Patna High Court
Heckett Engineering Co. vs Commissioner Of Income-Tax on 21 February, 1979
Equivalent citations: [1979]120ITR417(PATNA)
JUDGMENT S.P. Sinha, J.
1. Both these matters arise out of a super profits tax assessment of the assessee for the assessment year 1963-64. The matters being connected matters, are decided by this common judgment. One of the references is at the instance of the revenue and the other is at the instance of the assessee. The question of law referred in the former is :
"Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the amounts appearing in the balance-sheet of the assessee as 'retained earnings' and 'unremitted foreign income' were reserves for the computation of capital under the Super Profits Tax Act ? "
2. In the latter, two questions have been referred, which are :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the provisions of the Super Profits Tax Act, 1963, were applicable to this case ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that 'dividend payable' and 'provision for Federal, foreign and State income-tax' are not reserves for the purpose of computing capital of the company in accordance with the Second Schedule to the Super Profits Tax Act, 1963 ?"
3. These references, as stated earlier, are in relation to the assessment made under the Super Profits Tax Act, 1963 (Act 14 of 1963), hereinafter referred to as "the Act". The references have been made in terms of Section 19 of the Act read with Section 256(1) of the I.T. Act, 1961.
4. The relevant facts are that the assessee, M/s. Heckett Engineering Co., is a branch of M/s. Harsoo Corporation, which is incorporated in the United States of America. In India the company carries on business of reclaiming iron and steel contents from slag and scrap with its headquarters at Jamshedpur in the State of Bihar. For the assessment year in question, namely, the assessment year 1963-64, the accounting year is the calendar year 1962. In terms of the S.P.T. Act, such part of the chargeable profits, as exceed the amount of the standard deduction, are chargeable to super profits tax at the rate specified in the Third Schedule of the Act. I will presently deal with the connotation of the expression "standard deduction", but before I do so, I will state the other relevant facts.
5. For the said assessment year, the S.P.T. Officer determined the super profits tax payable at Rs. 3,67,232 after ascertaining the standard deductions calculated on the basis of the capital employed.
6. Sub-section (9) of Section 2 of the Act defines "standard deduction" to mean "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."
7. There are two provisos attached to this section, but it is not necessary to make a mention of them.
8. According to the Second Schedule of the Act :
"... ...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,... 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, or the Income-tax Act, 1961,......"
9. I have omitted to quote the entire rule, as occurring in the Second Schedule, for computing the capital of the company for the purpose of super profits tax, because for the purpose of these references only that part of the Second Schedule, as stated above, is relevant.
10. The assessee's case before the S.P.T. Officer was that the amount shown in its balance-sheet as on 1st of January, 1962, namely, on the first day of the relevant accounting year as "retained earnings" and "unremitted foreign income" should be reckoned in computing its capital for the purpose of determining the standard deduction. The S.P.T. Officer did not accept the assessee's contention and after computing the capital base and giving the standard deduction on that basis, determined the super profits tax payable at Rs. 3,67,232.
11. On appeal, the AAC held that the "retained earnings" were in the nature of "reserves" and were to be taken into consideration for determining the capital base of the company. He found that the retained earnings were used for the purpose of business of the company. Similarly, with regard to the unremitted foreign income, he held that its nature and character was the same as that of "retained earnings" and, therefore, this amount should also be taken into consideration in determining the capital base of the company as on the first day of the relevant accounting year.
12. The assessee further pressed its case that the provisions for dividend and the provision for taxation as made in the balance-sheet, should also be treated as "reserves" for the purpose of computing its capital. The AAC, however, did not accept this plea.
13. The revenue then preferred an appeal before the Tribunal against, treating "retained earnings" and "unremitted foreign income" as "reserves" for the purpose of computing the assessee's capital. The assessee on the other hand filed a cross-objection. In the cross-objection, the assessee raised two grounds, the first of which was that the assessee was not liable to the charge of super profits tax, inasmuch as it could not be considered to be a "company" for the purpose of the Act. The second ground was that in computing the capital base, the provisions for dividend and provisions for taxation were to be treated as "reserves".
