Rajendra Babu, J.
1. The matter under reference arises under the Companies (Profits) Surtax Act, 1964.
2. The Syndicate Bank came to be amalgamated with the assessee-company. For the assessment year 1973-74, the assessee claimed that a sum of Rs. 1,68,20,000 should be treated as a reserve for the purpose of the Companies (Profits) Surtax Act. The Income-tax Officer held that the said sum was not a reserve as this amount represented the surplus 'received as compensation' when the company's business was taken over on the nationalization of the bank and rejected the contention. He also stated that in working out the capital, he took note of the reduction in capital and in spite of the objection from the assessee, overruled the same.
3. On appeal, the Appellate Assistant Commissioner held that the company itself had not treated this amount as a reserve and it represented an existing liability which is liable to be distributed among the shareholders, He also held that it was not a reserve within the meaning of the Companies Act or in the parlance of commercial accountancy. As regards the computation of capital, he held that the certificate issued under section 103 of the Companies Act alone is conclusive and the date of registration should be taken as the effective date for reduction or date of special resolution to reduce the capital. In that view of the matter, he affirmed the findings of the Income-tax Officer.
4. On further appeal to the Tribunal, the Tribunal found that the capital has to be computed as on January 1, 1972, and the relevant balance sheet as on December 31, 1971, should be looked into. The amount of Rs. 1,68,20,000 stood as 'excess of compensation over paid-up share capital and premium as at July 18, 1969' and it is only in the subsequent period that this sum was shown as 'funds of the shareholders of Syndicate Bank Limited' and considered that the latter treatment was irrelevant in considering the assessee's claim. On January 1, 1973, it is not the funds of the shareholders of the Syndicate Bank even though it may not be treated as a reserve in the balance sheet and looking into the circumstances of the case, it is, in substance, a reserve, and allowed the contention of the assessee. On the question relating to the reduction of capital, the Tribunal held that the date of filling of the return to the Registrar of Companies under section 103(2) of the Companies Act would be the effective date. Thus. The Tribunal allowed the appeal of the assessee in toto.
5. Aggrieved by the order of the Tribunal, the Revenue sought for a reference to this court on the following two questions:
'(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal, is right in law in holding that the amount of Rs. 1,68,20,000 representing the excess of compensation received at the time of nationalization the excess of compensation received at the time of nationalization of the bank should be treated as a 'reserve' for the purpose of capital computation
(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that for the purpose of rule 3 of the Second Schedule to the Companies (Profits) Surtax Act, the date of filing of the return with the Registrar of Companies under section 103(2) of the Companies Act is the relevant date ?'
6. We shall take up the second question first for consideration:
7. Section 103(2) of the Companies Act, reads as follows:
'103(2). On the registration of the order and minute and not before, the resolution for reducing share capital as confirmed by the order shall take effect.'
8. In view of the plain meaning of section 103(2) of the Companies Act, the view of the Tribunal is that the date of filing of the return with the Registrar of Companies under section 103(2) of the Companies Act, would be the effective date, which is December 13, 1972. Hence we answer this question in the affirmative and against the Revenue.
9. On the first question, in order to appreciate the contentions raised by learned counsel, a brief reference to the various provisions of the Companies (Profits Surtax Act may be necessary.
10. Section 4 of the Companies (profits) Surtax Act provides for charging of tax on such chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the Third Schedule.
11. Surtax is to be charged on the amount by which the chargeable profits exceed the amount of the statutory deduction and the Second Schedule to the Companies (Profits) Surtax Act provides for computing the capital of a company for the purposes of surtax which reads as follows:
'(i) its paid up share capital;
(ii) its reserves, if any, created under the proviso (b) to clause (vib) of sub-section (2) of section 10 of the Indian Income-tax Act, 1022 (11 of 1923) or under sub-section (4) of section 32A or sub section (3) of section 34 of the Income tax Act 1961 (43 of 1961);
(iii) its other reserves as reduced by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the Indian Income-tax Act, 1922 (11 of the 1922), or the Income - tax Act, 1961 (43 of 1061);....
