve within the meaning of Rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, is justified in law ?'
2. The point was disposed of by the Tribunal for the reasons which are best set out in the words of the Tribunal as follows :
'It was found that over the years, the assessee had debited in its books depreciation which was in excess of the depreciation allowed under the Income-tax Act by a sum of Rs. 58,85,850. The assessee claimed that this sum should be treated as reserve and included in the computation of capital. But this contention was rejected by the revenue authorities.
(ii) It has been held by their Lordships of the Gujarat High Court in the case of CIT v. Viramgam Mills Co. Ltd. : 43ITR270(Guj) , that if any part of the amounts deducted for depreciation did not represent the true amount of depreciation suffered by the buildings and machinery of the asseseee-company, then to the extent of such excess it could be said that the reserve had been built up out of the profits of the company. The present appeal comes squarely within the ratio of the above judgment. We, therefore, accept the assessee's contention that the depreciation provided in the books in excess of the depreciation allowed for income-tax assessment should be treated as reserves for computation of capital.'
3. As we have noticed before, the short question is whether the excess amount of the depreciation of the sum of Rs. 58,85,850 should be allowed to be considered as a reserve within the meaning of Rule 1 of the Second Schedule to the S.P.T. Act, 1963.
4. The expression 'reserve' under Rule 1 of the S.P.T. Act, 1963, has been considered in several decisions.
5. In our decision, in the case of CIT v. Burn and Co. Ltd. : 114ITR565(Cal) , we had considered this question. There at p. 574 of the report, after reviewing several decisions, we had held that to determine whether the particular amount was reserve or not, we must find out, firstly, the substance of the matter. Secondly, we must find out whether the amount in question represented any profit earned by the assessee-company and other amounts available to the assessee-company and not distributed as dividends, and thirdly, whether there has been any decision by authorities competent to take the decision to keep the amount in question back for any purpose to which it might be put in future (underlined by us for the present purpose). We further held that the meaning put on the expression 'reserve according to the dictionary and the meaning of ordinary common parlance had been noted by the Supreme Court in the case of CIT v. Century Spg. & Mfg. Co. Ltd. : 24ITR499(SC) , and we had referred to that view of the Supreme Court in the said judgment.
6. Recently, in the decision delivered by us on 15th May, 1980, in Income-tax Reference No. 431 of 1976 (CIT v. Karam Chand Thapar and Brothers : 131ITR175(Cal) ) we had to consider this question afresh in the light of several other decisions and we had reiterated our views expressed in the decision in the case of CIT v. Burn and Co. Ltd. : 114ITR565(Cal) and also referred to the observation of the Bombay High Court in the case of Shree Ram Mills Ltd. v. CIT : 108ITR27(Bom) , where the following tests had been formulated : Firstly, a mass of undistributed profits could not automatically become a reserve for the purpose of Rule 1 of Schedule II to the S.P.T. Act, 1963, and somebody possessing the requisite authority must clearly indicate that the amount had been separated from the general mass of profit with a view to constitute it as a reserve. Secondly, it was reiterated, it should be apparent from the surrounding circumstances that the amount so set apart was in fact a reserve to be utilised in future for a specific purpose on a specific occasion (underlined by us for the present purpose). Thirdly, clear conduct on the part of the directors in setting apart a sum from the mass of undistributed profits, avowedly for the purpose of distribution as dividend, would be destructive of making the amount a reserve. Fourthly, having regard to the purpose of the Rules framed for computing the capital of the company under the S.P.T. Act, the amount so set apart should be available to the assessee for the purpose of its business.
