Vazir Sultan Tobacco Co. Ltd. Etc. Etc v. Commissioner Of Income-Tax Andhra Pradesh, Hyderabad

789 VAZIR SULTAN TOBACCO CO. LTD. ETC. ETC. COMMISSIONER OF INCOME-TAX ANDHRA PRADESH, HYDERABAD September 250 !981 (V.D. TULZAPURKAR, E.S. VENKATARAMIAH AND AMARENDRA NATH SEN, JJ.] Super Profits Tax Act, 1963 and Company's (Profits) Sur-tax Act, 1964-Ru/e I of Second Schedule-Scope of-'' Provision" and "Reserve"·-Distinction-A sum of money transferred from current profits to general reserves-Dividend paid from that fund-General reserve how calculated. The Super (Profits Tax) Act, 1963 and the Company's (Profits) Sur-ta. Act, 1964 (the scheme and main provisions of both of which are almost identical) impose a special tax on excess profits earned by companies. The special t~ is imposed in respect of so much of a company's "chargeable profits" of the previous year as exceeded the "standard deduction"-The term "chargeable profit" is defined to mean th~ total income of an assessee computed under the Income Tax Act, 1961 for aDy previous year and adjusted in accordance with the provisions of that Act. "Standard deduction" is determined by computing the capital of a company in accordance with the rules laid down in the schedule. The material part of rule 1 provides that before any amount or sum qualifies for inclusion in capital computation of a company two conditions are required to be fulfilled namely : (i) that the amount or sum must be a "reserve" and (b) that it must not have been allowed . in computing the company's profit for the purposes of Income Tax Acts, 1922 or 1961. In their respective balance sheets, the assessees had shown under the heading "current liabilities and provisions" appropriations of large sums of money for taxation, retirement gratuity and dividends and claimed that for the purposes of 1<uper profits tax these sums should be regarded as "other reserves" within the meaning of Rule 1 of Second Schedule to the Act and that for the computation of capital they should be taken into account . Treating these sums as "provisions" and not as "reserves", the Super Profits Tax Officer determined the capital and the standard deduction by exclud~ ing them from the computation of the capital. He then levied super profits tax on that portion of the chargeable profits of the previous year as exceeded the standard deduction. While the Appellate Assistant Commissioner upheld the assessee's contention that these sums were "reserves" which should be taken into account for comput· ing their capital, the Appellate Tribunal held that these were not "reserves" within the meaning of Rule 1 of the Second Schedule to the Act and as such could not enter into capital computation. On reference the High Court held that the sums set apart were not "reserves" and so should be excluded in the computation of the capital for the purposes of levying the super profits tax. In Tax Reference no. 5 (a case under the Companies (Profits) Sur-tax Act, 1964) the assessee transferred from out of its current profits a large sum of money to the general reserves and paid dividend to its shareholders from out of the augmented general reserves. On the question whether for computing the capital for the purpose of sur-tax the general reserves should or should not be reduced by the sum of dividend paid, the taxing authorities and the appeUate tribunal ignored this amount holding that it was not a "reserve". None of the items of appropriation either for taxation or for retirement gratuity or for proposed dividend in