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TMI Blog1991 (4) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... rule 1(iii) of the Second Schedule to the Surtax Act ?" The facts, as narrated by the Tribunal in the statement of case, are as under : The Income-tax Officer 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 Income-tax Officer 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 it fell short. The claim was made under rule I of the Second Schedule under the category "other reserves". The I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT [1983] 141 ITR 542. In the case of the present assessee, the contingency reserve was not earmarked for any specific purpose. The Commissioner of Income-tax (Appeals) directed the Income-tax Officer to include the above sum in the capital base for the purpose of the Surtax Act. The Department preferred an appeal before the Appellate Tribunal. The Appellate Tribunal noted the facts of the case that some time prior to the accounting period corresponding to the assessment year 1978-79, the assessee created a reserve known as the "contingency reserve" account and the balance standing at the credit of this account was Rs. 3,64,579. During the accounting period corresponding to the assessment year 1978-79 and that a further sum of Rs. 25,120 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which apparently was not to pay bonus out of it but to transfer some unspecified amounts as and when necessary to make up the shortfall in the provision for bonus by the assessee-company. The Appellate Tribunal observed that it was wrong to say that keeping a part of the profit for the aforesaid purpose was to meet a known liability. It was also pointed out that the company could not foresee as to when there would be surplus in the provision for bonus account or when there would be shortfall in the said account and the creation of the contingency reserve account to even out such shortfall if it ever occurred, was not for payment of bonus as such but for transferring the amount from the aforesaid reserve account to the profit and loss appro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the profit and loss account. A "reserve" was an appropriation of the profits, the asset or assets by which it was represented being retained to form part of the capital employed in the business. It was also observed in that case that the question whether an amount constituted "reserve" or not will have to be found out, having regard to the true nature and character of the sums so appropriated and for that the appropriation must be determined with reference to the substance of the matter and for that one must have regard to the intention or the purpose for which appropriation has been made and such intention and purpose had to be gathered from the surrounding circumstances. The second case on which reliance was placed was the decision of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontingency reserve was a reserve or provision will depend upon the purpose and intention of the assessee for creating such a reserve. If it is to meet a contingency, which is unforeseen and cannot be anticipated, then the amount so set apart as reserve cannot be treated as a provision to meet a known liability. In the instant case, the finding of the Tribunal is that the amount has not been set apart for payment of bonus but the reserve was created to meet an unknown and unforeseen eventuality. This is a case of an amount being set apart to meet an unknown liability which may not arise at all. The assessee as a prudent businessman set apart a certain sum of money to meet an unknown contingency. In view of the principles laid down by the Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X
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