Dipak Kumar Sen, J.
1. This reference under Section 256(1) of the Income-tax Act, 1961, is at the instance of the Commissioner of Income-tax, West Bengal-I, Calcutta. The assessment year involved is 1963-64, the relevant previous year being the one ended on 30th September, 1962.
2. In the said assessment year, the Braithwaite, Burn &. Jessop Construction Co. Ltd., Calcutta, the assessee, provided for the following item under the heading 'reserve and surplus' in its balance-sheet as at the 30th September, 1962.
Reserve for taxation---As per last balance-sheet
Surplus due to decrease of anticipated profits oncontracts-in-progress written back
3. In the same balance-sheet under the heading ' Provision ', there was an item as follows :
Provision for taxation
4. In the assessment for super profits tax the assessee contended that the said sum of Rs. 15,48,500 under the heading 'Reserve for taxation' was a reserve and ought to be taken into account in the computation of capital under the Second Schedule to the Super Profits Tax Act, 1963.
5. The Super Profits Tax Officer held that this item could not be regarded as reserve within the meaning of Rule 1(b) of the Second Schedule to the Super Profits Tax Act, 1963, as it was a mere provision for a liability already foreseen.
6. The assessee appealed to the Appellate Assistant Commissioner. It was contended in the appeal that the assessee carried on business as a contractor and its profits were assessed on the basis of completed contracts. It was contended further that the assessee out of abundant caution created a fund on the basis of estimated profits of the incomplete contracts so that if and when the contracts were completed and the assessee was faced with tax demands, money would be available for meeting the same. This fund had no relation to any liability for taxation as on the date of the balance-sheet and, therefore, was a true reserve and not a provision. The Appellate Assistant Commissioner accepted the submissions of the assessee and held that this reserve had no connection with any liability for taxation that existed on the date of the balance-sheet and, therefore, it was areserve required to be taken into account for computation of capital for the purpose of super profits tax.
7. There was a further appeal against this order of the Appellate Assistant Commissioner on behalf of the revenue. The only contention of the revenue before the Tribunal was that the amount had been reserved for taxation and, so long as the amount was intended for that purpose, it could not be called a reserve. The Tribunal did not accept the contention of the revenue and held that it was clear from the description in the account that the amount in question was not intended to meet any known liability for tax. It was just a reserve and had been kept separately, so that whenever it was necessary any extra amount needed for taxation could be transferred from it and it was only a special head under the head ' General reserve '. The Tribunal upheld the order of the Appellate Assistant Commissioner.
8. From this order of the Tribunal the following question has been referred for determination :
' Whether, on the facts and in the circumstances of the case, the sum of Rs. 15,48,450 appearing as a reserve for taxation was a ' reserve ' within the meaning of Rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, so as to be included in the capital computation for the purpose of the said Act '
9. Mr. B. L. Pal and Mr. Bagchi, learned counsel for the revenue, have made successive submissions before us at great length and with repetitive emphasis. The sum and substance of their argument is as follows . Mere labelling of an item as a reserve or a provision would not decide the matter as it was the character of the appropriation which had to be considered. Unless the liability was known, the assessee could not have estimated the amount and set it apart as has been done in the present case. The provision was made for meeting contingent liabilities arising out of incomplete contracts. The amount of Rs. 4,22,850 taken out from this item and put back in the profit and loss account as shown in the balance-sheet established that the item was a provision and not a reserve. A reserve which is created out of profits, could not have been put back into the profit and loss account.
10. Learned counsel for the revenue cited and relied on the following decisions which are considered in their chronological order hereafter.
(a) Sukhdeodas Jalan v. Commissioner of Income-tax : 26ITR617(Patna) . The question of law which was decided by the Patna High Court in this case was whether the proviso to Section 13 of the Income-tax Act could be applied to accounts of contracts which were closed to profits not at the end of each previous year but after the completion thereof. It was found that 9/10ths of a contract had been performed in the accounting year in question and it was held that Section 13 was applicable and the profitsfor that accounting year should be determined by the Income-tax Officer.
The facts of that case and the point decided are not of much relevance in the instant case.
(b) Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC was cited for the following oft-quoted passage at pages 67-68 of the report.
' The distinction between a provision and a reserve is in commercial accountancy fairly well known. Provisions made against anticipated losses and contingencies are charges against profits and, therefore, to be taken into account against gross receipts in the P & L account and the balance-sheet. On the other hand, reserves are appropriations of profits, the assets by which they are represented being retained to form part of the capital employed in the business. Provisions are usually shown in the balance-sheet by way of deductions from the assets in respect of which they are made whereas general reserves and reserve funds are shown as part of the proprietor's interest (See Spicer and Pegler's Book Keeping and Accounts, 15th edition, page 42). An amount set aside out of profits and other surpluses, not designed to meet a liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance-sheet is a reserve but an an amount set aside out of profits and other surpluses to provide for any known liability of which the amount cannot be determined with substantial accuracy is a provision) : See William Pickles Accountancy, second edition, page 192 ; Part III, Clause 7, Schedule VI to the Companies Act, 1956, which defines provision and reserve).' (c) Commissioner of Income-tax v. Periakaramalai Tea & Produce Co, Ltd. : 92ITR65(Ker) . Here the Kerala High Court in its judgment, following the earlier decision of the Supreme Court and this court, laid down the distinction between a reserve and a provision.