the asses!!:ees' cases had been allowed in computing their profits under the Income Tax Act, 1961. HELD : [per Tulzapurkar & Venkataramiah, JJ] TAT Arata Tea wea fafadson,TATA|AAR ATA, Ae Ita, tetars (Vazir Sultan Tobacco Company Limited TAT Feeeta fafars FATAATARTE ATI, BARAT(Ballarpur Industries Limited. Commissioner of Income-Tax, Calcutta)Hag ania tax fasa wraqat fafadeTATA‘ ATRL AA, HARAT(M/s. Bengal Paper Mills Company Limited - Commissioner of Income-Tax, Calcutta) waa Cast geet qteae fafats, arf|TAIT'«(M/s. EchjayAAT Industries AAA, Private FIs Limited, Bombay The Commissioner of Income-Tax, Bombay) gigat mizaza stgaz fafads, args Tara MART ATI, ATV-V,_ AFIS (Hyco Products Private Limited, Bombay The Commissioner of Income-Tax, City-V, Bombay) :(25 faavaz, 1981) (caratfanft ato to Gamgwee, Fo Gao THETIAZAT ikantes ara at) giz (sifea) dea Oaz, 1963 (1963 %t 14)— fede agget, fram 1[seat (ara) afrne afafaan, 1964fgata agaet, fra 1 ate arqat afafaaa, 1956, gataga, att 3, avs 7|—sa acta faat—aateaqaa—dag faalfeat wera geet STATA SY sAATaT awa fag erat & aay att ea afarat % Fe gaa wat ag THe afaara st saaen & satay & faq erat wt gst etaiqmat Ho uifae eae fae fede aggat & faa 1at& arefafaat at acres & fag JAE cet ae THATet fafteitora ae ata ate adata arfaer at fraig wea &fxg fear vat gaara Z| gax (sifaza) dex Baz, 1963 (1963 aT 14)fedtaoaggat, fara 1 [wear (eva) fase afa-faa,1964,fedtiaaqget,fare1]site araetafafaan, 1956, get aggat,arm 3, aoe (7) (ii)—arfeat—aatraaa—afe ate aeqat aga aral atzafaaet % 8 Rar faafa saaia & faq faltadaisaagfa AaaT HT Heat & at er fafaatar sana ads fg:erat afafeaa ata att adera afar F wa A saa.am—faeg afe cet arerft a fafaatsa fart fritgarfas arare & fear arat @ at Gar fate ot are, —arefa mart fafaalfaa sauiit srenfca aifaer (dais arareQt BE Med aeATA ger) BY ger Hea & fag ada aa-uf & afas faarg aie at eet agqgat & ara-3 &@ee (7) (ii)Fata sa anfae vt A arefata & oq FRTAT STITT: po~w"7 gre (iifeea) dea daz, 1963 (1963 wt 14)—facta agqgat, fara L[aecit(ara)afine afafiaa, 1964,fettaagqadt,fran l ate seatafefraa,1956,Qt 217(1) ate sagged 1, areal “se” fafaax 87]—atag fratfedt weed gra seaifaa arate at eqazer &fag seat & eral ate oa afatal FF fdas ate grrattain & aaaat facie & eq ¥ fear var fafaataseaa: ‘areata’ agt gt aaar ate ace oral at gait atarma & erifeter at feat area| 1973 at fafaa attr Fo 860 (asit qeata saat Hetalat AAA) TH oagH AAAF Me gas areata fafaataa araat atat ad ral g gafere ag ater Pat fe sa aaa F aeyfaeareqas faq arti ast gear gaat aradt fate got(wifsan) daa dae,1963 % ata faaifeat dtfaater ag1963-64 % faa faa® far qava wer aafs ae ad ar at30 fadtaz, 1962 at gare gar ot, afafaan F ada afeara|HT STII FastHF faq sa at F gard ara aafna Heafag faatfedt sect A erat fear 2g fe (#) werera & fae, (=)vat faafa star & faq atx (a) araidt B fag (st va az30 faaraz, 1962 at mer fara arated gaaca Hadaratfaea att soar’ aida 3 arate feare af et) fafaatersareafatian arfad at ate gad gaat aqaal ist & aanfa faan th ww aed aaa F aey od arefitfa” mfae fear. artsat aifeq| afaara wx afeard a fraffed at ag acta WATTwt at aalis gaat Ua Fa aa at “aqaeg” (Tawa) di a FeBaftaarefetta att ga cart fratfedt ergata Gat a aaa.a ae’ at acafra aca at ate ga araTe at sae Tait tar|Ae Behe a ataereT Pear ager gg adB gard areal ® ga urd qt at aaa He & afas at, afrara He Tar fear 1 Frater &facg faaifedt sradt ara sret a we atta F agra argaa(ata) & fraifedt a aetter edlare at aftae ag afafaatfcafrat fa & nd arefafa (Ferd) & aa faatfedt seqat at eratHw ana ee feata FM fratafeara