Sudhindra Mohan Guha, J.
1. This reference under Section 256(1) of the I.T. Act, 1961, at the instance of the Commissioner of Income-tax, Central, Calcutta, relates to the assessment year 1965-66 and the question referred to us is as follows :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 3,50,000 described as reserve for pension and the sum of Rs. 3,00,000 described as reserve for roofing repairs in the balance-sheet of the company were reserves within the meaning of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964?'
2. The Surtax Officer treated the following two amounts as reserves and computed the capital of the assessee-company under the Companies (Profits) Surtax Act, 1964:
Rs.
(i) Reserve for pensions
3,50,000
(ii) Reserve for roofingrepairs
3,00,000
3. The Commissioner was of the view that the Surtax Officer had wrongly included the above two items for computing the capital under the C. (P.) S.T. Act, 1964. As the Commissioner was of the view that the order of the Surtax Officer was erroneous in law and prejudicial to the interests of the revenue, he sought to revise the same under Section 16 of the C. (P.) S.T. Act, 1964. So, he issued a notice to the assessee to show cause why the order of the Surtax Officer should not be revised. The assessee submitted its explanation before the Commissioner. The Commissioner was of the view that the amounts in dispute represented amounts set apart for meeting the liabilities of the assessee-company. Thus, the Commissioner held that the Surtax Officer erred in treating the above two amounts as reserves. Hence, he set aside the order of the Surtax Officer and directed him to make a fresh assessment.
4. The assessee preferred appeal before the Tribunal. It was urged before the Tribunal that the disputed amounts were reserves and the Commissioner was not justified in setting aside the order of the Surtax Officer. On behalf of the revenue, it was urged that the disputed amounts were' provisions' and not 'reserves '. The Tribunal considered the provisions of the Companies Act and also the decisions in CIT v. Century Spinning & . : [1953]24ITR499(SC) , CIT v. Standard Vacuum Oil Co. : [1966]59ITR685(SC) and Metal Box Co. of India Ltd. v. Their Workmen : (1969)ILLJ785SC . The Tribunal found that in the balance-sheet, the first item was shown as 'reserve' under the heading 'Reserves and Surplus' and continued to remain so under that head. The pension reserves was first created in the balance-sheet for the year ended 30th June, 1957, with Rs. 50,000, and it increased year by year and on 30th June, 1961, it had risen to Rs. 3,50,000. The pension was payable by the assessee in respect of some employees. The expenditure incurred in respect of pensions had regularly been debited to the profit and loss account in the years during which they were incurred. The reserve for roofing repairs was created prior to 1957. In the balance-sheets for 30th June, 1956, 30th June, 1957, and 30th June, 1958, this item was shown as provision for roofing repairs under the head 'Current Liabilities and Provisions'. In the balance-sheet for 30th June, 1959, and onwards it was shown as 'reserve' for roofing repairs under the heading 'Reserves and Surplus' and continued to remain like that. In the balance-sheet for 30th June, 1956, the amount was Rs. 1,82,000 and it increased year by year to Rs. 3,00,000 by 30th June, 1961. The expenditure incurred in respect of repairs undertaken against the guarantee had regularly been debited to the profit and loss account in the years during which they were incurred. The Tribunal accepted the case of the assessee that the expenditure incurred in respect of pensions and repairs under guarantee had regularly been debited to the profit and loss account in the years during which they were incurred which was also supported by the auditors' report. It also observed that at least for a few years prior to the assessment years 1965-66 these retained amounts had not been made use of. The Tribunal held that the amounts had not been set apart from year to year with reference to any known or imminent liability. Thus, the Tribunal held that the amounts of Rs. 3,50,000 and Rs. 3,00,000 set apart were not designated to meet a liability, contingency or commitment which were known to exist as on the date of the balance-sheet relevant to this assessment year and these amounts were not 'provisions' but only 'reserves '. It was, therefore, held that the Surtax Officer had rightly included these amounts in the computation of the capital. The Tribunal, accordingly, set aside the order of the Commissioner and allowed the appeal.
5. As the Tribunal appears to have referred to the decisions of the Supreme Court in the cases of CIT v. Century Spinning and . : [1953]24ITR499(SC) , CIT v. Standard Vacuum Oil Co. : [1966]59ITR685(SC) and Metal Box Co. of India Ltd. v. Their Workmen : (1969)ILLJ785SC ; , in support of its reasonings to reverse the findings of the Commissioner, it would be better to find out what are the actual decisions of the Supreme Court in these cases.
