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TMI Blog1979 (7) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... " Questions arising out of the revenue's reference application : "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing the additional ground to be raised for the first time before it? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amounts of Rs. 2,40,966 and Rs. 2,09,999 respectively for provision for taxation and provision for dividends could be treated as 'reserve' to be included in the computation of the assessee's capital under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963 ? " The facts giving rise to these two reference applications are that the assessee known as M/s. Oswal Woollen Mills Ltd., Ludhiana, is a company and the assessment year is 1963-64, the previous year being the calendar year 1962. The issue involved relates to the computation of capital under r. of the Second Schedule to the S.P.T. Act, 1963. The computation of capital is provided in the aforesaid Act because an assessee gets a standard deduction of 6% of the capital computed or Rs. 50,000, whichever is greater, from the chargeable profits. This Act was in force on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tative objected to this ground being allowed to be raised at that stage because no such ground was taken before the authorities below, yet the learned Tribunal relying upon judgment of this court in CIT v. Ram Sanehi Gian Chand [1972] 86 ITR 724 allowed this additional ground to be taken and ultimately accepted the contention of the assessee relying upon a judgment of the Allahabad High Court in CIT v. Security Printers of India (P.) Ltd. [1972] 86 ITR 210. The view taken by the Allahabad High Court was that the " provision for taxation and provision for dividends " should be considered as Of reserves " for the purpose of r. 1 of the Second Schedule to the S.P.T. Act, 1963. Respectfully following that judgment, the Tribunal directed that the amount of Rs. 2,40,966, being " provision for taxation ", and Rs. 2,09,999, being " provision for dividends ", should be treated as a part of the " reserves " for the purpose of r. 1 of the Second Schedule to the said Act. As regards the other contention, claiming the transfer of Rs. 8,00,000 and Rs. 3,00,000 from the profit and loss account to the reserve fund account, the same was not accepted. Thus, the appeal was partly allowed. Feeling a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny such reserve as is not to be taken into account in computing the capital under this rule.." For the purpose of r. 1, the reserves of the company must be added to its paid up capital. While disallowing the amount of Rs. 8,00,000, the learned Tribunal observed : "The learned counsel for the assessee had pleaded that under section 86 of the Indian Companies Act (erroneously mentioned for regulation 87) the directors were authorised to create reserves. We do not doubt the authority of the directors to create reserve, before recommending any dividends, but the sanction of the directors must have the sanction of the shareholders. In this case we are not satisfied that the shareholders, while adopting the balance-sheet for the year 1961, approved the transfer of Rs. 8,00,000 from the profit loss account to the reserve fund account. " From these observations it is quite clear that the learned Tribunal rejected the claim of the assessee on the ground that though the board of directors had the authority to create " reserve" yet it must have the sanction of the shareholders in its general meeting. In the order the Tribunal has also reproduced the resolution of the board of direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Industries and Cotton Mills Ltd. v. CWT [1966] 59 ITR 767. We do not find that this helps the revenue in any way. No judgment dealing with the matter directly has been cited. Section 215 of the Companies Act provides the authentication of the balance-sheet and profit and loss account by the board of directors. The business of the company is controlled by the board of directors and they are in the, best position to know the affairs of the company and to act in the interests of the company. Thus, in our opinion, the learned Tribunal was wrong in holding that the sanction of the board of directors creating the reserve must have the sanction of the shareholders. There is no such requirement of any law under the Companies Act; rather s. 291 thereof read with regln. 87 prescribes the board's powers and restrictions thereon. The learned counsel for the revenue then argued that in any case the entry of Rs. 8,00,000 in accordance with the resolution of the board dated 1st March, 1962, was passed on 30th April, 1962, transferring Rs. 8,00,000 from the profit and loss account to the reserve fund account and was not shown in the balance-sheet for the year ending 31st December, 1961. According ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eaning of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963 ?" As regards the answer to this question, it is quite clear that with respect to this amount of Rs. 3,00,000 the board of directors passed a resolution on 29th June, 1963, for the first time, whereas the accounts for the year 1961 were passed in the year 1962, when a sum of Rs. 8,00,000 was credited to the reserve fund account. Therefore, the Tribunal rightly decided that this amount of Rs. 3,00,000 could not be considered as a part of the " reserve " as on 1st January, 1962. Thus, the answer to this question is in favour of the revenue and against the assessee. Question No. 1 arising out of the revenue's reference application : " Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing the additional ground to be raised for the first time before it ? " In view of the decision of this court in CIT v. Ram Sanehi Gian Chand [1972] 86 ITR 724, the learned Tribunal rightly allowed the additional ground of appeal to be taken. The judgment of the Gujarat High Court in CIT v. Karamchand Premchand P. Ltd. [1969] 74 ITR 254, relied upon by the learned counsel for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I meant reserve in the ordinary sense and need not be considered in contradistinction to " provision ". However, we are not inclined to agree with the view taken by the Calcutta High Court in CIT v. Burn and Co Ltd. [1978] 114 ITR 565 and we concur with the view taken by this court in Oswal Cotton Spinning and Weaving Mills [1981] 129 ITR 761. The learned counsel for the assessee also tried to argue that there is no finding that these two amounts, i. e., the " provision for taxation " and it provision for dividends " were made for discharging an existing liability. Under the circumstances, it was not warranted, since the Tribunal relied upon the Allahabad High Court judgment in CIT v. Security Printers of India (P.) Ltd. [1972] 86 ITR 210, in which it was held that the " provision for taxation " and " provision for proposed dividends " by company are entitled to be treated as " reserve " for the purpose of r.1 of the Second Schedule to the S.P.T. Act, 1963, and included these amounts in the computation. We are not inclined to agree with the views taken by the Allahabad and Calcutta High Courts and, relying upon the judgments of this court and other High Courts, we hold that the T ..... 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