7. In this instant case, on behalf of the revenue, these propositions were not disputed before us, but what was sought to be urged was that in this case there was no evidence of any decision on behalf of the persons capable of taking decision for the company, which normally means the board of directors, to keep it as a reserve as such. On the contrary, it was sought to be urged that they had treated this as a provision. It was, secondly, submitted that this was an excess depreciation and, therefore, it was really a provision for depreciation that the company had provided for in the balance-sheet. Therefore, according to the company's own judgment, it represented the depreciation which normally should be debited against the profit and was not to be set apart out of the profit. In this connection, reliance was placed on certain authorities on accountancy, which we shall presently note, and it was thirdly urged that, in view of Expln. 1 to the Second Schedule to the S.P.T. Act, 1963, this so-called depreciation cannot be considered to be capital for computing the capital of the company for the purpose of this Act. In this connection, reliance was placed on certain observations in an unreported judgment in the case of Income-tax Reference No. 50 of 1976, Upper Ganges Sugar Mills Ltd. v. CIT (judgment delivered on 24th August, 1978) [since reported in : 129ITR438(Cal) . As this is a short point, we should dispose of this point first.
8. Explanation 1 to the Second Schedule to the S.P.T. Act, 1963, provides as follows:
'A paid up share capital or reserve brought into existence by creating or increasing (by revaluation or otherwise) any book asset is not capital for computing the capital of a company for the purposes of this Act.'
9. It was sought to be urged on behalf of the assessee that the expression 'book asset' must be construed to mean an asset which was not a tangible asset but something which was considered to be an asset in the books, but not an asset in the real tangible sense like goodwill or patent right or any asset of this nature. As at present advised, we are unable to accept this interpretation. We should have thought that any asset which is required to be entered in the books--tangible or intangible--should be considered to be an asset. But we need not, and we should not, be considered to be expressing, a final opinion on this aspect of the matter. Even if depreciation, the amount provided for depreciation, is considered to be a book asset, in our opinion, it does not affect the position because this Explanation deals with a reserve which is brought into existence by creating or increasing by particular methods, that is to say, by a revaluation or otherwise of any book asset. The expression 'or otherwise', in our opinion, must be read ejusdem generis to the expression 'revaluation'. Here, there was no question of creating any asset. There might be a provision for an increased value of the asset. The same, however, was not done by a revaluation, in this case. It was precisely this question that was considered in the decision in Income-tax Reference No. 50 of 1976, Upper Ganges Sugar Mills Ltd. v. CIT : 129ITR438(Cal) , which we have referred to, where the facts were that while computing the capital of the company for the assessment year 1970-71, under the Second Schedule to the C.(P).S.T. Act, 1964, the ITO included Rs. 94,33,000 in the capital shown as the 'general reserve' in the balance-sheet of the company for a period ended 30th June, 1968. In the aforesaid general reserve of Rs. 94,33,000, a sum of Rs. 70,33,000 was included describing it as 'add balance of excess depreciation provided in past transfer from profit and loss account' and in Schedule D (Pt. I) to the balance-sheet the sum of Rs. 70,33,000 was shown as adjustment of excess depreciation on buildings, machinery, etc., being the difference between the amount provided and the amount calculated under Section 205(2)(b) of the Companies Act, 1956, up to 30th June, 1967. The company was claiming depreciation according to the written down value method adopted up to the earlier assessment year. But in this year it changed the said method and adopted the straight line method and adjusted the excess depreciation of Rs. 70,33,000 computed under Section 205(2)(b) of the Companies Act, 1956. The ITO deducted the statutory deduction of Rs. 94,33,000, being the 'general reserve', which included Rs. 70,33,000, being adjustment of excess depreciation. The Addl. Commissioner, acting under Section 16 of the Act and after hearing the company, held that the general reserve to the extent of a sum of Rs. 70,33,000 was created by the company by revaluation of the assets and it was brought into existence by creating or increasing, by a revaluation or otherwise, the book assets and, therefore, the aforesaid amount was erroneously included by the ITO in the computation of the capital of the company.
10. Now, this finding that the amount was brought into existence by a revaluation of the assets was not challenged by the assessee before this court. In those circumstances, in view of the Explanation, which I have set out hereinbefore, learned advocate for the assessee had to submit that as it was found as a fact that the excess depreciation was brought about by a revaluation or otherwise, and that finding had not been challenged by the assessee, the case falls within the Explanation. In this case there is no finding that the excess amount of depreciation was intended as a reserve, for, the amount of depreciation under the Act was brought about by a revaluation or otherwise.
