Desai, J.
1. In this reference certain questions have been referred to us at the instance of the Commissioner and one of the questions had been referred to us at the instances of the assessee. Before setting out the questions the facts from which the reference rises may be noted.
2. The assessee is a company incorporated in the United States under the laws of the State of New York. It maintains its accounts according to the calendar year, so that the calendar year would be the previous year for the purpose of its assessment under the I.T. Act. 1961. We are concerned in this reference with the assessment years 1963-64, 1964-65 and 1965-66. For the assessment year 1963-64, the assessee was liable to pay super profits tax under the S.P.T. Act, 1963; for the two later assessments years similar liability of the assessee would be required to be considered for surtax under the C.(P.) S.T. Act, 1964. Certain amounts were being shown in the balance-sheets of the assessee under the head 'Earned Surplus'. The assessee's contention was that these amounts shown in its balance-sheets as on January 1, 1962, as on January 1, 1963, and as on January 1, 1964, were eligible for being included as a 'reserve' in computing the capital of the assessee-company for the purpose of super profits tax and surtax under the respective statutory provisions for the assessment year 1963-64 (for super profits tax) and for the assessment years 1964-65 and 1965-66 (for surtax).
3. Before the ITO, Companies Circle, reliance was placed on behalf of the assessee on two decisions of the Supreme Court, viz., (1) First National City Bank v. CIT : [1961]42ITR17(SC) , and (2) CIT v. Standard Vacuum Oil Co. : [1966]59ITR685(SC) . The ITO held that these decisions were of no assistance to the assessee inasmuch as the assessee had led no evidence with regard to the accounting practice followed by it. Accordingly, he applied the ratio of the decision of the Supreme Court in the case of CIT v. Century Spinning and . : [1953]24ITR499(SC) , and excluded these balances under the heading 'Earned surplus' from the computation of capital for super profits tax and surtax purposes. For the later two years, it may be noted that the ITO had adduced what he considered were further reasons for rejecting the contentions on behalf of the assessee viz., that the two decisions relied on by the assessee were under the Business Profits Tax Act and not under the S.P.T. Act or the enactment providing for surtax. It is surprising to note that he distinguished the first two decisions without considering the very important factor whether the provisions of the enactments were in pari materia or not.
4. The assessee carried the matter to the AAC, who upheld the conclusion of the ITO observing that the amounts in question had not been specifically allocated for any purposes. In his view, the unallocated profits of the earlier years could not be considered as reserves for the purposes of the above Act. In his further view, the decision of the Supreme Court in Standard Vacuum Oil Co.'s case : [1966]59ITR685(SC) , was not available for assistance to the assessee since it was given under the Business Profits Tax Act. It is pertinent to note, as was pointed out by the Tribunal, that the AAC did not go into the question whether necessary evidence as to the accounting practice followed by the assessee was or was not led. In his somewhat naive view the two decisions were under different enactments and, therefore, could not be looked at. Accordingly, he applied the tests laid down in Century Spg. & Mfg. Co. Ltd.'s case : [1953]24ITR499(SC) and on these tests held against the assessee.
5. The matter was carried in second appeal to the Income-tax Appellate Tribunal by the assessee. The Tribunal has not passed a consolidated order in the several appeals, but has dealt with the question fully for the assessment year 1963-64, and in its other decisions for the two later years observed that the language of the C.(P.) S.T. Act, 1964, is almost identical but for the addition of the Explanation, which was required to be considered for the assessment years 1964-65 and 1965-66.
6. In its order the Tribunal has dealt with the contention which had found favour with the AAC that the two decisions given under the Business Profits Tax Act could not be availed of by the assessee since the assessments for the years in its case were concerned with the calculation of the super profits tax and surtax. As already noted, this conclusion had been reached by the AAC without the application of mind to the question whether the provisions of the enactments were similar or not. The Tribunal found that the provisions of the Business Profits Tax Act were in pari materia with the provisions of the S.P.T. Act, 1963. In para. 5 of its judgment the relevant rule has been extracted (see p. 35 of the paper book) and it was observed that both the enactments simply referred to the term 'reserves' or 'reserves'. Thus, the view of the Tribunal was - and it appears to us to be the correct view - that if the term 'reserves' has been interpreted by the Supreme Court in any particular manner in a case arising under the Business Profits Tax Act, the decision would be binding and will be required to be applied if a similar question arose under the S.P.T. Act, 1963. A similar approach was required to be followed for the two later assessment years, viz., assessment years 1964-65 and 1965-66, where the rule under Sch. II to the C.(P.) S.T. Act, 1964, was required to be considered. The rule also talks about reserves and was similar to the rule under the S.P.T. Act but for the addition of the Explanation.
