Dipak Kumar Sen, J.
1. Orient Paper Mills Limited is a company within the meaning of the Companies Act, 1956, and is an assessee under the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as the 'said Act'). In the assessment year 1972-73, the accounting period being the calendar year ending on March 31, 1972, the assessee was assessed to surtax under the said Act. In computing the capital of the assessee for determining the statutory deduction, the assessee had included an amount of Rs. 3,73,080 shown as forfeited dividend in its capital.
2. The ITO held that forfeited dividends did not have the character of reserve as they were in the nature of liabilities and, therefore, excluded the same in computing the capital of the assessee.
3. On appeal, the AAC upheld the assessment following a decision of the Allahabad High Court. On further appeal by the assessee, the Income-tax Appellate Tribunal, following its earlier decision in the case of the assessee for the assessment year 1963-64, affirmed the order of the AAC.
4. The present reference is at the instance of the assessee under Section 256(1) of the I.T. Act, 1961, read with Section 18 of the said Act. The Tribunal has referred the following question as a question of law arising out of its order for the opinion of this court :
'Whether, on the facts and in the circumstances of the case, and on a proper interpretation of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the Tribunal was justified in holding that the forfeited dividend of Rs. 3,73,080 did not constitute ' reserve ' and was not includible in the computation of capital of the assessee-company, under the Companies (Profits) Surtax Act, 1964 ?'
5. At the hearing, the learned advocate for the assessee, submitted that the question was concluded by a decision of this court in the case of the assessee. The said decision is Orient Paper Mills Ltd. v. CIT : 113ITR550(Cal) , where it was held that a sum kept apart under the heading 'Forfeited dividend' had the characteristics of a reserve and not those ofa provision for liability. It was found that the said amount had not been set apart for any anticipated or contingent claim and that the shareholders of the company had no claim against this fund directly or as a matter of course. It was also noted that the said fund had been shown in the accounts of the assessee under the general head of 'Reserves' along with other reserves of different nomenclature. It was held that the amounts set apart under the head 'Forfeited dividend' was a reserve within the meaning of the Super Profits Tax Act, 1963.
6. Learned advocate for the Revenue, however, contended that the above decision was concerned with the Super Profits Tax Act, 1963, and was not necessarily an authority in respect of the said Act. He submitted further that the Supreme Court has thereafter further laid down the law in the matter in Vazir Sultan Tobacco Co. Ltd. v. CIT : 132ITR559(SC) . He cited the said decision of the Supreme Court in support of his contention. The Supreme Court, in the case before it, considered, inter alia, whether provisions (a) for taxation, (b) for retirement gratuity, and (c) for proposed dividends, made out of the profits and other surpluses, would be considered as reserves within the meaning of Rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, or Rule 1 of the Second Schedule to the said Act for inclusion in the capital computation of an assessee under the said Acts. It was held that appropriations made for proposed dividends by a company did not constitute a reserve.
7. The relevant observations by the Supreme Court in its judgment are noted as follows :
'Though the expression ' reserve ' is not defined in the Act, it cannot be forgotten that it occurs in a taxing statute which is applicable to companies only and to no other assessable entities and as such the expression will have to be understood in its ordinary popular sense, that is to say, the sense or meaning that is attributed to it by men of business, trade and commerce and by persons interested in or dealing with companies. Therefore, the meanings attached to these two words in the provisions of the Companies Act, 1956, dealing with preparation of balance-sheet and profit and loss account would govern their construction for the purposes of the two taxing enactments, (p. 568) ...... the broad distinction betweenthe two is that whereas a provision is a charge against the profits to be taken into account against gross receipts in the P. & L. account, a reserve is an appropriation of profits, the asset or assets by which it is represented being retained to form part of the capital employed in the business. (p. 569).........There could be no dispute about the principle that if provision for a known or existing liability is made in excess of the amount that would be reasonably necessary for the purpose, the excess shall haveto be treated as a reserve and, therefore, would be includible in the capital computation......(p. 573)......The question whether the concerned amountsin fact constituted 'reserves' or not will have to be decided by having regard to the true nature and character of the sums so appropriated depending on the surrounding circumstances particularly the intention with which and the purpose for which such appropriations had been made. (p. 579) ...... the true nature and character of the appropriation must be determined with reference to the substance of the matter ; obviously this means that one must have regard to the intention with which and the purpose for which appropriation has been made, such intention and purpose being gathered from the surrounding circumstances. In that behalf, the following aspects mentioned in the judgment provide some guidelines : (a) a mass of undistributed profits cannot automatically become a reserve and that somebody possessing the requisite authority must clearly indicate that a portion thereof has been earmarked or separated from the general mass of profits with a view to constituting it either as a general reserve or a specific reserve, (b) the surrounding circumstances should make it apparent that the amount so earmarked or set apart is in fact a reserve to be utilised in future for a specific purpose and on a specific occasion, and (c) a clear conduct on the the part of the directors in setting apart a sum from out of the mass of undistributed profits avowedly for the purpose of distribution as dividend in the same year would run counter to any intention of making that amount a reserve, (p. 581) ...... the Explanation to Rule 1 in the SecondSchedule to the C.(P.) S.T. Act, 1964, though it seems to us prima facie that the Explanation, being clarificatory in nature, is declaratory of the existing legal position (p. 584) ......'
8. In our view, the said decision of the Supreme Court does not advance the case of the Revenue further. It is not the case of the Revenue that the amount segregated as forfeited dividend has been kept as a part of the mass of undistributed profit. Admittedly, a decision has been taken by persons in management of the assessee to segregate the said amount from the mass and keep it under a specific head. The ultimate utilisation of the said fund in future will be a matter to be decided by the assessee but it cannot be said that in the relevant accounting year the said fund has been earmarked against any general or specific or contingent liability.
9. We find support in the observations of the Supreme Court noted above to the effect that where a fund is set apart by way of a provision against a known or existing liability in excess of the amount reasonably necessary for the purpose, the same has to be treated as a reserve.
10. For the reasons as aforesaid, we answer the question referred in the negative and in favour of the assessee.
11. There will be no order as to costs.
Ajit K. Sengupta, J.
12. I agree.