Per Shri B. C. Mitra, Accountant Member - The original surtax assessment in the assessees case for the assessment year 1975-76 was completed as per the ITOs order under section 6(2) of the companies (Profits) Surtax Act 1964 (the Act) dated 16-1-1979, on a net chargeable profit of Rs. 1,44,12,170 as against net chargeable profit of Rs. 51,07,242 as shown by the assessee in its surtax return. In computing the net chargeable profit as aforesaid, the ITO took into consideration a sum of Rs. 35,50,000 as reflected in the balance sheet under the head Reserve against export obligation as a reserve, for the purpose of computing the capital of the assessee-company for purposes of allowing standard deduction in accordance with the provisions of the Second Schedule to the Act. Subsequently, the ITO issued a notice dated 20-2-1981, under section 13 of the Act requiring the assessee-company to show causes why the assessment be not rectified as there was an apparent mistake in the original assessment inasmuch as, standard deduction was allowed on a sum of Rs. 35,50,000 which according to the ITO was a provision and not a reserve. The assessee objected to the ITOs action by stating that section 13 was not applicable in the circumstance of the case and that the said amount of Rs. 35 lakhs was in the nature of a reserve and not a provision. The assesse-company also stated before the ITO that the sum of Rs. 35,50,000 appearing in the balance sheet under the head Reserve against export obligation had been transferred to general reserve account, in the subsequent year, for which the accounting year ended on 30-9-1975. The ITO rejected the assessees explanation and rectified the assessment under section 13 vide his order dated 4-3-1981. The Commissioner (Appeals) cancelled the ITOs order of rectification vide his order dated 30-12-1981, on the ground that the issue being highly debatable was beyond the scope and ambit of section 13. The commissioner (Appeals) in allowing the assessees appeal quoted extensively from the judgment of the Calcutta High Court in the case of Bridge & Roof Co. (India) Ltd. v. CIT : 132ITR279(Cal) and from the supreme Court judgment in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT : 132ITR559(SC) in support of his contention that the question whether a particular sum was la reserve or a provision being highly complex could not be decided without going through an elaborate process of reasoning and decided case laws on the subject. He, accordingly, following the decision of the Supreme Court in the case of T. S. Balaram. ITO v. Volkart Bros. : 82ITR50(SC) , cancelled the ITOs order of rectification without going into the merits of the case. Against the said order of the Commissioner (Appeals) the present appeal has been filed by the revenue and the grounds taken are as follows :
'1. On the facts and in the circumstances of case, the Commissioner (Appeals) was not justified in holding that there was no mistake of law, whilch was rectified under section 13 by the ITO.
2. On the facts and the circumstances of the case, the Commissioner (Appeals) was not justified in holding that the sum of Rs. 35,50,000 was in the nature of a reserve and not a provision as held by the ITO.'
2. The learned departmental representative by making reference to the directors report for the years ending 30-9-1970 and 30-9-1971, respectively, pointed out that the assessee transferred two amounts of Rs. 14,50,000 and Rs. 21 lakhs to a reserve styled reserve against export obligation in order to safeguard any loss that may arise in exporting the companys product against import of machinery. It has been further pointed out with reference to the directors report for the year ended on 30-9-1971 that the company exported Art silk Fabrics of the value of Rs. 33.75 lakhs at a considerable loss. In the departmental representatives opinion the sum of Rs. 35.50 lakhs transferred to the reserve against export obligation in two instalments during the accounting years 1969-70 and 1970-71 were for the purpose of providing a known liability, i.e., loss arising out of the companys export obligation. Accordingly, in view of the Supreme Court decision of Vazir sultan Tobacco Co. Ltd.s case (supra) the said amount of Rs. 35.50 lakhs was in the nature of a provision which was wrongly considered as reserve for the purpose of capital computation in the original assessment. The learned departmental representatives also furnished before us the comparative figures of export made by the assessee during the assessment years 1973-74 and 1974-75 in order to justify his stand that the amount provided in the accounts towards export obligation during the assessment years 1971-72 and 1972-73 which was carried forward in the balance sheet for the assessment year 1974-75 at a sum of Rs. 35.50 lakhs was not a reserve but a provision made against the loss incurred by the assessee on export of Art silk Fabrics. He, accordingly, made strenuous efforts in justifying the stand of the ITO even though the facts narrated by him, were neither recorded by the ITO in the impugned order under section 13 nor discussed by the commissioner (Appeals) while allowing the assessees appeal against the ITOs order of rectification.