7. The Tribunal further observed that even the decision in Century Spg. & Mfg. Co. Ltd.'s case : [1953]24ITR499(SC) was a decision given under the Business Profits Tax Act. Thus, the ITO and the AAC had followed the rather unusual practice of applying the principles laid down in Century Spg. & Mfg Co. Ltd.'s case : [1953]24ITR499(SC) which was under the Business Profits Tax Act and excluding from application the principles enunciated in First National City Bank's case : [1961]42ITR17(SC) and in Standard Vacuum Oil Co.'s case : [1966]59ITR685(SC) on the specious plea that these decisions were given under the Business Profits Tax Act. The only consistency to be found in this inconsistency appears to be that some principle had to be discovered and stated which would result in higher collection of tax.
8. After properly concluding that all the three decisions, viz., (1) Century Spg. & Mfg. Co. Ltd.'s case : [1953]24ITR499(SC) , (2) First National City Bank's case : [1961]42ITR17(SC) and (3) Standard Vacuum Oil Co.'s case : [1966]59ITR685(SC) were required to be considered, the Tribunal applied its mind to what the Supreme Court had laid down in connection with the amount to be found under the head 'Undistributed Profits' as far as American banks were concerned and similar amounts to be found under the head 'Earned Surplus' as far as American non-banking corporations were concerned. We will not exhaustively deal with this part of the order of the Tribunal since later on we will ourselves extract relevant portions of these judgments. The Tribunal correctly read these decisions and held that there was accounting practice established whereby the balances held for both the banking and non-banking corporations under these two heads, viz., 'Undistributed Profits' for banking companies and 'Earned Surplus' for non-banking companies partook the character of 'reserves'.
9. The Tribunal the dealt with the causal observation made by the ITO that no such practice had been proved before him. It noted that the AAC had not applied his mind and dealt with this aspect of the matter at all. The Tribunal which had carefully gone through the two decisions of the Supreme Court noted that the judgments themselves had exhaustively dealt with the accounting practice which was prevalent in the United States and the Tribunal accordingly accepted the argument of learned counsel who appeared on behalf of the assessee before it that the system of accounting which had been indicated in the two decisions was the generally prevalent system of accounting. In its opinion, it was not proper for the ITO to throw out the contentions of the assessee on the plea that the practice was not specifically proved before him. Accordingly, the Tribunal held that considering the generality of the observations made by the Supreme Court in regard to the practice prevalent in the United States they must be accepted as sufficient for the purpose of holding that the 'Earned Surplus' shown in the balance-sheets of the assessee-company was similar in character to the 'Earned Surplus' in the balance-sheets of the Standard Vacuum Oil Company which was considered by the Supreme Court in : [1966]59ITR685(SC) , and, accordingly, it held that the amounts must be regarded as reserves both under the S.P.T. Act and under the C. (P.) S.T. Act. For all the three years, therefore, the assessee's contentions were accepted.
10. For the two later years, however, the Tribunal decided against the assessee on a limited point by applying the Explanation to r. 1 of the Second Schedule to the C. (P.) S.T. Act, 1964. In the view of the Tribunal, the legal position as enunciated by the Bombay High Court in CIT v. Ayodaya Ginning and . : [1957]31ITR145(Bom) stood altered as a result of this Explanation. According to the Tribunal, in view of the clear language of the Explanation the amount which was required to be considered was the one which was shown as available under that head on the first day of the assessment year only. Thus, to this limited extent, the decision of the Tribunal went against the assessee. It is on this aspect of the matter that the question has been referred to us at the instance of the assessee for the assessment years 1964-65 and 1965-66.
11. It is in the background of theses facts then that we are required to consider the following questions :
12. For the assessment year 1963-64 :
'Whether the amount show as 'Earned Surplus' in the balance-sheet of the assessee was eligible for being included as a 'reserve' in computing the capital ?'
13. For the assessment years 1964-65 & 1965-66 :
'Q. 1 - Whether the amount shown as 'Earned Surplus' in the balance-sheet of the assessee was eligible for being included as a 'reserve' in computing the capital of the assessee for the purpose of the Companies (Profits) Surtax Act, 1964 ?'
'Q. 2 - Whether, on the facts and in the circumstances of the case, and having regard to the Explanation to rule 1 of the Second Schedule to the Companies (Profit) Surtax Act, 1964, the Tribunal was right in holding that the addition to 'Earned Surplus' as shown in the balance-sheet of the company as on December 31, 1962, and as on December 31, 1963, are not reserves as on the first day of the previous year, that is to say, January 1, 1963, and January 1, 1964 ?'