14. The Tribunal rejected both the appeals. It agreed with the AAC that "retained earnings" and "unremitted foreign income" qualify to be treated as "reserves" for the purpose of computing the capital base of the company. With regard to the provisions made for dividend and for taxation, the Tribunal held that these amounts could not be available to the assessee for any future use and, therefore, they could not be considered to be either a "general reserve" or a "specific reserve". Moreover, the dividend payable as also the provision for taxation, it was observed, had been shown in the balance-sheet as current liabilities of the Corporation. The amounts of dividend had already been declared, it only remained to be paid. With regard to the provision for taxation, the Tribunal held that it was against a liability, which had to be met.
15. On the question as to whether the assessee was a company for the purpose of the S.P.T. Act, the Tribunal held that the assessee had been declared to be a company under the Indian I.T. Act, 1922, and that, therefore, in terms of Sub-section (10) of Section 2 of the Act, the assessee was a "company" for the purpose of the Act. Thus, both the appeals were rejected by the Tribunal. Three questions, as stated earlier, have been referred to this court for its opinion,
16. On the question as to whether the assessee was a company for the purpose of levy of super profits tax, Mr. Roy, learned counsel for the assessee, submitted that although the assessee had been declared to be a company, yet that was a declaration made under the Indian I.T. Act, 1922. No such declaration had been made or at least the department was unable to produce any evidence of such declaration having been made under the I.T. Act, 1961. According to learned counsel for the assessee, the former declaration could not, therefore, enure to the benefit of the revenue after the repeal of the Indian I.T. Act, 1922. That declaration, it was submitted, was for a particular purpose and that purpose being over, unless a further declaration was made under the prevailing I.T. Act, the assessee could not be treated to be a company for the purpose of levy of super profits tax.
17. The learned standing counsel for the income-tax department has made reference to the provisions contained in Section 297(2)(k) of the I.T. Act, 1961, and on that basis it is submitted that a declaration made under the old Act (Indian I.T. Act, 1922) declaring the assessee to be a company would continue in force even after the repeal of the Indian I.T. Act, 1922, and the enforcement of the new Act (I.T. Act, 1961).
18. I think the contention on behalf of the revenue is well founded. The charge of super profits tax is on a company. The word "company" has not been defined in the S.P.T. Act, but Sub-section (10) of Section 2 of the Act says:
"All other words and expressions used herein but not denned and in the Income-tax Act shall have the meanings respectively assigned to them in that Act."
19. Under the Indian I.T. Act, 1922, "company" was defined in Sub-section (5A) of Section 2 to mean; (i) any Indian company, or (ii) any association, whether incorporated or not and whether Indian or non-Indian which is or was assessable or was assessed as a company for assessment for the year ending on the 31st day of March, 1948, or which is declared by general or special order of the Central Beard of Revenue to be a company for the purposes of this Act.
20. As stated, the assessee had been declared to be a company under this Act. This Act was repealed by the I.T. Act, 1961, and now under Sub-section (17) of Section 2 of the I.T. Act, 1961, "company" has been defined in much wider terms, part of it as laid down in Sub-clause (iv) of Section 2(17) reads :
"Any institution, association or body, whether incorporated or not and whether Indian or non-Indian which is declared by general or special order of the Board to be a company."
21. Therefore, both under the old Act as also under the new Act even a non-Indian company declared to be a company, shall be deemed to be a company for the purpose of the I.T. Act and, by necessary intendment, it would be a "company" for the purpose of super profits tax.
22. Now, the question is that whether a fresh declaration was necessary to be made declaring an assessee to be a company after repeal of the Indian I.T. Act, 1922, and the enforcement of the I.T. Act, 1961. The declaration made under the Indian I.T. Act, 1922, in my opinion, is saved by virtue of the provisions contained in Section 297(2)(k) of the I.T. Act, 1961. The said provision reads as under :
" Notwithstanding the repeal of the Indian Income-tax Act, 1922 (11 of 1922) (hereinafter referred to as the repealed Act),--...
(k) any agreement entered into, appointment made, approval given, recognition granted, direction, instruction, notification, order or rule issued under any provision of the repealed Act shall, so far as it is not inconsistent with the corresponding provision of this Act, be deemed to have been entered into, made, granted, given or issued under the corresponding provision aforesaid and shall continue in force accordingly."