3. The assessees learned counsel in supporting the commissioner (Appeals)s order stated that the arguments advanced by the departmental representative were not of context inasmuch as, they were irrelevant as the commissioner (Appeals) did not discuss the merits of the ITOs order since the appeal was decided on the point of jurisdiction, viz., whether the mistake sought to be rectified by the ITO was really a patent or an apparent mistake within the meaning of section 13. Even on merits, the matter has been decided in favour of the assessee by the Tribunal in their orders in ST Appeal Nos. 11 and 12(Cal.) of 1981 in the assessees own case, for the assessment years 1973-74 and 1974-75. According to the learned counsel for the assessee, the facts mentioned by the departmental representative have been duly considered by the Tribunal and by following the Supreme court decision in Vazir Sultan Tobacco co. Ltd.s case (supra) the Tribunal held that the test laid down by the supreme Court stand satisfied and the sum of Rs. 35.50 lakhs which appeared in the balance sheet as reserve against export obligation was in the nature of reserve and not provision as held by the Commissioner in his order under section 16 of the Act for the assessment years 1973-74 and 1974-75. In this connection, he drew our attention to paragraph 13 of the Tribunals order which reads as follows :
'The above explanations have not factually been disputed by the commissioner as erroneous. In view of the aforesaid explanations, we are of the opinion that the tests for finding out the reserve, which were laid down by their Lordships of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. discussed above, stand satisfied and the amounts in the circumstances are reserves, and, therefore, even on merits there was no scope for interference by the commissioner in terms of section 16. Accordingly the orders of the Commissioner are vacated.'
Accordingly, it has been urged that the commissioner (Appeals) was justified in cancelling the ITOs restificaroy order passed in terms of section 13.
4. We have considered the submissions of the rival parties concerned made at length before us. In our opinion, the commissioner (Appeals)s order does not require any interference inasmuch as, the mistake sought to be rectified did not come within the ambit of section 13. the expression reserve has not been defined in the Act, and with a view to ascertain whether a particular sum is a reserve or a provision, one has to refer to the relevant provisions of the Companies Act, 1956, in order to understand the meanings attached to these two words. It has been observed by their Lordships of the Supreme court in the case of Vazir sultan Tobacco Co. Ltd. (supra) that 'though the term provision is defined under the Companies Act, the definition of reserve is negative in form and not exhaustive in the sense that it only specifies certain amounts which are not to be included in the term reserve'. The effect of reading the two definitions together is that if any retention or appropriation of a sum falls within the definition of provision it can never be a reserve but it does not follow that if the retention or appropriation is not a provision it is automatically a reserve and the question will have to be decided having regard to the true nature and character of the sum so retained or appropriated depending on several factors including the intention with which and the purpose for which such retention or appropriation has been made because the substance of the matter is to be regarded and in this context the primary dictionary meaning of the term reserve may have to be availed of. It follows, therefore, that the question whether a particular amount is a reserve or not is a highly complex matter which can only be determined by an elaborate and long-drawn process of reasoning and by investigation of facts as well as the case laws decided on the subject. In any event, there being no obvious or patent mistake in the original order of assessment, the ITO was incompetent to pass the order of rectification in terms of section 13.
5. In view of what has been stated above, we decline to go into the merits of the case as in our opinion, the second ground taken by the department does not arise out of the order of the Commissioner (Appeals).
6. In the result, the departmental appeal is dismissed.