14. It is clear that question No. 2 for the assessment years 1964-65 and 1965-66 is the one at the instance of the assessee.
15. We may dispose of this point earlier, though the application of the answer to be given by us will obviously depend upon the question whether the amount is a reserve or not. If the amount shown under the heading 'Earned Surplus' is to be properly treated as a reserve, then, it has been fairly conceded by learned counsel for the revenue that at least as far as this court is concerned, the answer to the question is concluded in favour of the assessee by its decision in CIT v. Otis Elevator Co. (India) Ltd. : [1977]107ITR241(Bom) . In the said decision, the decision of the Supreme Court in CIT v. Mysore Electrical Industries Ltd. : [1971]80ITR566(SC) was applied. It was held in the said Bombay decision that the proposed additions made during the year were required to be related back to the first day of the previous year despite the Explanation. In this view of the question, Mr. Joshi stated that if the amount was considered to be a reserve, then, the principle enunciated in Otis Elevator Co.'s case : [1977]107ITR241(Bom) was required to be applied and the answer to question No. 2 for the assessment years 1964-65 and 1965-66 is required to be given in favour of the assessee.
16. Mr. Joshi, however, very strenuously urged that on the other questions the Tribunal had erred and had misapplied the decisions in First National City Bank's case : [1961]42ITR17(SC) and Standard Vacuum Oil Co.'s case : [1966]59ITR685(SC) . According to his submission, the Bombay High Court has occasion to consider these decisions in Shree Ram Mills Ltd. v. CIT : [1977]108ITR27(Bom) , where these decisions were read in a qualified manner. Before referring to the last mentioned decision, we may briefly advert to the two Supreme Court decisions which the Tribunal found fairly applicable and which, in the view of the Tribunal, clinched the issue in favour of the assessee. It may be pointed out before referring to these decisions that Mr. Joshi has not even urged that these two decisions given under the Business Profits Tax Act could not be looked into inasmuch as they were given under an enactment different from the S.P.T. Act and the C. (P.) S.T. Act. Even a cursory look at the three enactments would show that the Tribunal was entirely right in observing that the statutory provisions and the rules were in pari materia and what was held to be a reserve under the first Act would be required to be considered as a reserve under the latter two enactments. In First National City Bank's case : [1961]42ITR17(SC) , the Supreme Court was considering various amounts which has been shown in the balance-sheet of the bank under the head 'Undivided Profits'. The contention of the bank was that in computing the amount for the purpose of abatement (for the computation of the capital of the assessee-bank during the various chargeable accounting periods) it was entitled to include what was termed in the United States as 'Undivided Profits' as part of its capital, the contention being that this item fell within the word 'reserves' occurring in r. 2(1) of Sch. II of the Business Profits Tax Act. The High Court had held against the assessee observing that the various amounts shown under the said head did not satisfy the tests laid down by the Supreme Court in Century Spinning and Manufacturing Co.'s case : [1953]24ITR499(SC) as the amount was not transferred to any reserve and as there was no act of volition on the part of the directors, this could not be regarded as a reserve. It was the correctness of this view of the High Court which was under challenge before the Supreme Court. The conclusion of the High Court was supported on behalf of the revenue before the Supreme Court and it was contended that no sum could be treated as reserve unless the directors recommended it to be so allocated and it was so adopted by the shareholders. According to the Supreme Court, however, this argument ignored the evidence as to the accounting practice prevalent in the United States and adopted by the assessee. In connection with this practice, the Supreme Court considered in the first instance a copy of the letter from the Deputy Controller of Currency, Washington, extracting from such letter the relevant portion (at pp. 21 and 22 of the report-42 ITR). It was, inter alia, observed in this letter :
'....... The term 'undivided profits' simply follows a bank accounting nomenclature used in the United States to designate profits set aside, after provisions for expenses and taxes, dividends and reserves, for continuous future use in the business of the bank and it bears a close, if not identical, relationship to the Earned Surplus Account of an industrial corporation.' (p. 22).
17. The Supreme Court then observed that thus there was a clear difference between the system of accounting of banking companies in India and the United States, and it commented that the failure to appreciate this difference had led the Income-tax Appellate Tribunal in the first place and the High Court subsequently to arrive at an erroneous conclusion. According to the Supreme Court (p. 23 of 42 ITR) :
'In India at the end of an year of account the unallocated profit or loss is carried forward to the account of the next year, and such unallocated amount gets merged in the account of that year. In the system of accounting in the U.S.A. each year's account is self-contained and nothing is carried forward. If after allocating the profits to the diverse heads mentioned above any balance remains, it is credited to the 'undivided profits' which become part of the capital fund. If in any year as a result of the allocation there is a loss, the accumulated undivided profits of the previous years are drawn upon the surplus. In its very nature the undivided profits are accumulation of amounts of residue on hand at the end of year of successive periods of accounting and theses amounts are, by the prevailing accounting practice and the Treasury directions, regarded as a part of the capital fund of the banking company.'
