Sabyasachi Mukharji, J. - (1.) In this reference under Section 256(1) of the I.T. Act, 1961, we are concerned with the following question: " Whether, on the facts and in the circumstances of the case, and on a correct interpretation of the Explanation to Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, and of Part III of Sch. VI to the Companies Act, 1956, the Tribunal was right in holding that the amount of Rs. 8,30,716 shown as the additional depreciation reserve and Rs. 7,24,507 shown as included in the additional taxation reserve in the balance-sheet of the assessee-company should be regarded as reserves for the purposes of computation of the capital of the assessee under the provisions of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?"
(2.) The assessment year involved is the assessment year 1964-65. The assessee is a company. It used to provide for, on cash basis, depreciation at the rate of 15 per cent. on the plant and machinery, 25 per cent. on motor vehicles and 5 per cent. on buildings from year to year. The assets were re-valued by the assessee in 1962 as it thought it was desirable to provide for additional depreciation reserve over and above the normal depreciation. The additional depreciation reserve was worked out by adopting a certain percentage of the basic depreciation with reference to the year of purchase of those assets. The additional depreciation reserve was in a way provided for to meet the replacement cost which might be found necessary for the machinery and plant becoming too old and being rendered useless. In other words, the additional reserve was more or less like development rebate reserve intended to be utilised by the replacement of the machinery either by way of modernisation or by way of rehabilitation. At the beginning of the previous year relevant to the assessment year 1964-65, the additional depreciation reserve thus came to Rs. 8,30,716. The first part of the question relates to the decision of the Tribunal holding that the amount of Rs. 8,30,716 should be regarded as reserve for the purpose of computation of the capital of the assessee under the provisions of Schedule II to the C. (P.) S.T. Act, 1964. In view of the actual facts, as found by the Tribunal, as indicated hereinbefore and in view of the well settled principle on this aspect of the matter, it must be held that the Tribunal was right in its conclusion. This point was not seriously disputed before us on behalf of the revenue. Therefore, the first part of the question, that is to say, whether the Tribunal was right in treating the sum of Rs. 8,30,716 as reserve for the purpose of the computation of capital of the assessee-company under the relevant provision, must be answered in the affirmative and in favour of the assessee.
(3.) So far as the second aspect of the question is concerned, it relates to the additional taxation reserve of Rs. 13 lakhs. On this account, the directors had set aside a sum of Rs. 13 lakhs on 30th April, 1963, by way of additional taxation reserve in view of the impending levy of super profits tax proposed in the Budget of 1963. This is borne out by the directors' report to the shareholders dated 30th April, 1963, and is in relation to the account for the 52 weeks ending on 29th December, 1962. It may be mentioned here that the Super Profits Tax Act received the assent of the President on the 4th May, 1963, and was published in the Gazette of India on the 6th May, 1963. It was made clear from the directors' report that the directors thought that the company's liability in respect of the super profits tax would be approximately Rs. 81/2 lakhs in view of the reliefs announced, by the Finance Minister though they otherwise made a provision for Rs. 13 lakhs. It may not be inappropriate at this stage to refer to the report of the directors to the shareholders dated 30th April, 1963. In submitting the annual report with the accounts for the 52 weeks ending on 29th December, 1962, the directors had stated as follows : " Your directors have considered it prudent to make a transfer to Additional Taxation Reserve of a sum of Rs. 13 lakhs to provide for the levy of super profits tax proposed in the Budget. However, in view of the ' relief ' since announced by the Finance Minister, it is now estimated that the company's liability for this tax will be approximately Rs. 8 1/2 lakhs.";