Sabyasachi Mukharji, J.
1. In these references under Section 256(2) of the I.T. Act, 1961, the following two questions have been referred to this court :
'I. Whether, on the facts and in the circumstances of the case the Tribunal was right in holding that the amount shown as reserve for loss on future contracts was a reserve within the meaning of Sub-rule (iii) of Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?
2. Whether, on the facts and in the circumstances of the case, and on a proper understanding of the principle laid down by the Supreme Court in the case of Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC , the Tribunal was right in holding that the amount shown as reserve for loss on future contracts was not in the nature of a provision made against anticipated losses and contingencies ?'
2. The references arise under the C.(P.)S.T. Act, 1964, for the assessment years 1966-67 and 1967-68, for which the previous years were 31st October, 1965 and 1966, respectively. The assessee is a manufacturer of lead and chemicals. Its practice was to enter into forward contracts with its customers at certain fixed prices and make provision from its profits to provide for loss on future contracts. Accordingly, it created a reserve of Rs. 80,000 which appeared in its balance-sheet as 'Reserve for loss onfuture contracts'. The ITO treated the aforesaid as 'provision' in the two years under reference as in his opinion these reserves were essentially meant to meet specific anticipated liabilities. In his orders he also observed that this was further substantiated by the course of action taken by the company in the following year when a portion of this amount was transferred tathe profit and loss account and an identical amount had been appropriated towards the provision for loss on future contracts. In the assessment year 1967-68, he referred to a sum of Rs. 53,604 only as he thought that the amount of Rs. 26,396 out of Rs. 80,000 had already been written back to the profit and loss account. At the time of the hearing of the appeal the learned representative of the assessee pointed out before the Tribunal that a similar provision of Rs. 26,396 had been made from the account of the assessment year 1966-67, although it was shown in the balance-sheet under the head 'Provisions'. According to him, therefore, it was the sum of Rs. 80,000 in both the years which required the consideration of the Tribunal. The assessee went up in appeal before the AAC. It was contended before him that the reserve for loss on future contracts should be treated as reserve under Rule 1 of the Second Schedule to the Act for the purpose of computation of capital. It was stated that the assessee who was a manufacturer of red lead and litharge bad to create a reserve for loss relating to unexpired contracts at the end of each accounting year as the market in these two products fluctuated considerably. The AAC, relying on the Explanation to Rule 1, referred to above, held that what the assessee had claimed was nothing but provision for a contingent liability which could not be ascertained when the accounts were closed. He, therefore, agreed with ITO that the amounts in question in the two years could not be considered as reserves and, therefore, the claim that they should be included in the computation of capital was rightly rejected by the ITO. He thus dismissed the appeals and confirmed the orders of the ITO.
3. The assessee went up in appeal before the Tribunal and contended that the nature of the assessee's business required it to create such reserves and that it was not meant to meet any contingent liability as in fact there was no liability at that time. The contention before the Tribunal was that the amount was meant to meet a future liability if at all it arose and was in the nature of a general reserve to augment the resources of the company. The departmental representative, on the other hand, relied on the order of the AAC. The Tribunal, relying on the decision of the Supreme Court in the case of Metal Box Co. of India Ltd. v. Their Workmen : (1969)ILLJ785SC , held that an amount set apart out of profits and other surpluses not designed to meet any liability or contingency known to exist at the date of the balance-sheet was a reserve. According to the Tribunal admittedly no such liability or con-tingency was known to exist at the date of the balance-sheet in the present case and the amount of Rs. 80,000 was kept apart only to meet future contingency if at.all one arose. The Tribunal was, therefore, of the view that the above amount constituted reserve and the mere fact that the sum of Rs. 26,396 was shown under the head 'Provisions' in the balance-sheet of the assessee-company did not make any difference since it was not any item of the nature mentioned in the Explanation to Rule 1 of the Second Schedule to the Act. The Tribunal, therefore, directed the ITO to take the above amount into consideration in the computation of the assessee's capital for working 'out the statutory deduction. Out of this order two questions have been referred to this court which have been quoted above. The principle as to how the amount set apart as reserve should be judged, has been settled by the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT : 132ITR559(SC) . Judged by that principle, it appears that the Tribunal was correct in its conclusion on the nature of the amount to be considered as reserve but whether the entirety of the amount should be considered as reserve or not, the Tribunal should, in the light of the observations made, look into the balance-sheet and direct the ITO to compute the amount in the manner in consonance with the principles laid down by the Supreme Court.
4. In that view of the matter, we answer the first question in the affirmative and in favour of the assessee with this observation that the Tribunal will direct the ITO to find out the correct amount in respect of the year 1967-68. We also answer the second question in the affirmative and in favour of the assessee with this observation that the Tribunal would direct the ITO to find out the correct amount in respect of the year 1967-68.
5. Parties will pay and bear their own costs.
Suhas Chandra Sen, J.
6. I agree.