18. The Supreme Court then considered the test propounded in Century Spg. & Mfg. Co. Ltd.'s case : [1953]24ITR499(Bom) and extracted the observations to be found at p. 504 of that report; and applying the test to the disputed sum, the court held that the amount was a 'reserve' within the meaning of the rules. In its view, it was an integral part of the capital structure and it would be an error not to treat the amount of 'undivided profits' as a part of the capital fund of the assessee before it.
19. It may be pointed out that in the letter of the Deputy Controller of Currency, Washington, there was a clear statement that the position the was describing as applicable to balances shown under the heading 'Undivided profits' for banking companies in the United States was identical with the position of balance under the 'earned surplus' account of industrial corporations.
20. A direct question of such a non-banking corporation came to be considered by the Supreme Court in Standard Vacuum Oil Co. Ltd.'s case : [1966]59ITR685(SC) . The point is considered by the Supreme Court at p. 694 of the report. It was observed that 'earned surplus' had not been designated or called 'reserves'. But, according to the Supreme Court, if it is truly a reserve, it must be taken into account in the computation of capital. The Supreme Court then noted certain special features of the system of accounting in the United States which had already been noted earlier by it in its decision in First National City Bank's case : [1961]42ITR17(SC) . It was observed by the Supreme Court that in the United States it was usual to provide for specific or special reserves but there was no allocation to a head called 'General Reserve.' It was further pointed out as having been well settled that the accounts of the companies maintained under the American system are self-contained for each year. Under that system whatever remains on hand at the end of the year is entered on he liabilities, capital stock and surplus side as earned surplus. After extracting a passage from the decision in First National City Bank's case : [1961]42ITR17(SC) , it was observed that the characteristics noted in the said case were not peculiar to the accounts of a banking company and were applicable with appropriate variations to the accounts of all companies i which a different nomenclature was used, and the different nomenclatures used for non-banking companies were indicated as 'surplus', 'undivided profits' or 'earned surplus'. The view expressed was that as far as the American companies were concerned, under their practice of accounting, the balances shown under these several heads would be required to be considered as reserves. The revenue had very strongly relied upon the earlier observations of the Supreme Court in Century Spg. & Mfg. Co. Ltd.'s case : [1953]24ITR499(Bom) and these were explained by the court in Standard Vacuum Oil Co.'s case : [1966]59ITR685(SC) as observations dealing with the accounts of an Indian company, the balance-sheet of which was prepared according to the provisions of the Indian Companies Act, 1913. It was observed further that in the matter before the Supreme Court in Standard Vacuum Oil Co.'s case : [1966]59ITR685(SC) , the court was dealing with a foreign company whose system of accounting was different in important respects from the system which obtained in India, and this difference is noted by the court at pp. 697, 698. According to the court :
'Companies in India maintain diverse types of reserves : such as capital reserve, reserve for redemption of debentures, reserve for replacement of plant and machinery, reserve for buying new plant to be added to the existing ones, reserve for bad and doubtful debts, reserve for payment of dividend and general reserve. Depreciation reserve within the limit prescribed by the Income-tax Act or the Rules thereunder is the only reserve which is a permissible allowance in the computation of taxable profits. In its ordinary meaning the expression 'reserve' means something specifically kept apart for future use or for a specific occasion. The accumulated profits of the assessee-company, according to the system of accounting prevalent in the United States. They had to be allocated to some account, and they were allocated to 'earned surplus', which was intended for and was used in subsequent years for the purposes of the business of the assessee-company. The account in which this amount was carried retained its identity year after year.....'
21. The Supreme Court then considered the evidence which was available in First National City Bank's case : [1961]42ITR17(SC) and observed that although detailed evidence as to the accounting practice as available in the earlier case was not available in Standard Vacuum Oil Co.'s case : [1966]59ITR685(SC) , the balance-sheets from year to year would show that the earned surplus at the end of the year did not merge into the account of the subsequent year but it represented a specific account into which were added the net profits of the year and appropriations were made out of it and the balance was regarded as 'earned surplus' at the end of the year. It upheld the decision of the High Court in this view of the matter that the 'earned surplus' represented reserves.
