Sabyasachi Mukharji, J.
1. In this reference under Section 256(1) of the I.T. Act, 1961, the following question has been referred to this court:
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that,
Rs.(i) Additional depreciation reserve6,58,100(ii) Provision for taxation24,23,193(iii) Provision for gratuity3,75,005(iv) Proposed dividend22,28,245
are to be excluded in computing the capital base for determination of standard deduction under Rule 2(1) of the Rules of the Second Schedule to the Super Profits Tax Act,' 1963 '
2. We are concerned in this reference with the assessment for the assessment year 1963-64. The assessee is a public limited company. It claimed that the following four items should be included in the computation of the capital base as reserves as these formed other reserves within the meaning of r. 1 of the Second Schedule to the S.P.T. Act, 1963 :
Amount in lakhs(a)Additional depreciation reserve6.5(b) Provision for tax24.2(c) Provision for gratuity3.7(d) Proposed dividend22.7
3. The ITO, however, held that these four items were in the nature of provisions which were set apart to meet a known liability of which the amount could not be determined with any substantial accuracy and so he did not treat these as reserves and excluded these from the computation of the capital base on which the standard deduction was computed.
4. There was an appeal before the AAC. The AAC confirmed the order of the ITO.
5. The assessee went up in further appeal before the Tribunal. The Tribunal referred to several decisions and observed that regarding the first item the company had charged depreciation according to the Companies Act which was in the nature of a provision. The fact, according to the Tribunal, that a smaller amount was allowed in the income-tax assessment would not make any difference to this provision properly made according to the statute. So far as the second item was concerned, viz., the provision for taxation, the Tribunal was of the view that it was a present liability as decided by the Supreme Court in the case of Kesoram Industries and Cotton Mills Ltd. v. CWT : 59ITR767(SC) . Therefore, it could also not be treated as reserve. The Tribunal was further of the view that similar was the case of the third item, viz., provision for gratuity, because the Tribunal noted that the gratuity had been calculated and provided in accordance with the scheme regularly followed by the assessee. The fourth item, viz., proposed dividend, was also a provision, according to the Tribunal, for an imminent and known liability and the Tribunal, in this connection, referred to certain decisions of the Supreme Court. In that view of the matter, the Tribunal was of the view that the revenue was justified in treating the four items in question as not constituting ' reserves ' for the purpose of Rule 1 of Schedule II to the S.P.T. Act, 1963.
6. Now, as we have mentioned, we are concerned here with the four items, the first being 'additional depreciation reserve of Rs. 6,58,100'. Now, this amount of additional depreciation indicates that this was over and above the depreciation that was allowable or allowed under the I.T. Act. Indeed, the Tribunal has noted that, regarding the first item, the company used to provide for the actual basic depreciation at the rate of 15% on the plant and machinery, 25% on motor vehicles, and 5% on buildings from year to year. When the assets were revalued by it in 1952, it thought it desirable to provide for an additional depreciation reserve over and above the normal depreciation. Therefore, the Tribunal was of the view that it was in the nature of a provision.
7. The significant fact from the observations made by the Tribunal in its decision is that it is ' additional depreciation reserve over and above the normal depreciation, ' that is to say, normal depreciation for which the business is expected to meet the liability and for which something else isset apart. Now, that may be available for the purpose of use in the business in future.
8. Applying the ratio of the principle in the case of C1T v. Indian Leaf Tobacco Development Co. Ltd., Income-tax Reference No. 247 of 1973, judgment delivered by us on 2nd September, 1980 [since reported in : 132ITR831(Cal) ], where we were concerned with the excess of the amount of depreciation reserve, we are of the opinion that the Tribunal was in error in not treating this as part of the reserve. It has to be emphasised that, from a commonsense point of view, this was an additional depreciation reserve over, and above the normal depreciation, which was kept ready for use in future for the purpose of the business. Therefore, taking a commonsense and broad point of view, this should be treated as reserve and following the ratio of the said decision, we are of the opinion that the first item in the question in the instant case also should have been included in the capital base for the determination of the standard deduction.
9. Then the next item in the question is provision for taxation. Now, this provision for taxation, in our view, from the substance of the matter should also be treated as a liability and not as a reserve. It has not been found by the Tribunal that this was an excess provision for taxation. If this was such a case, then different considerations might have applied. Therefore, the Tribunal was right in holding the provision for taxation of Rs. 24,23,193, which is not an excess provision, should be excluded from computing the capital base for the determination of the standard deduction.
