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Miss A. Subhashini for the Respondent in Civil Appeal S.C. Manehanda and Miss A. Subhashini for the Respondent in Tax Reference Nos. 2 and 3 of 1977.

S.C. Manchanda, Anil Dev Singh and Miss A. Subhashini for the Respondent in Tax Reference Case No. 5/1978.

S P. Mehta and K.J. John for the Intervener.

Dr. Debi Paul and K.J. John for the Intervener in Tax Reference Case No. 5/1978.

The following Judgments were delivered:

TULZAPUKKAR, J. In these Civil Appeals and Tax Reference Cases certain common questions of law arise for our determination and hence all these are disposed of by this common judgment. The common questions raised are whether amounts retained or appropriated or set apart by the concerned assessee company by way of making provision (a) for taxation, (b) for retirement gratuity and (c) for proposed dividends from out of profits and other surpluses could be considered as "other reserves" within the meaning of Rule I of the Second Schedule to the Super Profits Tax Act, 1963 (or Rule 1 of the Second Schedule to the Company's (Profits) Sur-tax Act, 1964) for inclusion in capital computation of the Company for the purpose of levying super profit tax ? The first three matters concerning Vazir Sultan Tobacco Co. Ltd; Hyderabad, Ballarpur lndustries, Ltd; and M/s. Bengal Paper Mills Co. Ltd; Calcutta arise under the Super Profits Tax Act, 1963 while the the Tax Reference Cases concerning M/s. Echjay Industries Pvt. Ltd. and Hyco Products Pvt. Ltd. Bombay arise under the Companies (Profits) Sur-tax Act.1 964.

(a) provision for taxation and (b) provision for proposed dividend and in each one of these cases the Calcutta High Court had taken the view that these two items do not constitute "reserves" and as such have to be ignored while computing the capital of the assessee company.

In Tax Reference Case Nos. 2 and 3 of 1977 (M/s Echjay Industries Pvt. Ltd.)-a case under Companies (Profits) Surtax Act, 1964, we are concerned with two items of appropriation being (a) provision for taxation (b) provision for proposed dividend for the two assessment years 1969-70 and 1970-71 and in each of the years the Taxing Authorities as also the Income Tax Appellate Tribunal Bombay have taken the view that these appropriations did not constitute "other reserves" within the meaning of Rule I of the Second Schedule to the Companies (Profit) Surtax Act, 1954 and as such were not includible in the capital computation of the assessee company but in view of a divergence of opinion between the different High Courts on the point, the Tribunal has at the instance of the assessee company made a direct Reference to this Court under s. 257 of the Income Tax Act, 1961 read with s. 18 of the Companies (Profits) Surtax Act, 1964.

Having thus indicated the proper approach to be adopted, we shall proceed to deal with the three items of appropriation being (a) provision for taxation, (b) provision for retirement gratuity and (c) provision for proposed dividends in the case of concerned assessee companies in these Appeals and Tax Reference Cases.

Dealing first with the item of appropriation by way of provision for taxation, which arises in Civil Appeal No. 860/1973 (Vazir Sultan Tobacco Company), Civil Appeal No. 1614 (NT)/ 1978 (Ballarpur Industries Ltd;) Review Petition No. 50/1980 (M/s. Bengal Paper Mills Co. Ltd.) and Tax Reference Cases Nos. 2 & 3/1977 (M/s Echjay Industries Pvt. Ltd;)-the common question is whether the concerned amounts appropriated or set apart by these assessee-companies from out of the profits and other surpluses by way of making provision for taxation constitute a provision or a reserve on the relevant date, being the first day of the previous year relevant to the assessment year in question ? Taking Vazir Sultan Tobacco Company's case as an illustration, for the assessment year 1963-64 the relevant accounting period was the year which ended on September 30, 1962; under Rule I of the Second Schedule to the Super Profits Tax Act, the first day of the previous year would be october 1, 1961 and. therefore, the balance-sheet of that company as on September 30, 1961 and the profits and loss account which ended on September 30, 1961 would be relevant. It cannot be disputed that on the expiry of September 30, 1961, the assessee company incurred the taxation liability in respect of the profits which it had earned during that year, though the exact amount of such liability could not be determined with substantial accuracy at that time and the same would have to be ascertained by reference to rate of taxes applicable to that year. The liability for taxation having thus arisen on the expiry of the last day of the year, the setting apart of the sum of Rs. 33,68,360 by the Board of Directors will have to be regarded as a provision for a known and existing liability, the quantification whereof bad to be done later. On principle, therefore, it seems to us clear that the item of Rs. 33,68,360 which had been set apart by the Board of Directors for taxation must be regarded as a provision and cannot be regarded as a reserve. Similar would be the position in regard to the appropriations for taxation made by the other assessee-companies mentioned earlier.