6. In CIT v. Century Spinning and . : [1953]24ITR499(SC) , it was held that 'reserves' normally means profit earned by a company and not distributed as dividends to the shareholders but kept apart by the directors for any purpose or use in the future. In the case of CIT v. Standard Vacuum Oil Co. : [1966]59ITR685(SC) , the Supreme Court, on the other hand, held that reserves built up from sources other than profits may be admissible for inclusion in capital. Thus, it follows that in order to determine whether any amount is 'reserve' or 'provision ', the substance of the matter is to be looked into. Again, for the purpose of Rule 1 of the Second Schedule to the S.P.T. Act, 1963, it is to be seen whether the amount in question represents any profit earned by the assessee-company or any other amount available to it and not distributed as dividends and, lastly, whether there has been any decision by the authorities or directors to set apart the amount for any purpose to which it might be put in future.
7. In Metal Box Co. of India Ltd. v. Their Workmen : (1969)ILLJ785SC , it was observed by the Supreme Court that provisions made against anticipated loss and contingencies were charges against profits and, there-fore, would be taken into account against gross receipts in the profit and loss account and the balance-sheet. Reserves, on the other hand, were appropriation of profits, the assets by which they were represented being retained to form part of the capital employed in the business. In short, an amount 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 on the date of balance-sheet was reserve, but an amount set aside out of profits and other surpluses to provide for any known liability of which the amount could not be determined with substantial accuracy was a provision.
8. We had occasion to note the distinction between 'provisions' and 'reserves' in the case of Commr. of IT & SPT v. Burn and Co. Ltd. : [1978]114ITR565(Cal) , to which Mr. B. K. Bagchi, learned advocate for the revenue, makes a reference. He draws our attention to page 581 of the report, wherein we respectfully agreed as to the tests laid down by the Division Bench of the Bombay High Court in the case of Shree Ram Mills Ltd. v. CIT : [1977]108ITR27(Bom) , for determining 'reserve' for the computation of the capital. The tests laid down by the Bombay High Court are as follows :
'(i) a mass of undistributed profits cannot automatically become a 'reserve' for the purpose of rule 1 of Schedule II of the Super Profits Tax Act, 1963, and somebody possessing the requisite authority must clearly indicate that the amount has been separated from the general mass of profit with a view to constitute it as a reserve ;
(ii) it should be apparent from the surrounding circumstances that the amount so set apart is in fact a reserve to be utilised in future for a specific purpose on a specific occasion;
(iii) clear conduct on the part of the directors in setting apart a sum from out of the mass of undistributed profits avowedly for the purpose of distribution as dividend would be destructive of making that amount a reserve; and
(iv) having regard to the purpose of the Rules framed for the purpose of computing the capital of the company for the purpose of the Super Profits Tax Act, the amount so set apart should be available to the assessee for the purpose of its business. '
9. Mr. Bagchi contends that in order to set apart an amount as reserve there must be an indication to do so by the persons possessing the requisite authority, i.e., the directors. In this case, the company itself having shown the amount in the balance-sheet as 'provisions' cannot be subsequently allowed to treat the amount as a 'reserve'. The intention of the company, according to him, was apparent as not to treat the amount as 'reserve'. Reliance is placed on the Full Bench decision of the AndhraPradesh High Court in the case of Hyderabad Asbestos Cement Products Ltd. v. CIT [1916] 105 ITR 822. In this case, it is held by the High Court of Andhra Pradesh that the provisions for contingency and bonus are definite liabilities, the quantum of which cannot be specifically ascertained on the date creating the provision. Hence, the provision created to meet such definite contingency, the quantum of which cannot be specifically determined as on the date of creation of the provision, can be termed as provision but not reserve. It is further held that a 'provision' does not acquire the character of a 'reserve' merely because the assessee has been carrying forward the balance in the provision account from year to year after meeting the liability, unless some persons possessing the requisite authority designate it as such or indicate the manner of the disposal or the distinction of the balance amount concerned.
10. Reference is also made to the decision of the Punjab and Haryana High Court in the case of CIT v. Hindustan Milk Food Mfg. Ltd. . It is laid down therein that when a reserve in dispute is created, the directors should apply their mind in that behalf. On the basis of this decision, it has been argued by Mr. Bagchi that before setting apart any amount the directors should apply their mind clearly and indicate specifically as to what are their intentions for treating the amount, whether as a reserve or as a provision.
11. Our attention is also drawn to the decision of this court in the case of Indian Steel and Wire Products Ltd. v. CIT : [1955]27ITR436(Cal) , wherein it is held that if the surplus is simply carried forward without the persons in requisite authority allocating it to any particular purpose as a reserve, it does not acquire the character of a reserve for the purpose of capital computation under the Business Profits Tax Act.
12. Another decision of this court in CIT and Surtax v. Standard Pharma-ceuticals Ltd. : [1979]119ITR101(Cal) , is also cited by Mr. Bagchi. But nothing new has been found therein, because the points involved therein have already been discussed before.
