SUHAS CHANDRA SEN, J. - (1.) THE Tribunal has referred the following two questions of law to this Court under s. 256(1) of the IT Act, 1961, r/w s. 18 of the Companies (Profits) Surtax Act,1964. "1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that CIT had no jurisdiction under s. 16 of the Companies (Profits) Surtax Act, 1964 to direct the Surtax Officer to modify the computation of capital which the Surtax Officer (STO) had made for the purpose of surtax assessments for the asst. yrs. 1973-74 and 1974-75 ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the reserves for export obligation and taxation equalisation should not be excluded from the capital base of the assessee for the purpose of determining the surtax liability ?"
(2.) THE relevant years of assessment are the asst. yrs. 1973-74 and 1974-75, for which the corresponding periods of account are the years ending on 30th Sept., 1972 and 30th Sept., 1973 respectively. The controversy raised in Question No.1 has been dealt with by the Tribunal in the following manner : "We have carefully examined the facts of the case and the final submissions. The assessee's contentions appear to us to be well founded. The CIT(A) had adjudicated upon the question as to what would be proper capital base in present case. While doing so, the CIT(A) could have considered the question of exclusion or inclusion of the aforesaid two reserves if the matter was raised before him by the STO. Apparently the assessee was not aggrieved on the above account and, therefore, it was for the Revenue to have raised this issue. Even if the Revenue had not raised it, CIT(A) was competent to have considered the question with regard to the inclusion or exclusion of the aforesaid two reserves on his own. There was no fetter on his discretion with regard to the consideration of the aforesaid question. Rightly or wrongly he did not apply his mind to the aforesaid question but, for that reason it cannot be said that the question of computation of capital was not considered by him Once he expressed himself with regard to this question the original order of the STO lost its identity with regard to this point, and merged with that of the CIT(A) if there was any mistake in the said order, if at all it was the mistake of the CIT(A), and not of the STO and the CIT has not been given the authority under s. 16 of the Companies (Profits) Surtax Act, 1964 to modify the order of the CIT(A). If any authority for this proposition is needed, it is provided by the Full Bench decision of the Allahabad High Court in the case of J.K. Synthetics Ltd. vs. ITO 1975 CTR (All) 256 :(1976) 105 ITR 864 (All). In view of this the assumption of jurisdiction by the CIT in the present case was not proper." In view of the principles of law laid down in the case of Hindustan Aluminium Corporation Ltd. vs. CIT and Ors. (1989) 178 ITR 74 (Cal), it must be held that the approach of the Tribunal was erroneous. If in the assessment order, several points are decided and an appeal is preferred to the AAC only on some of the points, then it cannot be said that the entire assessment order has merged in the appellate order. The merger takes place only in respect of the points which have been dealt with in the appellate order. Merely because the AAC had jurisdiction to go into the points which were not the subject-matter of appeal before him, the merger of the entire assessment order in the appellate order does not take place. Since the CIT was trying to revise the orders of the ITO on points which were not raised before the AAC and on which the AAC had not expressed any opinion, the CIT(A) had the jurisdiction to pass an order in revision in respect of those points if he thought that the assessment was erroneous and prejudicial to the interests of the Revenue on those points. In that view of the matter, the question No.1 must be answered in the negative and in favour of the Revenue.
(3.) THE second question is in respect of two items of reserves created by the company. he first one relates to reserve for export obligation and the second one is with regard to "Tax equalisation reserve." So far as these two reserves are concerned, the Tribunal recorded its findings in the following words in the appellate order : "With regard to the reserve against export obligation the assessee's explanation was as follows : "THE assessee manufactured nylon yarn and considerable part of its exported. It gets subsidy against such exports and the same is accounted for as income as and when received. THE printed accounts will show the same. THE subsidy is based on certain export obligation statutorily fixed by Government. In the event of such obligation not being fulfilled, the assessee will be liable to certain recoveries to be made by Government. THE assessee no doubt has never failed in its obligation, but anticipating that in case of failure it might be liable to such recovery. It appropriated a part of the post tax profits in the said reserve. It was first created in 1971-72 assessment year, and account will show that the same has only swelled, without any part of it is being utilised. In 1975-76 assessment year, it was written back in the PandL Appropriation A/c and then transferred to General Reserves.' With regard to the taxation equalisation reserve the assessee's explanation was as follows: "This was created for the first time in 1972-73. In 1974-75 assessment year the entire reserve was written back and transferred to General Reserves. It was never utilised, otherwise than for transfer to reserves. THE assessee in its accounts provided taxes on the estimated income, less deduction on account of s. 80J. THE tax saving on account of such anticipated tax relief was then transferred out of unappropriated profits to its Reserve A/c. This was set aside for meeting eventual tax liability, in case the saving was ultimately reserved on any adverse decision of the tax authority. THE subsequent transfer to General Reserve, will also show that it was not intended to meet a liability known to exist on the first day of the relevant previous year." THE above explanations have not factually been disputed by the CIT as erroneous. In view of the aforesaid explanation, we are of the opinion that the tests for finding out the reserve, which were laid down by their Lordships of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. discussed above, stand satisfied and the amounts in the circumstances are reserves, and, therefore, even on merits there was no scope for interference by the CIT in terms of s. 16. Accordingly, the orders of the CIT are vacated." In our view, the Tribunal has come to a correct conclusion on this point. The findings of the Tribunal is that these amounts were not specifically needed by the assessee for any particular purpose. The reserves created for export obligation was to meet an eventuality that had not arisen at all. The assessee was exporting goods and was getting subsidy from the Government on that account. The subsidy was given under certain terms and conditions to be fulfilled by the assessee. If there was any failure on the part of the assessee in meeting its export obligation, the question of reimbursement of the amount of subsidy to the Government might have arisen. A reserve was created and a sum was set apart for that purpose. This was not done to meet any existing liability but as a prudent business organisation, the assessee set apart some money for an unlikely eventuality. The Tribunal noticed that the amounts were later transferred to "General Reserve.";