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TMI Blog1992 (1) TMI 100X X X X Extracts X X X X X X X X Extracts X X X X ..... ference under section 256(1) of the Act and section 18 of the Companies (Profits) Surtax Act, 1964 (for short "the Surtax Act"), on the question of law which was answered in, the negative and against the appellant thus : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that a sum of Rs. 76,00,000 which was paid as dividend for the year 1962 following the general meeting dated 31st May, 1963, out of the dividend reserve of Rs. 90,00,000 as on the 1st January, 1963, was not to be taken into account for the computation of capital as on the lst January, 1963, in pursuance of the rules of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?" The previous year relevant to the assessment year, in relation to the paid up capital, the reserves, the debentures, etc., under rule 1 of the Second Schedule to the Surtax Act, is the calendar year 1963. The assessment year is 1964-65. The position of the capital was to be considered as on the 1 St day thereof, i.e., January 1, 1963. The appellant Claimed in its assessment a sum of Rs. 90,00,000 transferred to the dividend reserve as reserve entering into capital computation. The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear relevant to the assessment year, of its paid-up share capital, its reserves, if any, and other reserves as reduced by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the Indian Income-tax Act, its debentures, if any, or any borrowed amounts. The Explanation thereto provides thus : "For the removal of doubts it is hereby declared that any amount standing to the credit of any account in the books of a company as on the first day of the previous year relevant to the assessment year which is of the nature of item (5) or item (6) or item (7) under the heading 'Reserves and Surplus' or of any item under the heading 'Current Liabilities and Provisions' in the column relating to 'Liabilities' in the 'Form of Balance-sheet' given in Part I of Schedule VI to the Companies Act, 1956 (1 of 1956), shall not be regarded as a reserve for the purposes of computation of the capital of a company under the provisions of this Schedule." Section 217 of the Companies Act, 1956, enjoins the company "to attach to every balance-sheet laid before a company in general meeting, report by its board of directors, with r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the procedure for computation thereof was indicated in the Second Schedule. In the computation of the profits, the capital or reserve forming capital of the company had to be excluded. It is well-known that the accounts of the company have to be brought up for a year up to a particular date. On the facts of this case, the crucial date is January 1, 1963. If it was reasonably practicable to make up the accounts as on that date and present the same to the directors of the company as on December 31, 1962, and the balance-sheet thereof is placed before the general body meeting of the shareholders as on that date, they could have made up their minds on that date and declared their intention of appropriating the dividend or any other sums to reserves of different heads of liabilities. But the fact remains that it was not done for the obvious reason that the calculation or collection of the figures of all the items of income and expenditure of the company of the previous year ending December 31, 1962, was bound to take some time and it was not done. The fact remains that the shareholders in the general body meeting held on May 31, 1963, resolved to appropriate Rs. 76,00,000 towards div ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the payment of dividend and appropriated by subsequent resolution was only provision and the residue of Rs. 14,00,000 was reserve. In Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53, this court was concerned with whether the appropriation amounted to reserve or provision. Dealing with the question of payment of bonus to the workmen and appropriation thereof on that account, this court held that the distinction between a provision and a reserve was, in the commercial accountancy, fairly well known. Provisions were made against anticipatory losses and contingencies were charged against profits and they had been taken into account against gross receipts in the profit and loss account and balance-sheet. On the other hand, reserves were appropriation of profits, the assets by which these were represented being retained to form part of capital employed in the business. Provisions were usually shown in the balance-sheet by deduction from the assets in respect of which those were made whereas general reserve and reserve fund were shown as part of the proprietor's interest. An amount set aside out of profits and other surpluses, not designed to meet a liability, contingenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with which and the purpose for which such retention or appropriation has been made because the substance of the matter is to be regarded and in this context the primary dictionary meaning of the term 'reserve' may have to be availed of. But it is clear beyond doubt that if any retention or appropriation of a sum is not a provision, that is to say, if it is not designated to meet depreciation, renewals or diminution in value of assets or any known liability the same is not necessarily a reserve. We are emphasising this aspect of the matter because during the hearing almost all counsel for the assessees strenuously contended before us that once it was shown or became clear that the retention or appropriation of a sum out of profits and surpluses was for an unknown liability or for a liability which did not exist on the relevant date it must be regarded as a reserve. The fallacy underlying the contention becomes apparent if the negative and non-exhaustive aspects of the definition of reserve are borne in mind. Having regard to the type of definitions of the two concepts which are to be found in clause 7 of Part III the proper approach in our view would be first to ascertain whether th ..... 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