R.S. Pathak, J. - (1.) THE Income-tax Appellate Tribunal has referred the following question ; "Whether, on the facts and in the circumstances of the case, it could be held that the provision for bonus, provision for taxation and provision for proposed dividends represented 'reserves' and were to be included in the computation of capital under the Super Profits Tax Act, 1963 ?"
(2.) THE assessee is a private limited company. During assessment proceedings under the Super Profits Tax Act, 1963, for the assessment year 1963-64 (the relevant previous year being the financial year ending March 31, 1963), the assessee claimed that the following three items of reserves should be considered while computing its capital investment. (a) provision for bonus Rs. 5,000 (b) provision for taxation Rs. 81,000 (c) provision for proposed dividends Rs. 52,500 The Income-tax Officer rejected the claim on the ground that these amounts were designed to meet a contingent liability and, therefore, could not be treated as reserves. The Appellate Assistant Commissioner of Income-tax affirmed the decision. The Tribunal examined the balance-sheet of the assessee, and upon a consideration of the nature of the provision for bonus, taxation and proposed dividends, held that they fell within the meaning of the expression "reserves". There was no dispute before the Tribunal that the three items had been actually debited to the assessee's profit and loss account and had not been allowed as a deduction for the purposes of income-tax assessment. Accordingly, the Tribunal allowed the appeal and directed that the three items should be treated as "reserves" and included in the computation of the capital of the assessee for the purposes of super profits tax. At the instance of the Commissioner of Income-tax, the Tribunal has now made the present reference. The Super Profits Tax Act, 1963, enacted by Parliament, imposes a special tax on certain companies. Section 4 charges the tax on every company for every assessment year from April 1, 1963, in respect of so much of the chargeable profits of the previous year as exceed the standard deduction at the rates specified in the Third Schedule. The expression "standard deduction" is defined in Section 2(9) as "an amount equal to six per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of fifty thousand rupees, whichever is greater. The Second Schedule contains rules for computing the capital of a company for the purposes of super profits tax, and Rule 1 declares : "Subject to the other provisions contained in this Schedule, the capital of a company shall be the sum of the amounts, as on the first day of the previous year relevant to the assessment year, of its paid up share capital and of its reserve, if any, created under the proviso (b) to Clause (vib) of Sub-section (2) of Section 10 of the Indian Income-tax Act, 1922 (11 of 1922), or under Sub-section (3) of Section 34 of the income-tax Act, 4961 (43 of 1961), and of its other reserves in so far as the amounts credited to such other reserves have not been allowed in computing its profits for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or the Income-tax Act, 1961 (43 of 1961), diminished by the amount by which the cost to it of the assets the income from which in accordance with Clause (iii) or Clause (vi) or Clause (vii) of Rule 1 of the First Schedule is not includible in its chargeable profits, exceeds the aggregate of-- (i) any money borrowed by it which remains outstanding ; (ii) the amount of any fund, any surplus and any such reserve as is not to be taken into account in computing the capital under this rule ......"
(3.) FOR the purpose of Rule 1 the reserves of the company must be added to its paid up capital. The reserves are those specified by the rule. Admittedly, the provision for bonus, for taxation and for proposed dividends are not reserves contemplated under proviso (b) to Section 10(2)(vib) of the Indian Income-tax Act, 1922, or Section 34(3) of the Income-tax Act, 1961. The case of the assessee is that they represent other reserves the amounts of which have not been allowed in computing the assessee's profits for the purposes of the Indian Income-tax Act, 1922, or the Income-tax Act, 1961. For the revenue, while it is not disputed that the amounts represented by the three items have not been allowed in computing the assessee's profits for the purposes of either of the Income-tax Acts, it is contended that the three items cannot be described as reserves : What then is a "reserve" for the purpose of Rule 1 ? ;