11. On behalf of the revenue reliance was also placed on a decision given by us in Income-tax Reference No. 456 of 1973 [CIT v. Shalimar Tar Products (1935) Ltd., judgment delivered on May 6, 1980 : 127ITR86(Cal) . There the court was concerned with the questions, namely, reserve for pension and reserve for roofing repairs. There, on the facts, my learned brother held, to which I agreed, that as to the provision for pension it could be said that the company was aware of the fact as to how many employees were to retire in a particular year, and as such there was no necessity for setting aside any amount out of profits and other surpluses for any contingencies. Provision for pension was, therefore, held to be a known liability though the actual amount had not been determined on the date of the balance-sheet. Again, roofing repairs could be taken as liabilities for contingencies and might be provided under the head 'Current liabilities and Provisions'. Indeed it was noted in the judgment that in the past amounts set apart for roofing repairs had been adjusted against actual roofing repairs. Thus, initially, it was further found, the impugned amount represented the amount set apart for meeting the liabilities of the assessee-company. Therefore, there was a liability of the assessee-company, which was a known and existing liability, and an amount was set apart for that contingency. Again, from the facts and circumstances of the case, it was observed that the intention of the persons in authority, that is, the board of directors, could not be gathered in view of the past conduct, that it was to be kept apart for use in the future. It was, further, found that only in 1957 an amount was set apart for the creation of pension reserve and up to 30th June, 1961, the directors described the amount as a reserve for pension fund and the amount was shown in the balance-sheet as reserve and as surplus. But, admittedly, the expenditure incurred in respect of pensions had regularly been debited to the profit and loss account. Similarly, for the period 30th June, 1956, to 30th June, 1958, the amount for roofing repairs was shown as a provision for roofing repairs and under the head 'Current Liability and Provision'. Since 30th June, 1959, the amount had been shown as 'reserve' for roofing repairs under the head 'Reserves and Surplus'. That amount again admittedly, had been debited to the profit and loss account. It was further held that taking the matter as a whole, that is to say, past conduct and the fact that both the roofing repairs and the pension liabilities were incurred out of these funds, we are of the opinion that this should not be considered as a 'reserve' in terms of the section. The said decision cannot be said to be an authority for the proposition that something more than profit kept apart for some future use was required to be treated as a reserve.
12. Reliance was placed, as we have indicated before, on Spicer and Pegler's Book-keeping and Accounts, 17th Edn. At p. 45 of the said well-known book, the editors have observed that depreciation was the exhaustion of the effective life of a fixed asset owing to 'use' or obsolescence. It may be computed as that part of the cost of the asset which will not be recovered when the asset is finally put out of use. The object of providing for depreciation, the learned editors observe, is to spread the expenditure, incurred in acquiring the asset, over its effective lifetime; and the amount of provision, made in respect of an accounting period, is intended to represent the proportion of such expenditure, which has expired during that period.
13. Relying on the aforesaid observations, on behalf of the revenue it was sought to be urged that the provision for depreciation was intended to indicate the expenditure required to be incurred for acquiring the assets over its effective lifetime. The necessity for providing depreciation has been further observed as follows (p. 45):
'Section 7. The necessity of providing for depreciation--At the end of its effective life, the asset ceases to earn revenue, i. e., the capital value has expired and the asset will have to be replaced or a substitute found. Provision for depreciation is the setting aside, out of the revenue of an accounting period, the estimated amount by which the capital invested in the asset has expired during that period. It is the provision made for the loss or expense incurred through using the asset for earning profits, and should, therefore, be charged against those profits as they are earned.
If the whole of the profits were withdrawn during the life of the asset, without providing for depreciation, monies would not be accumulated out of revenue, for replacing it; consequently, when it became necessary to replace the asset, new capital would have to be found.
