A.N.SEN, J. - (1.) IN this application under s. 256(1) of the IT Act, 1961, r/w s. 19 of the Super Profits Tax Act, 1963, the following questions of law have been referred to this Court : "(1) Whether, on the facts and circumstances of the case, the Tribunal was right in allowing the claim for deduction of the annual sum of Rs. 4 lakhs only to the extent allowed by it in the corresponding income-tax appeal? (b) Whether the Tribunal was right in not treating the following three items as 'reserve' within the meaning of r. 1 of the Second Schedule to the Super Profits Tax Act, 1963, for the purpose of computing the capital of the assessee-- (a) provision for taxation (b) proposed dividend (c) provision for bonus ?"
(2.) IN view of our decision in IT Ref. No. 169 of 1969 [Braithwaite & Co. (India) Ltd. vs. CIT (1978 111 ITR 542 (Cal)] covering the question No. 1, raised in the present reference, we must hold for reasons stated in our judgment in the said reference that the Tribunal was not right in allowing the claim for deduction of the annual sum of Rs. 4 lakhs only to the extent allowed by it in the corresponding income-tax appeal and the said question is accordingly answered in the negative, against the Department and in favour of the assessee. In view of our decision in the said reference, the first question has not been any further argued in the instant reference. The facts of the case relating to the question No. 2, with which we are now concerned in the present reference, have been set out in the statement of the case and the same may be briefly indicated. The statement of the case relates to the asst. yr. 1963-64 for which the previous year concerned is the calendar year 1962. For the purpose of computing the chargeable profits of the assessee-company, the Super Profits Tax Officer adopted as a starting point the total income as computed for the income-tax assessment, namely, Rs. 1,25,90,785, and computed the chargeable profits at Rs. 42,59,972 under s. 4 of the Super Profits Tax Act. Super profits tax is leviable in respect of so much of its chargeable profits of the previous year as exceed the "standard deduction." Under s. 2(g), "standard deduction" means an amount equal to 6per cent of the capital of the company as computed in accordance with the provisions of the Second Schedule. Under r. 1 of the Second Schedule, the capital of a company shall be computed as on the first day of the previous year, i.e., as on 1st Jan., 1962, and shall be the aggregate of, (1) its paid up share capital, (2) the amount in its development reserve amount, and (3) other reserves in so far as the amounts credited to such other reserves have not been allowed in computing its profits for the purpose of the IT Act. The Super Profits Tax Officer computed the capital of the company as under : Before the Super Profits Tax Officer the assessee claimed that the following four items should also be included in the computation of capital base as "reserves" : The Super Profits Tax Officer did not allow the said claim of the assessee. An appeal was preferred to the AAC against the order of the Super Profits Tax Officer. The AAC directed that the total income for income-tax purposes, as reduced in appeal, should be made the starting point for . Rs. Rs. Paid up capital 56,59,790 . Addition to preference capital 3/12ths of Rs. 40,00,000 10,00,000 . General reserve 63,50,000 . Development rebate reserve 10,34,450 . Standard deduction being 6per cent of the above . 1,40,44,240 . . 8,42,654 . . Rs. (1) Provision for taxation 32,25,000 (2) Proposed dividend 14,14,948 (3) Provision for gratuities 7,00,000 (4) Provision for bonus 21,77,750 arriving at the chargeable profits. The AAC confirmed the Super Profits Tax Officer's action in treating the four items appearing as provision for taxation, gratuities, bonus and proposed dividend as not forming part of the reserves. Against the said order of the AAC the assessee preferred a further appeal to the Tribunal. The Tribunal in its order held that as regards the provision for taxation, provision for dividend and provision for bonus, the sums mentioned could not be considered to be reserves and the Tribunal agreed with the authorities below that these did not constitute reserves. The Tribunal, however, as regards the provision for gratuity, held that the balance in this account of Rs. 5 lakhs as on 1st Jan., 1961, should be treated as part of the reserves. The Tribunal in its order observed : "The balance sheet for the year 1962 was drawn up in May, 1963. So we have to go back to the accounts of the calendar year 1961 and see what are the reserves to be considered as on 1st Jan., 1962. The balance sheet for that year was drawn up in March, 1962, and considered by the directors in the general meeting thereafter. Therefore, the appropriations out of profits being after 1st Jan., 1962, have not to be taken into account."
(3.) THE Tribunal held : "The ITO has taken into account, apart from share capital, general reserves of Rs. 63,50,000 and development rebate reserve of Rs. 10,34,450 only. The provision for taxation is not really a reserve and it has rightly been treated as having been set aside to meet a definite liability. It is now well settled that liability to tax arises on the last date of the previous year ; consequently the provision for taxation has rightly been treated as not a reserve. There was an item of proposed dividend of Rs. 14,14,948 in the balance sheet as on 31st Dec., 1960. We take it that this dividend would have been paid during the year 1961. There is an item of proposed dividend of a like sum in respect of the year 1961. But this proposal did not arise before 15th March, 1968. Therefore, as on 1st Jan., 1962, it formed a part of unappropriated mass of profit of the current year. Consequently, this sum also cannot be considered as a reserve. So far as the provision for gratuity is concerned, this is undoubtedly in the nature of a reserve. This provision is to meet contingent liabilities and not accrued liabilities. It is not allowed for income-tax purposes. The amount is withheld in the business to be utilised as and when any retirement gratuity is sanctioned. This payment could well have been met from out of general reserves. Consequently, we hold that the provision for retirement gratuity has to be treated as a reserve. As on 1st Jan., 1961, the balance stood at Rs. 5 lakhs and it was increased by a further sum of Rs. 2 lakhs only after 1st Jan., 1962. Consequently, the sum of Rs. 5 lakhs only should be treated as part of the reserves. So far as the provision for bonus is concerned it is again an appropriation for meeting a definite liability to be incurred at the end of the year. We, therefore, agree with the authorities below that this is not a reserve." ;