23. Learned counsel for the assessee submitted that what was required to make a non-Indian company assessable to super profits tax, was that it should be declared to be a company for the purpose of the I.T. Act. It requires declaration and so far as the provisions contained in Section 297(2)(k) are concerned, it did not cover a case of "declaration".
24. I think the expressions "notifications" or "orders" are wide enough to cover "declaration". A declaration is always in the shape of an order or may be in the shape of a notification as well. The declaration of a company to be a company for the purpose of the I.T. Act shall always be in the form of an order and a notification. In my opinion, therefore, the assessee having been declared to be a "company" under the Indian I.T. Act, 1922, such declaration will continue in force, notwithstanding the repeal of the Indian I.T. Act, 1922, by virtue of the provisions contained in Section 297(2)(k) of the I.T. Act, 1961.
25. Learned counsel for the assessee has referred to the decision of the Supreme Court in the case of Bengal Immunity Co. Ltd. v. State of Bihar [1955] 6 STC 446 (SC); AIR 1955 SC 661 and, on that basis, has submitted that a fiction created for a certain purpose, namely, in the instant case, for the purpose of the Indian I.T. Act, 1922, cannot be extended for the same purpose for another Act, namely, the I.T. Act, 1961.
26. I do not think the proposition, taken in isolation of the facts of that case, can be used with any advantage in the instant case. I, therefore, do not find any relevancy of the ratio laid down in the said case for the instant case.
27. This question is, therefore, answered against the assessee, that is to say, question No. 1 in the assessee's reference has to be answered in the affirmative.
28. I now pass on to deal with the question relating to "reserves", which question is common in both the references. In the reference made at the instance of the Commissioner the items are:--(i) retained earning, and (ii) unremitted foreign income.
29. In the reference made for the assessee the items are: (i) provision for dividend, and (ii) provision for Federal, foreign and State income-tax. In order to answer both the questions, it would be necessary to know what a "reserve" is. The expression "reserves", although used in the Second Schedule of the S.P.T. Act for computing the capital of a company for the purpose of super profits tax, has not been defined in the Act. This expression had, however, also been used in certain other previous Acts, one of them being the Business Profits Tax Act (Act 21 of 1947). Under the said previous Act also, for the purpose of computing the capital base of a company, certain items were required to be taken into consideration, one of them was "reserves", without defining what it meant; and, naturally, therefore, quite a number of cases cropped up in regard to its meaning. One of such cases is reported in CIT v. Century Spg. & Mfg. Co. Ltd. [1951] 20 ITR 260 (Bom), In that case the question was whether a sum of Rs. 5,08,637 which was the balance of the amount left over after making provision for depreciation, etc., and carried to the balance-sheet was a "reserve" which was to be taken into account for determining a company's capital as on the first day of the relevant accounting year.
30. It may be stated that the provisions contained in the Business Profits Tax Act, for the purpose of computing the capital of a company, were virtually the same as are contained for that purpose in the S.P.T. Act. Chief Justice Chagla, speaking for the court, observed (p. 264):
"Therefore, we cannot give to the expression 'reserves' used in this rule any technical meaning which has been given to it in any taxing statute, but we must give to it its plain natural meaning."
31. He further observed (p. 265):
"A 'reserve' in the sense in which it is used in rule 2 can only mean profit earned by a company and not distributed as dividends to the shareholders but kept back by the directors for any purpose to which it may be put in future."
32. Further on, his Lordship observed (p. 266):
"It is not sufficient for the company to earn profits. Having earned profits it must then by some conscious act determine what part of these profits should be kept back. It is only when part of these profits is kept back that it constitutes reserves. We are told that these profits were used in business and, therefore, they constitute reserves. But, what makes a part of the profits reserves is not the fact that they are used in the business but that they are consciously kept back and not distributed amongst the shareholders as dividends."
33. This matter was taken in appeal to the Supreme Court, which decision is reported in [1953] 24 ITR 499 (CIT v. Century Spinning and Manufacturing Co. Ltd.). Their Lordships accepted the connotation of the expression "reserve" as given by Chief Justice Chagla. Their Lordships observed (p. 503):
"The term 'reserve' is not defined in the Act and we must resort to the ordinary natural meaning as understood in common parlance."