If depreciation is not provided for, the books will not contain a true record of revenue or capital. If the asset were hired instead of purchased, the hiring fee would be charged against the profits; having been purchased, the asset is, in effect, then hired by capital to revenue, and the true profit cannot be ascertained until a suitable charge for the use of the asset has been made. Moreover, unless provision is made for depreciation, the balance-sheet will not present a true and fair view of the state of affairs ; assets should be shown at a figure which represents that part of their value on acquisition, which has not yet expired.'
14. Reliance was placed on the observation at page 59, where the learned editors observed as follows :
'Where the cost of replacement is estimated to exceed the cost of the original asset, and it is not desired to introduce new capital to meet the excess, but it is the intention to provide it out of profits, the fund must be computed at the amount as is necessary for the acquisition. As already indicated, the excess of the provision over the true depreciation charge should preferably be regarded as an appropriation of profits, not a charge against them.'
15. Certain recommendations of the Institute of Chartered Accountants were also relied on, which were noted in the said book of Spicer and Pegler. The recommendation of the Council of the Institute of Chartered Accountants on the methods which should be applied in providing for depreciation of fixed assets may be set out below (p. 63, para. 5):
'Amounts set aside out of profits for obsolescence which cannot be foreseen, or for a possible increase in the cost of replacement, are matters of financial prudence. Neither can be estimated with any degree of accuracy. They are in the nature of reserves and should be treated as such in the accounts.'
16. Our attention was also drawn by learned advocates for the revenue as well as the assessee to certain observations on Accountancy by Pickles 4th Edn., Chap. 07, p. 0701; (et al.), it may be instructive to set these out as follows :
'Depreciation, Reserves and Provisions
Depreciation may be defined as the permanent and continuing diminution in the quality, quantity or value of an asset. The purchase of an asset, generally, is nothing more than a payment in advance for an expense. A simple example of this is seen in the purchase of buildings. By such purchase the purchaser expends a certain sum in advance, as a result whereof he will save the cost of rent in the future, but at the end of a period of years the building will become valueless. Thus, the purchase outlay is the equivalent to paying rent in advance for a period of years.
The reason for the non-permanency of an asset is merely that in consequence of natural laws it usually suffers from the effects of time. The infinite variety of operative causes superimposed upon the fundamental one--the effluxion or lapse of time--will cause unequal incidence in the depreciation burden; hence the amounts of depreciation will vary according to circumstances. Obviously the elements of destruction will, sooner or later, overcome the elements of resistance.'
'Whatever method is adopted, the following principles are fundamental :......
(b) The provision for depreciation (unless excessive) is a charge against profits.......' Page 0717 :
'As a preliminary to closer study, reserves and provisions may be defined as follows:
1. Reserves are amounts set aside out of profits and other surpluses which are not designed to meet any liability, contingency, commitment, or diminution in value of assets known to exist at the date of the balance-sheet.
2. Provisions are amounts set aside out of profits and other surpluses to provide for :
(a) depreciation, renewals or diminution in value of assets, or
(b) any known liability of which the amount cannot be determined with substantial accuracy.
It follows, therefore, that:
1. Any amount set aside for the purposes described in (2)(a) and (b) (above) in excess of estimated requirements must be regarded as a reserve, and.....' Page 0720 :
'As already stated any amount set aside in excess of a necessary provision is a reserve and should appear so in the balance-sheet. For example, in regard to stock, the amount required to cover the excess of cost over, say, net realizable value is a provision ; any further amount, e.g., in respect of a possible future fall in values, is a reserve.' Page 2332 :
'(a) The expression 'provision' shall, subject to sub-paragraph (2) of this paragraph, mean any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy ;
(b) The expression 'reserve' shall not, subject to as aforesaid, include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability or any sum set aside for the purpose of its being used to prevent undue fluctuation in charges for taxation;
(2) Where: (a) Any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, not being an amount written off in relation to fixed assets before the commencement of this Act; or......'
