Sabyasachi Mukharji, J.
1. The assessment year involved is 1963-64. The assessee in its accounts disclosed the reserves in the beginning of the year at Rs. 46,11,711 and a loss of Rs. 21,89,282. In the accounts, the assessee had not adjusted the loss against the reserves. In the balance-sheet for the preceding year, however, the loss had been adjusted and the reserves had been shown at Rs. 24,22,429. The plea of the assessee before the ITO was that the reserves should betaken at Rs. 46,11,711 as shown in the accounts of the assessee and not at Rs. 24,22,429 as shown in the balance-sheet as on 31st March, 1962. The assessee's contention was that the loss had been adjusted in the balance-sheet as it was required under the provisions of the Companies Act, but the assessee's accounts disclosed the reserves at Rs. 46,11,711 and that, according to the provisions of the S.P.T. Act of 1963, the reserves were to be taken as shown in the accounts and not as shown in the. balance-sheet. The ITO did not accept the assessee's contention. He was of the opinion that the reserves and losses could not co-exist and the real state of affairs of the assessee-company was disclosed by the balance-sheet. The ITO, therefore, considered the amount at Rs. 24,22,429 as includible in the computation of the capital base of the assessee-company. He accordingly rejected the assessee's claim for the inclusion of Rs. 46,11,711 and included only Rs. 24,22,429 in the computation of the capital base of the assessee-company. The asses-see-company being aggrieved by the order of the ITO went up in appeal before the AAC. It was submitted before him on behalf of the assessee that the adjustment of loss that had been made in view of the requirements under the Indian Companies Act did not bind the assessee and that the assessee was entitled to treat the loss as separate. It was also submitted that in its accounts no such adjustment had been made and that the reserves had been carried forward as such while the losses had been accumulated and continued separately. The AAC, relying upon the decision of the Tribunal in the case of Dalhousie Jute Company Ltd., accepted the.assessee's plea and directed the ITO to include the amount of Rs. 46,11,711 in the computation of the capital base of the assessee.
2. The revenue being aggrieved by the aforesaid decision of the AAC came up on appeal before the Tribunal. It was emphasized on behalf of the revenue that the loss and reserve could not co-exist. On the other hand, reliance was placed on behalf of the assessee on the decision of the Tribunal in the case of Dalhousie Jute Company. The Tribunal followed the order of the Tribunal in the case of Dalhousie Jute Company and, therefore, rejected the revenue's contention. In the circumstances aforesaid, the Tribunal has referred to this court under Section 256(1) of the I.T. Act, 1961, the following question :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that in computing the capital base of the assessee-company the reserves should be taken at Rs. 46,11,711 as shown in the accounts and not at Rs. 24,22,429 as shown in the balance-sheet as on 31st March, 1962, after adjusting the loss of Rs. 21,89,282 ?'
3. Now, as the Tribunal had referred to the decision in the case of Dalhousie Jute Company for the assessment year 1963-64, it may not be inappropriate to refer to the reasonings of the Tribunal in the said decision. After setting out the facts in that case, the Tribunal went on to observe as follows:
'In the present appeal by the department, the submission is that this sum of Rs. 62,456 was rightly adjusted by the Income-tax Officer. We are unable to agree with the departmental representative. The amount had not been adjusted in the books. For the purpose of giving the comparable figures, this amount had been deducted. The real entries in the books do not show any adjustment for the said sum of Rs. 62,456. The provisions of the Act do not require adjustment being made by the Income-tax Officer except to exclude those amounts which do not qualify as eligible reserves. Having regard to the Second Schedule to the Super Profits Tax Act, we are unable to agree with the Income-tax Officer that the sum of Rs. 62,456 can be adjusted by him. The assessee's claim was rightly accepted by the Appellate Assistant Commissioner.'
4. Now, the question with which we are concerned is the computation of capital of a company for the purpose of the S.P.T. Act, 1963. Rule 1 of the Schedule II to the said Act stipulates that subject to the other provisions contained in that Schedule, the capital of a company shall be the sum of the amounts, as on the first day of the previous year relevant to the assessment year, of its paid up share capital and of its reserves, if any, created under the prov. (b) to Clause (vi) of Sub-section (2) of Section 10 of the Indian I.T. Act, 1922, or under Sub-section (3) of Section 34 of the I.T. Act, 1961, and of its other reserves in so far as the amounts credited to such other reserves have not been allowed in computing its profits for the purposes of the Indian LT. Act, 1922, or the I.T. Act, 1961, diminished by the amount by which the cost to it of the assets the income from which, in accordance with Clause (iii) or Clause (vi) or Clause (viii) of Rule I of Schedule I, is not includible in its chargeable profits, exceeded the aggregate of the amount mentioned in the different clauses. So far the material question is whether the computation of the capital would be made of the amounts as on the first day of the previous year relevant to the assessment year. Now, the scope and purpose for its determination under this rule has been examined by several decisions including the decision of the Supreme Court as well as the decision of this court and other High Courts, and it is not necessary for our present purpose to go into those questions. One of the basic fundamental aspects which the Supreme Court emphasized in the case of CIT v. Century Spinning & Manufacturing Co. Lid. : 24ITR499(SC) , dealing with the expression 'reserve' in the context of the Business Profits Tax Act, Schedule II, Rule 2(1), which used similar language as the present Rule 1 of Schedule II to the S.P.T. Act, 1963, were, in the words of the Supreme Court at pp. 503, 504 of the report, as follows :
'The term 'reserve' is not defined in the Act and we must resort to the ordinary natural meaning as understood in common parlance. The dictionary meaning of the word 'reserve' is :
1(a) To keep for future use or enjoyment ; to store up for some time or occasion; to refrain from using or enjoying at once.