34. Their Lordships then gave the dictionary meaning of the word "reserve". One of such dictionary meanings is--" To keep for future use or enjoyment; to store up for some time or occasion; to refrain from using or enjoying at once. "
35. It was further observed that (p. 504):
"What is the true nature and character of the disputed sum, must be determined with reference to the substance of the matter and when this is borne in mind, it follows that on the 1st of April, 1946, which is the crucial date, the sum of Rs. 5,08,637 could not be called a 'reserve' for nobody possessed of the requisite authority had indicated on that date the manner of its disposal or destination. On the other hand, on the 28th February, 1946, the directors clearly earmarked it for distribution as dividend and did not choose to make it a 'reserve'. Nor did the company in its meeting on the 3rd April, 1946, decide that it was a reserve. It remained on the 1st of April as a mass of undistributed profits which were available for distribution and not earmarked as 'reserve'...... "
36. Thus, although the decision of the Bombay High Court was upset by the Supreme Court, yet in so far as it concerned the meaning of the expression 'reserve', the Supreme Court confirmed the meaning assigned to it by the Bombay High Court.
37. In the case of First National City Bank v. CIT [1961] 42 ITR 17 (SC), the meaning as assigned to the said term was reiterated by the Supreme Court in this decision. The expression "reserves" on further occasions came up for being defined in other cases also before the Supreme Court but each time the Supreme Court has reiterated the same meaning which it gave to the expression in its decision in the case of CIT v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499. One of the later decisions, besides the one in the case of First National City Bank v. CIT [1961] 42 ITR 17, is CIT v. Standard Vacuum Oil Co. [1966] 59 ITR 685 The Supreme Court in both these decisions has, however, struck a note of caution that mere nomenclature of a certain sum was not relevant for deciding its true nature and character. For example, the amount was described as "undivided profits" in the case of First National City Bank [1961] 42 ITR 17 (SC) and yet it was held that it could not mean a mass of undistributed profits, because under the Treasury Rules, the creation and maintenance of the item to be known as undivided profits was required to be done. In substance, therefore, the undivided profits were in the nature of "reserves", Similarly, in the case of Standard Vacuum Oil Co. [1966] 59 ITR 685 (SC) the amounts were described as "capital paid in surplus and earned surplus". They were not described as "reserves" and yet after ascertaining the true nature and character of the amounts, they were held to be "reserves" available for being reckoned in computing the capital base of the company.
38. There have been several other decisions of some of the High Courts in this country, but none of these decisions have tried to attach any other meaning to the expression "reserve" than what has been expressed by the Supreme Court in the aforesaid decisions. I do not consider it necessary to make a note of all those High Court decisions, because it would be just multiplying the case-law without deriving any further benefit by mentioning them.
39. Thus, on the basis of the decisions discussed above, the expression "reserves" must be understood in its ordinary natural meaning as understood in common parlance and that it should be determined by keeping in view the nature and character of the sum with reference to its substance. If a certain sum has been set apart by a person possessed of the requisite authority to do so for future use or enjoyment, or is set apart for using it and enjoying it at once, such sum set apart is a "reserve".
40. While setting apart sums out of the profits of the company, the amount set apart are sometimes described as "provision" and sometimes as "reserves". Part III of the VIth Schedule of the Companies Act, 1956, has given a different connotation to the said two expressions; whereas "provisions" has been defined to mean "any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for a known liability of which the amount cannot be determined with substantial accuracy", the expression "reserve" has been defined "not to include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability". To put these definitions in simple language, according to the Companies Act, if a provision has been made for a liability, the amount of which cannot be determined with substantial accuracy, it is a provision. Where, however, that is not the case and yet an amount has been set apart for future use it would be "reserve". The distinction made by the Companies Act between "provision" and "reserve" has led to a divergence of opinion between the various High Courts of this country. There are two distinct trends of thought in this regard. Where a "reserve" has been made towards an existing liability, some of the High Courts have held it to be a mere "provision" and not a "reserve" which could be reckoned in computing the capital base of a company as on a relevant date. On the other hand, some of the High Courts are of the opinion that, unless the liability has been converted into a demand, the "reserve" would continue to be a "reserve" and would form a part of the capital base as on that particular date. The Madras High Court in the case of CIT v. Indian Steel Rolling Mills Ltd. [1973] 92 ITR 78 took the view that though there is a distinction between a ''reserve" and "provision" in the Companies Act, 1956, that distinction cannot be imported into the meaning of the word "reserve" in Rule I of the Second Schedule to the S.P.T. Act. According to this decision, the mere nomenclature of a sum set apart as "reserve" or "provision" made no difference for the purposes of computing the capital base of the company so long as the amount set apart was one such which could go towards forming the capital base of the company.