17. Our attention was also drawn to the Sixth Schedule of the Companies Act, 1956, regarding the meaning of the expression 'assets, reserves and surpluses' and how these are to be treated. Our attention was also drawn to Pt. III, that is to say, interpretation of the Sixth Schedule. Learned advocate for the revenue emphasized that if this excess depreciation was treated as a 'reserve' in the balance-sheet, it could not be adjustable. We are unable to accept this contention.
18. On behalf of the revenue, reliance was also placed on the observations in the case of CWT v. Hindustan Motors Ltd. : 104ITR430(SC) , where the Supreme Court was dealing with a case where owing to paucity of profits the assessee-company had not provided for the full depreciation allowable under the provisions of the I.T. Act in its balance-sheet. The WTO, however, adopted the value of the assets, as shown in the balance-sheet, under Section 7(2)(a) of the W.T. Act, 1957. It was held that a mere statement, to the effect that adequate depreciation could not be provided for in the balance-sheet on account of paucity of profits, was not sufficient to discharge the onus which rested on the assessee-company to establish that the value shown in the balance-sheet was not the real value of the assets as on the valuation date. The assessee-company had also to show further to what extent the depreciation had resulted in lowering the value of the assets as compared with that in the balance-sheet and establish after producing the relevant material that the real value of the assets was lower than that shown in the balance-sheet.
19. According to the observations made in the context that the obligation was cast on an assessee, under Section 7(2)(a) of the W.T. Act, 1957, perhaps it could not be considered to be an excess depreciation, that is to say, when the depreciation is in excess, it should not be considered to be a 'reserve'.
20. Reliance was also placed on the observations of the Gujarat High Court in the case CIT v. Tensile Steel Ltd. : 104ITR581(Guj) , where the assessee had entered into a contract with a Japanese firm for the purpose of erecting a plant for high tensile steel wires. For that purpose a basic agreement was effected between the parties for providing financial collaboration, supply of plant and machinery and technical know-how. Under the basic agreement the assessee got plant and machinery on deferred payment terms, 20% of the cost of plant and machinery was to be paid at the time of signing the contract. 80% was to be paid in instalments spread over a period of five years. The rate of interest on the deferred payments was to be 6% per annum. The payment was to be made in pounds sterling and it was specifically agreed that in case of any change in the official rate, the difference caused by the change would be adjusted at the time of the payment of each instalment. The assessee included an amount of Rs. 3,65,040 being the interest at 6% on the cost of machinery and plant, and an amount of additional interest due to the devaluation of rupee in determining the actual cost of plant and machinery for purposes of depreciation and development rebate. The Revenue had contended that the interest paid would not form part of the actual cost of plant and machinery and in any event the interest paid after the assessee-company went into production could not be capitalised. It was held that the obligation for the payment of interest was incurred for obtaining the deferred payment terms under the contract of purchase of machinery and plant. In other words, it was for the acquisition of an asset, without which, the assessee-company could not have commenced its business. The price paid for the facility of deferred payment by the foreign suppliers was a part of the financial and technical collaboration agreements resulting in a spread over of the payment of the actual price over a long period, which in turn necessarily involved the question of payment of interest also. The assessee was maintaining its accounts on the mercantile basis and when it debited the price of plant and machinery, the interest was also incurred. The fact that a part of the interest was paid after the assessee-company went into production was immaterial.
21. In our opinion, this principle is of no relevance in adjudicating the question as to whether, in terms of Rule 1 of Schedule II of S.P.T. Act, 1963, with which we are concerned, and the relevant Act, the word 'assets depreciation' should be considered as capital or not.