13. On the basis of the decisions discussed above, it is contended by Mr. Bagchi that it is essential that the persons in authority, viz., the directors of the company, must indicate clearly that a certain amount would be allocated for a particular purpose as a reserve, otherwise the amount set apart must be taken to be a provision.
14. Next, Mr. Bagchi for the purpose of explaining the import of contingent liabilities draws our attention to the decision in the case of CIT v. Century Spg. & Mfg. Co. Ltd. : [1977]108ITR431(Bom) . In this case, in the balance-sheet of the assessee-company as at December 31, 1961, a sum of Rs. 40 lakhs was shown as 'provision for contingencies' and in the profit and loss account for the year ended December 31, 1961, also the said sumof Rs. 40 lakhs was debited as 'provision for contingencies '. Therefore, on January 1, 1962 (the material date for computing the capital base under the S.P.T. Act, 1963, for assessment year 1963-64), the said sum of Rs. 40 lakhs stood appropriated as provision for contingencies. In the directors' report for the year ended December 31, 1962, it was stated that out of the gross profit of Rs. 3,77,93,273, a sum of Rs. 77,00,425 had been set apart towards payment of bonus to the employees of the textile section for the years 1958 to 1961 and the directors' report further stated that for the purpose of making this payment the amount of Rs. 40 lakhs, which had been set apart as provision for contingencies, was drawn upon. The ITO excluded this sum of Rs. 40 lakhs while computing the capital base of the assessee-company for the assessment year 1963-64, under Rule 1 of Schedule II of the S.P.T. Act, 1963. On appeal, the AAC held that the ITO was not justified in excluding the said amount from the capital computation. On appeal by the revenue, the Tribunal held that the provision for contingencies made by the assessee was not for an existing liability, inasmuch as the settlement regarding bonus was only arrived at in October, 1962, that is, after the end of 1961, and since the said sum was not set apart to meet any known liability which could be ascertained with certainty, it should be treated only as a reserve_and not as provision. The Tribunal, therefore, held that the said amount should be included in computing the capital base of the assessee. On a reference, at the instance of the Commissioner, the revenue contended that even a contingent liability, albeit a known contingent liability, is also included within the definition of the expression 'provision' and urged that since the sum of Rs. 40 lakhs had been set apart for the purpose of meeting the liability in the matter of bonus in respect whereof a dispute between the textile workers on the one hand and the mill owners on the other had been pending before the adjudicating machinery under the statute, the said setting apart of the sum of Rs. 40 lakhs would have to be regarded as a provision intended to meet a known or existing contingent liability and, therefore, this being in the nature of a provision, the same was not includible in the capital computation. The assessee, on the other hand, contended that as on the material date, i.e, January 1, 1962, the amount set apart for contingencies could not be said to be for any known or existing liability as the settlement regarding the bonus was arrived at only in October, 1962, and as such the setting apart of the amount of Rs. 40 lakhs was rightly regarded by the Tribunal as a reserve includible in the capital computation. In that case, the Bombay High Court held that the setting apart of the sum of Rs. 40 lakhs in the balance-sheet as on December 31, 1961, for contingencies, which according to the assessee-company's own statement before the Tribunal, was for the purpose of meeting the liability which might arise as a result of an awardthat would be made in an industrial adjudication which was pending under a statute will have to be regarded as a provision made for a known contingent liability, the quantification whereof was to depend upon either the actual award that would be made by the adjudicating machinery or as a result of settlement that may be arrived at by the parties. Therefore, the setting apart of the sum of Rs. 40 lakhs being in the nature of a provision would not be includible in the capital computation of the assessee-company for the purpose of the S.P.T. Act, 1963.
15. To show us the characteristics of 'provision' and 'reserve', Mr. Bagchi takes us to the decision of this court in the case of CIT and SPT v. Eyre Smelting Pvt. Ltd. : [1979]118ITR857(Cal) . The characteristics of provision and revision are mentioned therein as follows (headnote):
'The characteristics of a 'provision' are (a) provisions are made against anticipated losses and contingencies; (b) provisions are charges against profits ; (c) provisions are taken into account in the profit and loss account against gross receipts; (d) an amount set aside out of profits designed to meet a liability or contingency or commitment or diminution in the value of assets known to exist at the date of the balance-sheet can be a provision ; and (e) an amount set aside to provide for any known liability of which the amount cannot be determined with substantial accuracy is a provision.
The characteristics of a 'reserve' are : (a) reserves are appropriation of profits which are retained to form part of the capital employed in the business ; (b) a reserve is not designed to meet any liabilty, contingency, commitment or diminution in the value of assets known to exist at the date of the balance-sheet; and (c) a reserve is something set apart for future use or enjoyment. '
16. Mr. Bagchi also cites the decision of this court in the case of Braithwaite & Co. (India) Ltd. v. CIT : [1978]111ITR825(Cal) . In this case, an amount set apart for payment of surtax was found to be a provision for taxation and as such not to be included in the computation of capital tax. This decision has no bearing on the issue before us.