41. I most respectfully agree with this view.
42. Apart from the fact that the Supreme Court in the case of Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499 and in the other two cases has attached no importance to the name given to a particular sum set apart out of profit by a company, merely describing a sum set apart as "reserve" or a "provision" does not help in understanding the true nature of the sum set apart. For example, an amount set apart from the profits might be described as a "reserve" and yet it may be required by virtue of an existing demand to be spent out the very next day. Thus, although the name given to the amount set apart is "reserve", in substance it is not so. Similarly, an amount when set apart is described as "provision" and yet it is not required to meet any existing demand. Such an amount would necessarily be an amount available for future use and, therefore, a "real reserve".
43. I also respectfully agree with the aforesaid decision of the Madras High Court, in so far as it says that the definition of the expressions "provision" and "reserve" given in the Companies Act, 1956, will not be relevant for understanding the meaning of the said terms for the purposes of the S.P.T. Act. It is one of the cardinal principles of interpretation of statutes that the definition given to an expression in one statute should not be imported into another unless the circumstances so demand. Now, the interpretation of the expression "provision" and "reserve" as given in Schedule VI, Part III of the Companies Act, are meant for the purpose of understanding the balance-sheet and the profit and loss account as mentioned in Parts I and II of Schedule VI of the said Act. The definitions are for a particular purpose, namely, to understand the said two expressions occurring in the balance-sheet and the profit and loss account of a company. This interpretation given in the said Act cannot, therefore, be projected into understanding the same term for the purpose of the S.P.T. Act. The super profits tax is concerned with charging super profits tax on such part of a company's profit as exceed the standard deduction. "Standard deduction" has been defined to mean an amount equal to 6% of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of 50,000 rupees, whichever is greater. This definition of "standard deduction" necessitates the computation of the capital of the company which has gone into producing the company's profits. The Second Schedule of the said Act has prescribed rules for computing the capital of a company for that purpose. According to 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 other "reserves" in so far as the amount credited to such other reserves have not been allowed in computing its profits for the purpose of levy of income-tax under the I.T. Act. The description of the sum set apart, therefore, becomes immaterial. The only relevant fact to be considered is whether the amount set apart either as a "reserve" or "provision" would go into the computation of the capital base of the company as on the first day of the relevant accounting year.
44. As observed earlier, there has been divergence of opinion as to whether a reserve created for a specific purpose but towards existing liability, shall be considered as reserve for the purpose of forming the capital base of a company as on the first day of the relevant accounting year. The following decisions have taken the view that even though the reserve has been created towards an existing liability, it would still form a part of the capital base of the company :
1. CIT v. Vasantha Mills Ltd. [1957] 32 ITR 237 (Mad), 2. CIT v. Indian Steel Rolling Mills Ltd. [1973] 92 ITR 78 (Mad), 3. CIT v. Security Printers of India (P.) Ltd. [1972] 86 ITR 210 (All) and 4. CIT v. Aryodaya Ginning and Manufacturing Co. Ltd. [1957] 31 ITR 145 (Bom).
45. In fact one of the principles enunciated by the Bombay High Court in its decision has since been approved by the Supreme Court in the case of CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566.