22. In the case of CIT v. Viramgam Mills Co. Ltd. : 43ITR270(Guj) , a decision of the Gujarat High Court, in its balance-sheet the assessee-company, to which at the relevant time Section 23A of the I.T. Act was applicable, showed the original cost of its buildings and machinery on the assets side, and the depreciation thereon claimed year after year on the liabilities side under the head 'Buildings and Machinery Depreciation Fund'. The 'Buildings and Machinery Depreciation Fund' stood at Rs. 6,24,948 when the machinery and buildings were sold in 1946 and the said sum was carried forward in the balance-sheets year after year from 1946. For the assessment year 1952-53, the assessee's balance-sheet for the calendar year 1951 showed the sum of Rs. 6,24,948 against the 'Buildings and Machinery Depreciation Fund', Rs. 2,20,000 against 'Reserve Fund' and Rs. 93,387 as the 'income-tax fund in excess of requirements'. These three amounts amounted to Rs. 9,38,335 and exceeded the paid up capital of Rs. 6,98,000. In that context it was held, in order that the proviso to Section 23A(1) could apply, it was necessary that the reserves shown in the balance-sheet should represent the accumulations of past profits.
23. In this connection, on behalf of the revenue, our attention was drawn to the question and the facts and the question posed before the Division Bench was whether, in the facts and circumstances of the case, 'depreciation fund' constituted a reserve within the meaning of the first proviso to Section 23A(1). Learned advocate for the revenue strongly relied on the observations of the court at p. 280 of the report, where Chief Justice Chagla of the Bombay High Court in that case (Bipinchandra Maganlal & Co. Ltd. v. CIT : 28ITR1(Bom) ) had observed at p. 6 as under:
'The real position, it seems to us, is this that when an asset is depreciated from year to year and the depreciation is debited to the profit and loss account and comes out of the profits of the company, that amount constitutes a reserve created by setting apart a portion of the profits from year to year and not distributing those profits or not otherwise dealing with those profits.'
24. Those observations, in our opinion, rather support the contention of the assessee than that of the revenue because if it is separated and set apart out of the undistributed profit for a specific purpose for future use, and as we have indicated before in Karam Chand Thapar's case : 131ITR175(Cal) , for utilisation in the business, then for the purpose of Rule 1 of the present Act, with which we are concerned, it will constitute reserve. Our attention was also drawn to the decision of the Supreme Court in the case of P.K. Badiani v. CIT : 105ITR642(SC) , where the question really was about the development rebate reserve and, at p. 649, the Supreme Court dealt with the observations of the Gujarat High Court in the decision noted above (Viramgam Mills Co. Ltd.'s case : 43ITR270(Guj) ) and the said observations were not in the context with which we are concerned.
25. Next, reliance was placed on the decision in the case of Nagammal Mills Ltd. v. CIT : 94ITR387(Mad) , where at p. 391, dealing with the expression 'reserve' under Rule 1 of the Second Schedule to the S.P.T. Act, 1963, the Madras High Court observed as follows :
'The items in dispute relate to the excess provision for bonus, provision for dividend, provision for taxation and the excess development rebate reserve. So far as the excess provision made for bonus and development rebate reserve is concerned, we are of the view that the said two items should be treated as reserve within the meaning of Rule I of Schedule II to the Act. Though the said two items represent excess provision, they still form part of the allocation for specified purposes and they have been utilised by the company for its business purposes. They are kept in continuous use in the business of the company and are treated as part of the capital structure. In this view, these two items have to be treated as 'reserves'. The reasoning of the Tribunal as to why the excess development rebate cannot be treated as a reserve is that the development rebate reserve has been allowed as a deduction to the extent of 75% and, therefore, the excess cannot be taken to be a reserve. This cannot be accepted. The fact that the excess reserve was not allowed as deduction under the Income-tax Act cannot be taken to show that the excess amount is not a reserve coming within the words 'other reserves' occurring in Rule 1 of Schedule II,
Coming to the provision for dividend of Rs. 3,43,485, it is seen that the said dividend has actually been paid out by the company to its shareholders. Though the same was set apart for a specified purpose, it cannot be said to be available for the future use of the company so as to partake the character of capital. The said sum set apart for payment towards a specific liability cannot be said to be a reserve for future use of the company. The sum has, therefore, to be treated as not a reserve.