10. The third item of the question, with which the Tribunal was concerned, was the provision for gratuity. Now, here we must refer to the fact found by the Tribunal that there was a scheme for gratuity and the provision had been made in accordance with that scheme. Now, in the decision in the case of CIT v. Burn and Co. Ltd. : 114ITR565(Cal) , as well as in the decision in the case of CIT v. Karam Chand Thapar, Income-tax Reference No. 431 of 1976 [since reported in : 131ITR175(Cal) ], as well as in the decision in the case of CIT v. Indian Leaf Tobacco Development Co. Ltd., Income-tax Reference No. 247 of 1973 : 132ITR831(Cal) , we had reiterated the principles which should normally be followed in examining this question. We have said that, firstly, the substance of the matter has to be found. Secondly, we must find out whether the amount in question representing the profit earned by the assessee and the other amount earned by the assessee (sic) and was not distributable as dividend and, thirdly, whether there has been a decision of the authority competent to take the decision to keep the amount in question apart, which might be put to use in future. It is, therefore, important that these tests should be applied in the background of the substance of the matterand in the reality of the situation. Where there is a scheme for gratuity which is regularly followed by the company and according to that scheme a provision is made, then, in the reality of today's business dealings a provision has to be made, even though such a provision may not amount to an actual debt to the workers. Now, such an amount kept apart would be available for the business, but it could not be said to be available for future use in the business. It will be to meet a very immediate contingency which might have not matured into a liability as yet on the relevant date. Looked from that point of view, in our opinion, the provision for gratuity in this case cannot also be treated as reserve.
11. The Supreme Court has also reiterated, quite apart from other considerations, in the case of Metal Box Co. of India Ltd. v. Their Workmen : (1969)ILLJ785SC of the report as follows :
' In our view, an estimated liability under gratuity schemes such as the ones before us, even if it amounts to a contingent liability and is not a debt under the Wealth-tax Act, if properly ascertainable and its present value is fairly discounted is deductible from the gross receipts while preparing the P. & L. account. It is recognised in trade circles and we find no rule or direction in the Bonus Act which prohibits such a practice.'
12. Though we have distinguished the observations in the case of Metal Box Co.'s case in the context of this Act in some other decisions, in respect of some other items, yet in the above-mentioned sentence the Supreme Court was stressing the commercial point of view in judging the concept of a reserve, which we have also reiterated in several decisions mentioned hereinbefore, the last of which is the decision in the case of CIT v. Indian Leaf Tobacco Development Co. Ltd., Income-tax Reference No. 247 of 1973 [since reported in : 132ITR831(Cal) ].
13. Learned advocate for the assessee drew our attention to a decision of the Madras High Court in the case of CIT v. Indian Steel Rotting Mills Ltd. : 92ITR78(Mad) , and he drew our attention to the observations at p. 84 of the report. It is true that it was not that the liability in certain circumstances might not have matured into an actual liability or debt, and a provision made for some purpose provided for in the scheme for gratuity might be available for use by the company in its business. But at the same time looked from a commonsense and broad point of view, it cannot be said to be available for use by the company in its business in future. It would be needed for immediate use in the business. Therefore, in that concept, it cannot be treated as a reserve.
14. The last item with which the Tribunal was concerned was the proposed dividend. It is true that until the dividend was declared, no debt was created. Reliance was placed on the observations of the Supreme Court in the case of Kesoram Industries and Cotton Milts Ltd. v. CWT : 59ITR767(SC) . It is true, as the learned advocate for the assessee stressed, that ' for use of the business ' is not synonymous with the expression ' use or expansion of the business '. But at the same time ' for use of the business' must be for future use in the business. It must not be construed in a narrow sense where it is a contingency which though might not have matured into a liability or debt, it would be required to meet an immediate future requirement as proposed by the board of directors which awaited approval in the forthcoming meeting of the shareholders before the relevant date. Therefore, from a commonsense and broad point of view it cannot be considered as a sum available for use in the future by the company in its business.
15. Therefore, in our opinion, the Tribunal was right in excluding the three items, viz., the provision for taxation, provision for gratuity and provision for proposed dividend, in computing the capital base for determination of the standard deduction under Rule 2(1) of the Rules of the Second Schedule to the S.P.T. Act, 1963. But the Tribunal was in error in not excluding the additional depreciation reserve of Rs. 6,58,100 in the facts and circumstances of the case.
16. The question is answered in the manner indicated above.
17. In the facts and circumstances of the case parties will pay and bear their own costs.
Sudhindra Mohan Guha, J.
18. I agree.