46. The following decisions have, however, taken the view that if a "reserve" has been created against an existing liability, it does not qualify as a "reserve" for the purpose of forming the capital base of the company as on the first day of the accounting year,
1. Hotz Hotels Pvt. Ltd. v. CIT [1975] 101 ITR 596 (HP), 2. Hyderabad Asbestos Cement Products Ltd. v. CIT [1976] 105 ITR 822 (AP) [FB], 3. Shree Ram Mills Ltd. v. CIT [1977] 108 ITR 27 (Bom), 4. Braithwaite and Co. (India) Ltd. v. CIT [1978] 111 ITR 729 (Cal), 5. Mettur Industries Ltd. v. CIT [1978] 114 ITR 439 (Mad), 6. Nagammal Mills Ltd. v. CIT [1974] 94 ITR 387 (Mad), 7. CIT v. Hind Lamps Ltd. [1973] 90 ITR 487 (All) and 8. CIT v. British India Corporation (P.) Ltd. [1973] 92 ITR 38 (All).
47. The reasons which have weighed in taking such a view in some of these decisions is the ratio as laid down by the Supreme Court in the case of Metal Box Company of India Ltd. v. Their Workmen [1969173 ITR 53 ; 39 Comp Cas 410. The decisions of the Himachal Pradesh High Court in Hotz Hotels Pvt. Ltd. v. CIT [1915] 101 ITR 596 and of the Full Bench decision of the Andhra Pradesh High Court in Hyderabad Asbetos Cement Pro-ducts Ltd. v. CIT [1976] 105 ITR 822 have been wholly guided by the ratio laid down in this decision.
48. As observed by me earlier, as to whether a particular sum could be considered to be a "reserve" for the purpose of computing the capital base of a company under the S.P.T. Act, should necessarily be considered in the light of the provisions of the Act itself. As to how a particular "reserve" has been defined for the purpose of another statute might lead to anomalous results. The decision of the Supreme Court in the case of Metal Box Company of India Ltd. [1969] 73 ITR 53 was in the context of determining the amount of bonus payable to the workmen under the Payment of Bonus Act, 1965. It was specifically for such determination that the expression "reserve" came to be considered in this case. The company's claim to depreciate the amount of its profit for the purpose of distribution of bonus to the workmen by setting apart certain sums by way of making provision and reserves was the main bone of contention in this decision. It is, therefore, clear that the "reserves" were tried to be analysed not for the purpose of determining the capital base of the company but for the purpose of determining as to whether they could form a part of the profit which have been wrongly set apart as "reserve" kept away from payment of bonus to the workmen. The consideration involved in this case for understanding the meaning of the expression "reserve" being wholly in a different context, it would not be a proper guide to understand its meaning for the purpose of S.P.T. Act.
49. The basis for some of the aforesaid decisions for discarding the setting apart from the category of a "reserve" for the purpose of capital computation is the decision of the Supreme Court in the case of Kesoram Industries v. CWT [1966] 59 ITR 767. In this decision, the Supreme Court was concerned with the question as to whether the amount set apart as "provision" for income-tax and super-tax was a "debt owed" within the meaning of Section 2(m) of the W.T. Act, 1957, and as such was deductible in computing the net wealth. The Supreme Court held that it was a debt owed on the valuation date. Some of these decisions have, therefore, taken the view that if a provision has been made for a liability which, though unascertained but must arise, was a debt owed and consequently cannot form a "reserve" for the purpose of computing the capital base of a company. The Bombay High Court in its decision in the case of Shree Ram Mills Ltd. [1977] 108 ITR 27 has been guided by this principle.
50. It cannot be denied that the setting apart of a sum to meet the taxation liability is an amount set apart to meet a debt which has to be paid out of the amount set apart.