So far as the provision for taxation is concerned, the total sum set apart was Rs. 7,50,000 as against the actual tax liability of a sum of Rs. 3,87,040. The said sum of Rs. 3,87,040 have been paid out of the company for discharging the actual tax liability ; it cannot be taken to be an amount set apart or appropriated for a specific purpose, or for future use of the company and is only a provision made for discharging a specific liability. Therefore, the said sum cannot be treated as a reserve. But the balance of Rs. 3,62,960 representing the excess provision for taxation was available to the company for its use and, therefore, it has to be treated as a reserve.'
26. The Madras High Court again, in order to deal with excess depreciation in the case of United Nilgiri Tea Estates Co. Ltd. v. CIT : 96ITR734(Mad) , was dealing with the said question of reserve under Rule 2(1) of the Second Schedule to the S. P. T. Act, 1963, and at p. 736 observed as follows:
'In this case, though a sum of Rs. 12,16,000 has been set apart as provision for taxation, the entire amount cannot be taken to be available to the company for its use and it is only the excess over the actual liability for income-tax for the assessment year that can be taken to be a reserve. It has not been ascertained as to what is the actual liability for income-tax during the assessment year and the authorities below including the Tribunal have not found out the excess provision made for taxation which alone can be treated as a reserve. This question will, therefore, be considered by the Tribunal at the time of passing the consequential order.
As regards the provision for dividend it has been held in the said earlier judgment of this court in Nagammal Mills Ltd. v. Commissioner of Income-tax : 94ITR387(Mad) that the amount set apart as a provision for dividend, is for payment towards a specific liability and it cannot, therefore, be said to be a reserve for future use of the company. Following the said decision, we have to hold that a sum of Rs. 3,18,026 set apart as proposed dividend cannot be treated as a reserve for future use of the company.
As regards the amount in credit of the depreciation reserve account in excess of the amount allowed for tax purpose, it is seen that it is part of the amount set apart as provision for depreciation. Though a provision for depreciation was not actually considered in Nagammal Mills Ltd. v. Commissioner of Income-tax : 94ITR387(Mad) the reasoning given there in relation to the excess development rebate will equally apply here. Dealing with the provision for development rebate it has been held that, as it has been utilised by the company for its business purpose, it should be treated as a reserve within the meaning of Rule 1 of Schedule II of the Act, Following that view, we have to hold that the sum of Rs. 1,31,000 which is found to be excess of the amount of depreciation allowed for tax purposes has to be treated as a reserve for the purpose of the Super Profits Tax Act, 1963.'
27. The Bombay High Court had to consider the same aspect from a different point of view in the case of CIT v. Zenith Steel Pipes Ltd. : 112ITR215(Bom) , where at p. 222, it was dealing with the facts of the case, and at p. 223, the Division Bench observed as follows :
'It is, therefore, quite apparent that the assessee-company when it asked for deduction of depreciation for the purpose of income-tax was conscious of the fact that the depreciation provided for was insufficient as per the provisions of the Income-tax Act and, in fact, the contention of the assessee-company was accepted because the depreciation in its books of account was provided on the footing of straight-line method while, in fact, the depreciation to be calculated in accordance with the provisions of the Income-tax Act was much larger. For computing its income for the purpose of the Income-tax Act such larger amount of depreciation was allowed and the excess amount, i. e., the amount of difference between the amount of depreciation actually allowed for the purpose of the Income-Act and the amount of depreciation actually provided in the books of the assessee-company, was diverted as forming part of the general reserve and actually the amounts that were credited to the general reserve included within its item such difference between the amount of depreciation allowed for the purposes of the Income-tax Act and the amount of depreciation actually provided in the books. Thus, on a plain interpretation of the language used in Clause (iii) of Rule 1 of the Second Schedule to the Act, it is quite apparent that if the amount of depreciation provided in the books of the assessee-company for a particular year is less than the amount of depreciation actually allowed by the Income-tax Officer for computation of the income, then the difference between these two amounts has to be deducted from the amount standing to the credit of 'other reserves', namely, general reserves, so far as the facts of this case are concerned. Thus, the Appellate Assistant Commissioner was right in taking the view that for the first year a sum of Rs. 5,68,112 ought to be deducted from the amount of general reserve of Rs. 7,50,000 and a sum of Rs. 12,52,957 ought to have been deducted from the amount of general reserve of Rs. 37,00,000 for the second year.'