12. Explanation - For the removal of doubts, it is hereby declared that any amount standing to the credit of any account in the books of a company as on the first day of the previous year relevant to the assessment year which is of the nature of item (5) or item (6) or item (7) under the heading 'Reserves and Surplus' or of any item under the heading 'Current liabilities and Provisions' in the column relating to 'Liabilities' In the 'Form of Balance-sheet' given in Part 1 of Schedule VI to the Companies Act, 1956(1 of 1956), shall not be regarded as a reserve for the purposes of computation of the capital of a company under the provisions of this Schedule.'
13. The question, refefore, for consideration is:
'Whether the excess of compensation over paid-up share capital and premium of Rs. 1,68,20,000 could be treated as a reserve and not attract surtax ?'
14. The expressions 'provision' and 'reserve' have been the subject-matter of servile decisions of the Supreme Court. In metal Box Co., of India Ltd. v. Their workmen [1960] 73 ITR 53, the Supreme Court held that reserves are amounts set aside out of profits and other surpluses, not designed to meet a liability, contingency, commitment or diminution in the value of assets known to exist at the date of the balance-sheet; but any amount set aside out of profits and other surfaces to provide for any known liability of which the amount cannot be determined with substantial accuracy is a provision. This concept is reiterated in Vazir Sultan Tobacco Co. Ltd. v. CIT : [1981]132ITR559(SC) wherein it has been held that a provision was meant to provide for any known liability and the essence or the substance of the matter has to be kept in view. This view was further reiterated by the Supreme Court in CIT v. Elgin Mills Ltd. : [1986]161ITR733(SC) . However, different types of reserves and their effect for the purposes of the Companies (Profits) Surtax Act were considered by the Supreme Court in CIT v. Saran Engineering Co. Ltd. : [1986]161ITR741(SC) .
15. The contention of the Department is that there was no earmarking of the amount as a reserve for a specific purpose as held by the Supreme Court in Elgin Mills Co. Ltd.'s case : [1986]161ITR733(SC) . That reserve is an appropriation of profits to provide for an asset which it represented and that the Tribunal was wrong in holding that the same is a reserve. How-ever, it may been seen that the Supreme Court in that case was concerned with different types of reserve, viz., (i) investment reserve; (ii) rehabilitation reserve; (iii) capital reserve, and (iv) depreciation reserve. In analysing the same, the Supreme Court took the view that the reserve is an appropriation of profits to provide for an asset which it represented. That was the observation made in the context of that case. In the case of Saran Engineering Co. Ltd. : [1986]161ITR741(SC) , the Supreme Court categorically observed that so far as the capital reserve is concered, that amount representing the reserve fund and not earmarked for being utilised for any existing liability by the company, it must be held to be a reserve.
16. A close reading of the various observations of the Supreme Court leads to the inference that the substance of the matter has to be looked into.
17. In the present case, when the banks were nationalised and the company's business was taken over the amount of Rs. 1,68,20,000 paid to them by way of compensation was the amount left with the company and, in fact, on that day there was no known liability of the company at all. In view of the fact that it is not to be appropriated towards any known liability, a liability known and existing on the date of the balance-sheet, it is to be treated as a reserve in accordance with the well known practice of commercial accountancy.
18. In this connection, a reference may be made to Advanced Accounts by M. C. Shukla and T. S. Grewal, Sixth Edition, at pages 196-197. Examples of reserves are, general reserve, capital reserve, dividend equalisation reserve, contingency reserve, etc. This finds support from the Sixth Schedule to the Companies Act, which deals with various reserves that are referred to by the learned authors.
19. In this view of the matter, the Tribunal is right in reaching its conclusion.
20. Therefore, we answer the first question referred to us in the affirmative and against the Revenue.