Hz afaare gt BIEstné get ata 8 araaze atte afeaer 5 fear at actaedtart at aff ate ag afafaaifes feat fe a afefaaa at gazeagqat & fron 1aet H arefarfer (Ferd)wet Fale ga TAITae fratfedt cert at got at arora H arf at Fear aTaaar | fraifedt wert ® freq oz gre (Mfaea) cea Tae 1963.at arr 10 % ara ofa aramzt afafaan, 1961 st are 256(1)Bada feo ae fade % farafafac fafe-wer ares sea o=asarataa FY, Baar Ta H fae, Har Ta— “Fat ATA HF Tealamare gz ate ofefeafrat % (#) eerera % fare, (@) Far fratagaara & fae ate (1) vrata & fay aader fraica ae 1963-64fac gaz (ifnea) dan daz, 1963 AY gat aagal F ataafaarape & cata % far ist at aaorar & fare arreferfar (Pest)aa at aea fs aad aay asia ge fare wey F ae TTarava & da val st araa set BT TAT UTed fart Foe Fate fratfedt weordt & fader F fear att ag afafaatfca fear feeral arr aaa gaara & gag cat Tea ate arfrat Feo ae# ate we gana Ber ad & faq wart arate aaa afaara wTsaver & qataa & fae sast gat al aaTaT FT aaa BATart seq carat & edt Wa at fraifedt wea 41973 syfafaa atta to 860 F qatet a 8i fafad atte at arta: ATE@<a gu, 1978 at fafaa atado 1614 ate 1980 aT GA-facta frdtara do 57 afer HA BU, 1977 Br He fase aaawo 2 att 3 aar 1978 Bare free Araar do 5 F faface svat|ar sax faara & va H ate fratfeat seat F farer F BA ga, afafaatfica—art (mifnea) dea Baz, 1963 4 “arrefiafa’” qa at afearar vai a TE 3 1 Hae CAH Tes HT BAA TF TTat faz wear dat t Gat sata sarfe safe asestela ag aaaa sqavit &, faeg ag qater adh gar zaife aerate F arefafa ate “stare” gaat Boge ad 8a aaa gaat at aac . arat Hare aeat sel fear var & oa fe faara & ded F ga aat Fun eee gat faafaa 2.1 aeanleia wat ® aqarz, dat weeage go caizarat g ate gaa usgs arco afera sat F 1 affarasrdad sit va afafran arefafaat at fade ® aqgedt qa oe # arafer ferae F-—ag oft at darorar arfnfers &eared % afafaa qa 2, cafae ag arazas at sar f fe arefafeate sraee ata} daccaral er afafera sernrd sar are att 4gstat se fe arfnfsan Aarng F safer ea F Aal F gar Haz21 cae afafees, varie “arefafa” ce afafran H afeafor wetfear var’, ag ad qatar oT awat fe. ag Ht wea aTGT Aara & A Rae eghaal aT ary Var & ate rea Frei Frawral wtadt aar Sa THT ea Ie AY GAR aaa Maar F aT FH aMAATrar art ga ara ar ae F ay fae arearz,earare ate arfnsayait ater afte seafrat F faraat sae acafeag eafarat aregear fear oat 81 ta: gears ate ara-grit Sear Fare HTH Aarafead meqat afafaaa, 1956 % sraeal HF ea ec areata fagTay ay saraafafsafafaatFsteal ®fat sat mareaaa & fre are gt (Fe 8) arady afafaan, 1956 at aqadt 6 jet ara 3 fraaa as-& fat arr 1 ate 2 % arg gu fafaed cat lav ofemard a TE gaie “arefafa”, “agaen” atc‘ arfaca” aedl at gah avs (7) Fafcarfica faar war 2 1 (Fer 10) graded aitque 7(1)(%) ate (a) gar avs 7(2) %ea aa & ag ease sala at area fe wafa “scafeaa cau” Teat ofearar ag fafafese wih fafeamieaa wo F at 7g g fH gaATwar re 2, Carefafa” wea at ofearst sea F aartrens & atxga ad % fate adl 3 fe cat Fae go at cat fafafase st 7eSmtafcarsrl-at ‘Carefafa’ we ce ara Ho Tea arfaet A ae adi sHe ay ore gla & fH & ( gaz ale feet areal ar H, etalar afaareo ar fafraaa erafaer wea St afcarsTsy areata sat“Sat ag wat at arefafa adt gt ana feeg saar ag afasasagt 2 fis afe sfaaren ar fafaaiat ocaftad tae set gal ag The expressions' 'reserve" and "provision" have not been defined in the Act. Standard dictionaries, without making any distinction between the two concepts, use them more or less S}nonymously connoting the same idea. But since in the context of the legislation a clear distinction between the two is implied it is essential to know the exact