28. In the case of CIT v. Indian Steel Rolling Mills Ltd. : 92ITR78(Mad) , regarding an excess provision for tax, the Madras High Court observed as follows at p. 86 :
'Next we come to the excess provision made for taxes. According to the assessee an excess or overshot provision is to be treated necessarily as a reserve, for the sum set apart is used for the business of the assessee and reference is also invited to the Circular No. 2-P (XV-6) dated 5th February, 1968, of the Central Board of Revenue which treats an excess provision as a reserve. That circular directs that an excess provision in the development rebate reserve account over and above the minimum statutory percentage should be taken to come under the words 'other reserves' occurring in Rule 1 of Schedule II. In Commissioner of Income-tax v. Security Printers of India (P.) Ltd. : 86ITR210(All) the term, 'reserve' in Rule 1 of the Second Schedule to the Super Profits Tax Act was construed as a sum specifically kept apart for future use or application in a future contingency which is anticipated and provisions made for bonus, for taxation and for proposed dividends by a company were treated as 'reserves'. In this case, the question is limited as the assessee has claimed only the excess provision for tax as a reserve. We are definitely of the view that the sum of Rs. 6,150 which is an excess provision for taxation and which was available for use by the company in its business has rightly been treated as a reserve.'
29. Similar view was expressed in a Bombay High Court decision in the case of CIT v. Century Spg. & Mfg. Co. Ltd. : 108ITR431(Bom) . In that case it was held that the setting apart of the sum of Rs. 40 lakhs in the balance-sheet as on December 31, 1961, for contingencies, which according to the assessee-company's own statement before the Tribunal, was for the purpose of meeting a liability which might arise as a result of an award that might be made in an industrial adjudication, which was pending under a statute, would have to be regarded as a provision made for a known contingent liability, the quantification whereof was to depend upon either the actual award that would be made by the adjudicating machinery or as a result of a settlement that might be arrived at by the parties. Therefore, the setting apart of the sum of Rs. 40 lakhs being in the nature of a provision would not be includible in the capital computation of the assessee-company for the purpose of the S.P.T. Act, 1963.
30. In view of the proposition that we have enunciated from the decision of Karam Chand Thapar's case : 131ITR175(Cal) and in view of the fact that in this case it is admittedly the position that there was an excess depreciation which had been mentioned as 'excess' for depreciation purposes, it had been kept apart for use in future. It is true, as learned advocate for the revenue sought to urge, that there is no specific finding or evidence to the effect that the persons in authority in this case, that is to say, the directors of the company, had decided to treat it as reserve but it was certainly out of profits earned by the company and not intended to be distributed as dividend to the shareholders but kept back by the directors for any purpose to which it might be put in future, that seems to be the irresistible inference from the facts already found by the Tribunal. This would be reserve according to the meaning which the Supreme Court gave, as we have understood it in the case of CIT v. Karam Chand Thapar and Brothers in I.T. Ref. No. 431 of 1976 : 131ITR175(Cal) . Further, learned advocate for the revenue stressed that the substance of the matter had to be looked into. We entirely agree that the substance of the matter had to be looked into. But the substance of the matter indicated that though it was not distribution, yet it was not intended to be used for making a future expenditure that might be necessary. That is the fundamental distinction one has to bear in mind about an expenditure to be incurred and the principle relating to allowance which is liable for deduction, that is to say, it is not to be expended out but to be kept back for future use. As there is no finding that this major provision for distribution has not been brought about for any revaluation or other methods of the book assets as contemplated by Expln. 1 of the Second Schedule to the Act, we are of the opinion that the Tribunal was justified in law in its finding. In the premises, the question will be answered in the affirmative and in favour of the assessee.
31. In the facts and circumstances of the case, the parties will pay and bear their own costs.
Sudhindra Mohan Guha, J.