51. The question, however, is not that the amount so set apart is at some point of time to be paid out, but the question involved is whether having set apart that amount for a particular purpose, it could still form a "reserve" for the purpose of computing the capital base of a company as on a particular date. It has to be borne in mind that the computation is required to be made having regard to the state of affairs as present on the first day of the accounting year relevant for the assessment in question. If on this date a certain reserve has been created, though for the purpose of meeting a liability which is sure to arise, but which has not arisen, I do not see as to how the company could be deprived of the benefit of using that sum towards its capital base. One can understand the exclusion of such amounts from being reckoned towards the capital base against which a demand has already arisen, for example, where a provision has been made for payment of dividend, the dividend having already been approved by the shareholders at their meeting. The reserve created for the purpose of payment of dividend in such circumstances will not qualify to be reckoned as reserve for the purpose of computing capital base as on the first day of the relevant accounting year. There is a clear distinction between an "existing liability" and an "existing demand". For example, although a sum is required to be paid out but as to when it is required to be paid is not specified, and if a reserve has been created towards that liability, it can be called a reserve towards an "existing liability", but it is not the same thing as a reserve towards an "existing demand". If this difference is borne in mind the distinction between an existing liability or "debt owed" and an existing demand or a demand for payment is easily understandable. One can understand a case where an amount has been paid out even towards advance payment of tax as not being a reserve for the purpose of capital computation. As was held by the Gujarat High Court in the case of Rohit Mills Ltd. [1965] 58 ITR 854 or by the Madras High Court in the case of Nagammal Mills Ltd. [1974] 94 ITR 387 and the Calcutta High Court in the case of Indian Steel and Wire Products Ltd. [1958] 33 ITR 579, if an amount is paid out, certainly it cannot be available for the purpose of forming the capital base. As is the oft-quoted phrase, one cannot have the cake and eat it at the same time. I am, therefore, unable to accept the view that merely because it is a "debt owed" or it is an "existing liability", a provision made towards it in the shape of reserve will not qualify to form a capital base as on a particular date.
52. Mr. Roy appearing for the assessee strenuously urged that having regard to the requirements contained in Rule 1 of Schedule II of the S.P.T. Act, the only consideration that should weigh for deciding as to whether an amount set apart as reserve could be taken into consideration for computing the capital base should be that the said reserve had not been allowed as deduction in computing the profits of the company for the purpose of income-tax. This contention, in my opinion, goes a little too far, for the simple reason that only such amounts can be taken "into consideration in computing the capital of the company, whose true nature and character is that of a reserve meaning thereby an amount which can flow into the capital base of the company, having been created as reserve on the first day of the relevant accounting year.
53. Coming now to the facts of the instant case, the three items which are required to be considered, as stated earlier are:
(i) The retained earning and the unremitted foreign income;
(ii) an amount set apart towards the proposed dividends; and
(iii) the amount set apart as provision for Federal, foreign and State income-tax.
54. With regard to the first item, I need only add to what has been found by the Tribunal that these amounts, besides being classified under the head "Capital", were required to be retained in that shape under the law of the land where the company has been incorporated. I may recapitulate that in the case of First National City Bank [1961] 42 ITR 17, the Supreme Court held that an amount described as "undivided profits" was held to be a reserve because the law of the land, where the company was incorporated, required it to be so done. Similar is the position here. Moreover, the balance-sheet which has formed the basis of the super profits tax assessment is not the balance-sheet of the company's affairs of business only in India, but it is of business affairs throughout the world. Necessarily, therefore, it is guided by the provisions of law of the land where it has been incorporated. The Tribunal was, therefore, correct in holding that the retained earning and the "unremitted foreign income" were reserve for the purpose of computing its capital under the S. P. T. Act.
55. With regard to the provisions for Federal, foreign and State income-tax, there being no existing demand of tax, the sum set apart for this purpose would also be a reserve for the purpose of computing the capital of the company in accordance with the Second Schedule of the S. P. T. Act. It may be stated that the said reserve has not been deducted in computing the assessee's income for the purpose of the I. T. Act.
56. So far as the provision for dividend is concerned, from the statement of the case it is clear that the amount has been set apart towards dividend already declared by the company. It was, therefore, an amount set apart towards existing demand and consequently cannot be treated as a reserve for the purpose of computing the capital of the company in accordance with the Second Schedule to the S. P. T. Act.
57. Having regard to the discussions made above, question No. I in Tax Case No. 54 of 1974 is answered in the affirmative and against the assessee. Question No. 2 is answered in this way that whereas the provision for dividend is not a reserve for the purpose of computing the capital of the company in accordance with the Second Schedule to the S.P.T. Act, 1963, the amount set apart as provision for federal, foreign and State income-tax, is such a reserve. This question is, therefore, answered in part in the affirmative and against the assessee and in part in the negative and in favour of the assessee.
58. The question referred in the department's reference, namely, Tax Case No. 55 of 1974, is answered in the affirmative and against the department.
59. There will be no order as to costs in either of the references.
S. Sarwar Ali, J.
60. I agree.