(d) Commissioner of Income-tax v. Century Spg. & Mfg. Co. Ltd. : 108ITR431(Bom) . Here in the assessment year in question disputes were pending between the assessee and its workers regarding payment of bonus for earlier years, namely, 1958 to 1961. The dispute was settled in October, 1962, as a result whereof the assessee had to' pay a sum of Rs. 77,00,425. Under the heading ' Current Liabilities and Provisions' in its balance-sheet the assessee had set apart a sum of Rs. 40,00,000 describing the same as provision for contingencies. The said sum of Rs. 40,00,000 was adjusted in making payment of the bonus as settled. On these facts, the Bombay High Court held that in view of the dispute pending before the statutory adjudicating machinery giving rise to a contingent liability, a provision had been made by setting apart this amount and it could not be included in the capital computation for the purpose of the Super Profits Tax Act. The Bombay High Court quoted with approval text bookdefinitions of a contingent liability as follows : Spicer and Pegler's Practical Auditing, 4th edition, Part I, Chapter V at page 149 :
'(12) Contingent liabilities: The auditor should ascertain whether there are any transactions outstanding at the date of the balance-sheet which might involve the payment of money at some subsequent date. Such outstandings are termed ' contingent liabilities ', and may be of two classes : the one involving a loss should the liability accrue and the other involving the acquisition of an asset of corresponding value......
The most familiar instance is the contingent liability on bills receivable which have been discounted.........there will be a contingent liability inrespect thereof, since, if the acceptors do not meet the bills on maturity, the holders will have a right of recourse against the drawer or any prior indorser......
Other instances of contingent liabilities which might involve a loss, should they accrue, would be damages and costs in the case of an action pending, forward contracts, guarantees for their parties, and speculative transactions on the stock exchange still undecided.'
11. Dictionary for Accountants by Kohler, 3rd edition.
' Contingent Liability : An obligation, relating to a past transaction or other event or condition, that may arise in consequence of a future event now deemed possible but not probable. If probable, the obligation is not contingent but real (ordinarily, a current liability), and recognition in the accounts as required, notwithstanding that its amount must be estimated in whole or in part. The possibility of a future loss, as from fire, not linked with a past event does not give rise to a contingent liability. Following are the common sources of contingent liabilities......'
12. Dr. D, Pal, learned counsel for the assessee, has contended, on the other hand, that the matter is concluded by the decision of the Supreme Court in Metal Box Company of India Ltd. : (1969)ILLJ785SC and that of the Bombay High Court in the case of Century Spinning & Mfg. Co. Ltd. : 108ITR431(Bom) .
13. He submitted that it has been found both by the Appellate Assistant Commissioner and the Tribunal as a fact that this particular item had no connection with any liability for taxation that existed on the date of the balance-sheet and that it was not intended to meet any known liability to tax.
14. In the facts and circumstances of this case, the contentions of the aseessee appear to be of substance. Learned counsel for the revenue placed great reliance on the submissions of the assessee before the Appellate Assistant Commissioner. But it is clearly recorded in the order of the Appellate Assistant Commissioner that the assessee is assessed to income-tax on the basis of completed contracts. Therefore, the estimated profitson incomplete contracts of the assessee could not create any liability, real or contingent, in the relevant accounting period. The purpose of the assessee in creating a special 'reserve' was foun'd to be that, if faced with a demand in future on any future assessment, this reserve could be utilized.
15. In Metal Box Company Co. India Ltd. : (1969)ILLJ785SC , the Supreme Court has categorically laid down that, in order to come within the definition of a 'provision', a liability or a contingency provided for must be known to exist at the date of the balance-sheet. The liability for which a ' reserve ' has been created in the instant case can, by no stretch of imagination, be stated to have come into existence at the material time. It would only, if at all, arise in the future after completion of the contracts.
16. The text book definitions of contingent liability quoted in Century Spg. & Mfg. Co. Ltd. : 108ITR431(Bom) are also illuminating. In the definition from Spicer & Pegler many items of contingent liability are given by way of example, viz., discounted bills, forward contracts, guarantees for third parties and speculative transactions, but there is no mention of future taxation. The Dictionary for Accountants states that only an obligation relating to a past transaction might result in a contingent liability. A future assessment as provided for in the instant case is not a past transaction in that sense.
17. The facts in the case of the Century Spg. & Mfg. Co. : 108ITR431(Bom) are also clearly distinguishable from the facts in the instant case. In that case, there was in existence a claim for bonus for past years, the quantum of which had not been finalised by adjudication. This was clearly a contingent liability in existence and it had been provided for.
18. For the reasons as stated above we answer the question referred to usin the affirmative and in favour of the assessee. There will be no order asto costs.
19. I agree.