Suhas Chandra Sen, J.
1. In this case, M/s. Braithwaite, Burn and Jessop Constructions Co. Ltd. is the assessee and the assessment year concerned is 1967-68.
2. The Surtax Officer did not treat a sum of Rs. 23,27,500, shown as reserve for taxation in the balance-sheet of the company, as a reserve in the computation of the capital base for the purpose of surtax assessment for the assessment year 1967-68. He treated the amount as a provision.
3. On appeal, the AAC, following the Tribunal's decision in the case of the assessee for the assessment year 1965-66, treated this amount as a reserve eligible for inclusion in the capital base for surtax purposes. The AAC relied on the finding of the Tribunal that the provision for taxation was separately made by the assessee and that the reserve for taxation was in the nature of general reserve which had no relation with any accrued liability and, therefore, the character of the said reserve was that of a reserve and not of a provision.
4. On further appeal by the Department, the Tribunal upheld the AAC's order on this issue.
5. The following question of law has been referred by the Tribunal at the instance of the Commissioner of Income-tax.
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 23,27,500 appearing as a 'reserve for taxation' was a 'reserve' within the meaning of Rule 1 to the Second Schedule to the Companies (Profits) Surtax Act, 1964, so as to be included in the capital computation for the purpose of the said Act ?'
6. A similar question came up for consideration before this court in the case of the assessee for the assessment year 1963-64 under the provisions of the Super Profits Tax Act, 1963 (CIT v. Braithwaite Burn and Jessop Construction Co. Ltd. : 113ITR577(Cal) ). In that case it was held that the estimated profits on incomplete contracts of the assessee could not create any liability, real or contingent, in the accounting period relevant to the assessment year 1963-64. The assessee was assessed to income-tax on the basis of completed contracts. It was held that the liability for which the reserve was created would only, if at all, arise in the future after the completion of the contracts. The court, in that case, held that the Tribunal had correctly held that the amount 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.
7. In this case the Tribunal has recorded that both the parties to the dispute drew its attention to the decision of the Tribunal in the case of the assessee for the earlier years under the Surtax Act and the Super Profits Tax Act and had relied on the arguments advanced before the Tribunal for those years.
8. The case of the Revenue is that the judgment of this High Court given in the earlier year was under the Super Profits Tax Act, 1963. The present case is governed by the Companies (Profits) Surtax Act, 1964. The Explanation appended to Rule 1 in the Second Schedule was not consideredin the earlier year. In view of the Explanation, the amount has to betreated as a surplus and as such to be excluded from the capital for the purpose of the said Act.
9. In this case the amount has been definitely earmarked as a reserve. Reserve can be general or special. Since the amount has been given a local habitation it cannot be regarded as a mass of undistributed profits. The Explanation merely states that any amount standing to the credit of any account in the books of a company as on the first day of the previous year relevant to the assessment year which is of the nature of item (5) or item (6) or item (7) under the heading 'Reserves and Surplus' or of any item under the heading 'Current Liabilities and Provisions' in the column relating to liabilities in the form of balance-sheet given in Part I of Schedule VI to the Companies Act, 1956, shall not be regarded as a reserve for the purpose of computation of capital of a company. The amount in question in this case has been clearly designated in the balance-sheet as 'Reserve for taxation'. Therefore, this amount does not come within the mischief of the Explanation to Rule I of the Second Schedule of the said Act.
10. Another point that has been urged is that at least 80% of the contracts had been worked out. Therefore, the amount set apart as reserve for taxation was really in respect of tax liability. The company had made profits in the course of working out the aforesaid contracts and the company was merely setting apart an estimated amount of tax on the accrued income.
11. In this case the company was keeping its accounts on completed contract basis, as has been pointed out by the AAC. Therefore, the profits could be taken into consideration only after the contracts were fully worked out. In any event, this point is concluded by the judgment of this High Court in the case of the assessee in the earlier year.
12. In the premises, respectfully following the decision of this court in the case of the assessee for the assessment year 1963-64, the question is answered in the affirmative and in favour of the assessee.
13. There will be no order as to costs.
Sabyasachi Mukharji, J.
14. I agree.