(b) To keep back or hold over to a later time or place or for further treatment.
6. To set apart for some purpose or with some end in view; to keep for some use,
11. To retain or preserve for certain purposes' (Oxford Dictionary, Vol. VIII, p. 513).
In Webster's New International Dictionary, 2nd Edn., p. 2118, 'reserve' is defined as follows : -
'1. To keep in store for future or special use ; to keep in reserve ; to retain, to keep, as for oneself.
2. To keep back ; to retain or hold over to a future time or place.
3. To preserve.'
What is the true nature and character of the disputed sum, must be determined with reference to the substance of the matter and when this is borne in mind, it follows that on the 1st of April, 1946, which is the crucial date, the sum of Rs. 5,08,637 could not be called a 'reserve', for, nobody possessed of the requisite authority had indicated on that date the manner of its disposal or destination. On the other hand, on the 28th February, 1946, the directors clearly earmarked it for distribution as dividend and did not choose to make it a reserve. Nor did the company in its meeting on the 3rd April, 1946, decide that it was a reserve. It remained on the 1st of April as a mass of undistributed profits which were available for distribution and not earmarked as 'reserve'. On the 1st of January, 1946, the amount was simply brought from the profit and loss account to the next year and nobody with any authority on that date made or declared a reserve. The reserve may be a general reserve or a specific reserve, but there must be a clear indication to show whether it was a reserve either of the one or the other kind. The fact that it constituted a mass of undistributed profits on the 1st January, 1946, cannot automatically make it a reserve. On the 1st April, 1946, which is the commencement of the chargeable accounting period, there was merely a recommendation by the directors that the amount in question should be distributed as dividend. Far from showing that the directors had made the amount in question a reserve, it shows that they had decided to earmark it for distribution as dividend. By the resolution of the shareholders on the 3rd April, 1946, the amount was shortly afterwards distributed as dividend. The High Court appears to have been under a misapprehension as to the real position, for, they observed (p. 504):--'It was open to the directors to distribute the sum of Rs. 5,08,337 as dividends. They did not choose to do so and have kept back this amount. Therefore, by keeping back this amount they constituted it a reserve; A reserve in the sense in which it is used in Rule 2 can only mean profit earned by a company and not distributed as dividend to the shareholders but kept back by the directors for any purpose to which it may be put in future. Therefore, giving to the 'reserves' its plain natural meaning it is clear that the sum of Rs. 5,08,637 was kept in reserve by the company and not distributed as profits and subjected to taxation. Therefore, it satisfied all the requirements of Rule 2'. The directors had, no power to distribute the sum as dividend. They could only recommend, as indeed they did, and it was up to the shareholders of the company to accept that recommendation in which case alone the distribution could take place. The recommendation was accepted and the dividend was actually distributed. It is, therefore, not correct to say that the amount was kept back. The nature of the amount which was nothing more than the undistributed profits of the company, remained unaltered. Thus, the profits lying unutilised and not specially set apart of any purpose on the crucial date did not constitute reserves within the meaning of Schedule II, Rule 2(1).'
5. Therefore, only a mass of undistributed profits could not be said to be a reserve as such. There must be a decision by an authority competent to take the decision to treat the amount as reserve to be available to thecompany for its use in future. Now, it is true that in certain cases, even where there is a loss, there might be reserve and the directors or the persons in authority might decide to treat the same as reserve without taking into account any loss either with a view of adjusting the same in future or to carry it forward for future adjustment. In the instant case, however, in the balance-sheet the adjustment has been so indicated. The balance-sheet must have been prepared with the authority of the persons who are competent to decide and give directions for the preparation of the balance-sheet, i.e., the board of directors. Now, it was represented that the balance-sheet had to be prepared in accordance with the provisions of the Companies Act. In accordance with the Companies Act, under Schedule VI, Note (h) of the balance-sheet provides that the debit balance in the profit and loss account should be shown as a deduction from uncommitted reserves, if any. If, therefore, there is a committed reserve, the debit balance cannot be shown. Therefore, if there is a mass of undistributed profits which is not earmarked for meeting any particular demand of the company and the directors had decided to treat it as a reserve, then certainly that amount can be maintained as a reserve. But if the directors had chosen in the balance-sheet to treat an amount as adjusted against a particular contingency, viz., the loss in this case, then) in our opinion, this amount cannot be said to be available for a future use by the company which is the fundamental test as enjoined by the scheme of the S.P.T. Act, 1963, After all, in a matter of this nature, it has also been emphasised that the substance of the matter should be looked into. If an amount has for all practical purposes been decided to be adjusted against a loss and indicated in the balance-sheet as such, unlike an amount which has not been adjusted against a loss and decided to be kept as reserve as such and the loss had been decided' to be carried forward the to get it set off, from the future profits, in such a case, in our opinion, having regard to the reality and the substance of the matter and the scheme of the Act, the question must be answered in the negative and in favour of the revenue.
6. In the facts and circumstances of the case, parties will pay and bear their own costs.
Sudhindha Mohan Guha, J.
7. I agree.