17. Last of all, with reference to Pt. I of Schedule VI of the Companies Act, 1956, and relying on our decision in the case of CIT v. Indian Standard Wagon Co. Ltd. : [1979]116ITR539(Cal) , Mr. Bagchi contends that the amount with which we are concerned comes under the heading 'Current liabilities and provisions '. In the form of balance-sheet given in Pt. I of Schedule VI of the Companies Act, 1956, the heading 'A' deals with current liabilities and provisions are treated in heading 'B '. It was held in the case of CIT v. Indian Standard Wagon Co. Ltd. : [1979]116ITR539(Cal) that any item which cannot be ascertained with any substantial accuracy, either by following any normal method of accounting, actuarial or otherwise,cannot be considered to be a contingent liability which merits exclusion from being considered as reserve in the context of Rule 1 of the Second Schedule to the Act. This aspect is important even if one considers the question of 'reserve' in contradistinction to 'provision' in the accountancy principle.
18. Mr. Banerjee, on behalf of the assessee with reference to para. 6 of page 21 of the paper book draws our attention to the fact that in the year ended 30th June, 1957, the sum of Rs. 5,000 was shown as reserve for pensions in the balance-sheet. But in the report of the directors for that year and subsequent years up to and inclusive of 30th June, 1961, it is described as provision for pension fund, but in the report of the following year, that is, for 31st June, 1962, it is again described as a reserve for pension fund. But all the time in the balance-sheet it was shown as 'reserve' under the head 'Reserve and Surplus '. Thus, in refuting Mr. Bagchi's arguments it is contended that it would not be right to say that the company itself had shown the amount in the balance-sheet as 'provisions '. In support of his argument that the amount in question may be treated as reserve he relies on the decision of the Karnataka High Court in Addl. CIT v. Indian Telephone Industries : [1979]118ITR291(KAR) . In this case, the subsidy received by the assessee had to be utilised for the construction of houses of workers and on such utilisation it would become part of the assets of the assessee. The question of repayment would arise only when the assessee went into liquidation or where the condition of grant was violated. There were unknown factors on the date of preparation of the balance-sheet. The subsidies could not, therefore, partake of the character of provision. The surplus referred to in item 5 of Schedule VI to the Companies Act, 1956, is the surplus which remains over after allocation of reserves. As the subsidies in question had been allocated in the balance-sheet as reserves, the Explanation to Rule 1 of the Second Schedule would not apply to exclude the same from construction in determining the capital base of the company. The decision herein is not of much relevance for the determination of the question under the facts and circumstances of the instant case. It is to be. found out whether the amounts constituted reserves or provisions, i.e., liabilities.
19. As to the provision for pension it can be said that the company was aware of the fact how many employees were to retire in a particular year, and as such there is no necessity for setting aside any amount out of profits and other surpluses for any contingencies--provision for pension was a known liability though the actual amount could not be determined on the date of the balance-sheet. Again roofing repairs may be taken as liabilities for contingencies and may be provided under the head 'Current liabilities and provisions'. In the past, the amounts set apart for roofingrepairs had been adjusted with actual roofing repairs. Thus, initially, the impugned amount represented amount set apart for meeting the liabilities of the assessee-company. Again, from the facts and circumstances of the case, the intentions of the persons in authority, that is, the directors, cannot be gathered that they had ever intended to treat the impugned amount as 'reserve'. Only in 1957, an amount was set apart for the creation of pension reserve and up to 30th June, 1961, the directors described the amount as a reserve for pension fund. The amount was shown in the balance-sheet as reserve and surplus. But admittedly the expenditure incurred in respect of pensions had regularly been debited to the profit and loss account. Similarly, for the period from 30th June, 1956, to 30th June, 1958, the amount for roofing repairs was shown as a provision for roofing repairs and under the head 'Current liabilities and provisions'. Since 30th June, 1959, the amount had been shown as 'reserve.' for roofing repairs under the heading 'Reserves and surplus'. That amount again admittedly had been debited to the profit and loss account. But in terms of Schedule VI to the Companies Act, 1956, all these amounts were to be shown under the head 'Current liabilities and provisions '. Moreover, undisputedly at the initial stage the amount represented amounts set apart for meeting the liabilities of the company.
20. Thus, taking the matter as a whole we are of opinion that the persons in authority had no intention to treat the impugned amount as 'reserves '. On the discussions made above and under the facts and circumstances of the case, we are of the opinion that the Tribunal was not justified in holding the amount in question as reserve and in reversing the decision of the Commissioner. Accordingly, we answer the question in the negative and in favour of the revenue.
21. Under the facts and circumstances of the case, each party to pay and bear its own costs.
Sabyasachi Mukharji, J.
22. I agree.