- (1.) The following question of law has been referred to this Court by the Tribunal under section 256(1) of the Income -tax Act, 1961 ('the Act'): "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the 'contingency reserve' was not created for a specific purpose and, in that view was correct in holding that the balance in the 'contingency reserve' should be taken in computing the capital base of the company in terms of rule 1 (iii) of the Second Schedule of the Surtax Act, 1964 - The facts, as narrated by the Tribunal in the statement of case, are as under: The ITO who completed the assessment for the assessment year 1978 -79 noted in the order that the assessee claimed contingency reserve of Rs. 3,64,679 as reserve to be taken as the computation base. This reserve was created by the transfer of the amount from their profit and loss appropriation account. The ITO noted that although there was no explanation in the auditor's note, the assessee submitted that the reserve was created to make subsequent bonus payment if fell short. The claim was made under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ('the Surtax Act') under the category 'other reserve'. The ITO pointed out that reserve has been differentiated from provision although there was no definition given in the Act. In the instant case, he pointed out that the reserve was created towards a known liability but the quantum was unascertained and the payment had been made out of it in the relevant year and in the following years also and, therefore, it could not be said that there was a reserve created to strengthen the capital base. He pointed out that it was nothing but a provision for bonus reserve. The claim of the assessee was accordingly rejected. That was in the assessment year 1978 -79.
(2.) In the assessment year. 1979 -80, the ITO disallowed the claim on the same basis in respect of the amount which was stated to be Rs. 3,89,699. In the assessment year 1980 -81 the similar claim was made for Rs. 3,79,285. The ITO on the basis of his earlier order declined to accept the contention of the assessee.
(3.) The assessee took up the matter before the Commissioner (Appeals) who allowed the claim of the assessee. The assessee pointed out that the contingency reserve was created for the first time for the year 1978 -79 after appropriating from surplus of profit and loss account and general reserve. It was pointed out that in the balance sheet, the contingency reserve was shown under the general head 'Reserve and surplus'. The assessee relied on the decision of the Hon'ble Calcutta High Court in the case of Dunlop India Ltd. v/s. CIT : [1983] 141 ITR 542. In the case of the present assessee the contingency reserve was not earmarked for any specific purpose. The Commissioner (Appeals) directed the ITO to include the above sum in the capital base for the purpose of the Surtax Act.;