22. It is true that to a certain extent details as to the accounting practice have not been brought on record by the assessee before us. But the approach of the Tribunal as indicated earlier, viz., that the Supreme Court has in First National City Bank's case : [1961]42ITR17(SC) laid down general principles as to the accounting practice almost universally followed in the Unites States, appearing to be proper. Further, we find enclosed to the statement of case the balance-sheets of the assessee-company for the several years under consideration, and they would appear to us to be in total conformity with the balance-sheets and the position noted therefrom in Standard Vacuum Oil Company's case : [1966]59ITR685(SC) . If that be so, it would appear to us that the matter is totally concluded in favour of the assessee by the aforesaid two decisions of the Supreme Court and the amount under the head 'Earned Surplus' would be required to be considered as a reserve. It now becomes necessary to see whether Mr. Joshi is right in his submission that the aforesaid two decisions have been given a restricted or qualified application different from the one that we have extracted in the decision of a Division bench of this court in Shree Ram Mills Ltd.'s case : [1977]108ITR27(Bom) . The said case was a case of an Indian company which was required to keep its accounts in conformity with the Indian accountancy practice and in accordance with the mandatory provisions of the Indian Companies Act, 1913, and the Companies Act, 1956. Mr. Joshi drew our attention to the observations at p. 37 of the said report, where the Division Bench has dealt with CIT v. Century Spg. & Mfg. Co. Ltd. : [1953]24ITR499(SC) and CIT v. Hindustan Milk Food Mfg. Ltd. , where the Punjab and Harayana High Court indicated several propositions flowing from the Century Mills' decision. It then noted the two decisions of the Supreme Court, viz., First National City Bank's case : [1961]42ITR17(SC) and Standard Vacuum Oil Co.'s case : [1966]59ITR685(SC) . Our attention was drawn to the observations made in connection with these two decisions at pp. 40, 41 ad 42 of the report in Shree Ram Mills Ltd.'s case : [1977]108ITR27(Bom) . What has been observed on these pages appear to us to be the proper ratio extracted from these decisions and these observations at pp. 40 to 42 ending with the first para. on p. 42 in nowise support the case of the revenue. Mr. Joshi, however, submitted that having regard to what is observed in the second para. onwards at p. 42, it must be held that the decisions of the Supreme Court had been understood by the Division Bench as having a limited, restricted or qualified application. With respect, this appears to be a misreading of the decision of the Bombay High Court. The two decisions of the Supreme Court on which reliance is placed by the assessee before us pertain to American companies, one baking and the other non-banking, which were maintaining their accounts not in accordance with the requirements of the Indian Companies Act, 1913, and the Companies Act, 1956, which had no application to them, but in accordance with the accounting practice generally prevalent in the United States. Considering that accounting practice, the Supreme Court had held in those two decisions that the amounts indicated in the balance-sheets as standing to the credit of the heads 'Undistributed Profits' for the banking company and 'Earned Surplus' for the non-banking company, were required to be treated as 'reserves' and the reasons for such conclusion have been earlier indicated. The principles enunciated in the said two decisions were not available to Shree Ram Mills Ltd. : [1977]108ITR27(Bom) and the ratio in Century Mills' case : [1953]24ITR499(SC) , therefore, was required to be applied fully and was applied fully to that assessee which was an Indian company which was mandatory required to keep its balance-sheets in accordance with the provisions of the Indian Companies Act, 1913, and the Companies Act, 1956. We find nothing in the observations to be found in the second para. onwards at p. 42 of Shree Ram Mills Ltd.'s case : [1977]108ITR27(Bom) as modifying, restricting or departing from the clear ratio laid down by the Supreme Court in First National City Bank's case : [1961]42ITR17(SC) and Standard Vacuum Oil Co.'s case : [1966]59ITR685(SC) . These two decisions are clearly available to the assessee and have been properly applied by the Income-tax Appellate Tribunal. If that be our view, to the question referred to us for the assessment year 1963-64 as also to the question No. 1 for the two later assessment years, the answers must be in favour of the assessee.
23. In this view of the matter, the questions referred to us are answered as follows :
For the assessment year 1963-64, the question is answered in the affirmative and in favour of the assessee.
For the assessment years 1964-65 and 1965-66 :
Question No. 1 is answered in the affirmative and in favour of the assessee.
Question No, 2 - The Tribunal was not right in holding that the addition to 'earned surplus' was not a reserve as on the first day of the previous year; in our view, such addition would be required to be related back and added to the amount on the first day of the previous year. The answer is in favour of the assessee and against the view expressed by the Tribunal.
24. The assessee has fully succeeded in this reference and, accordingly, the Commissioner is directed to pay the costs of the reference to the assessee.