connotation of the two concepts and the distinction as known in commercial accountancy. The rules for computation of capital contained in the Second Schedule to the Act proceed on the basis of the formula of capital plus reserve, a formula well known in commercial accountancy. But since they occur in a taxing statute applicable to companies only these expressions will have to be understood in the sense or meaning attributed to the1n by men of business, trade and commerce and by persons interested in or dealing with companies. Therefore, the meaning attached to these words in the Com-panies Act, 1956 would govern their construction for the purpose of these two enactments. [800 C·H] The broad distinction between the two expressions as judicially evolved by this Court is that, while a "provision" is a charge against the profits to be taken into account against gross receipts in the profit and loss account, a "reserve" is an appropriation of protits, the· asset or assets by which it is represented being retained to form part of the capital employed in the business. [801 F] C.l.T. v. Century Spinning & Manufacturiag Co., 24 ITR 499 and Metal Box Company of India Ltd. v. Their Workmen, 13 ITR 67 followed. The Cornpanies Act, which enjoins upon the Board of Directors of every company to lay before the annual general meeting of its shareholders an annual balance sheet and a profit and loss account, enumerates the separate heads that should be shown in the balance sheet, two of these items being "reserve" and "provision". The definitions of these two expressions given in the Act show that if any retention or appropriation of a sum falls within the definition of "provision" it can never be a "reserve", But the converse is not true. If the reten-tion or appropriation is not a "provision" that is, if it is not designated to meet depreciation, renewals or diminution in value of assets or any known liability it is not automatically a ''reserve'' and the question will have to be decided having regard to the true nature and character of the sum so retained or appropriated depending on several factors, including the intention with which and the purposes for which such retention or appropriation had been made. [803 E·F] Having regard to the type of definitions of the two concepts, if a particular retention or appropriation of a sum falls within the expression "provision" then that sum will have to be excluded from the computation of capital. If the sum is in fact a "reserve" then it would be taken into account for the computation of capftal. l804 B-C] Where the assessee had set apart a sum of money to meet tax liability in respect of profits earned during an accounting year, which liability was not quantified, such setting apart for a known and existing liability, would be a "provision" and could not be regarded as a "reserve". [806 A-C] Kesorarri Industries and Co1ton Mills Ltd. v. Commissioner of Wealth Tax (Central) Caicutta, 59 JTR 767 followed. But if provision for a known or existing liability is made in excess of the amount reasonably necessary for the purpose, such excess shou1d,,.be treated as "reserve" and, therefore, would be includible in capital computation. [806 E] Since the assessee (in C.A. No. 860/73) had at no stage of the proceedings before the Taxing Authorities or Appellate Tribunal or the High Court raised a plea that the provision made by it for taxation was in excess of the amount reasonably necesssary for the purpo~e and that such excess should be treated as a "reserve'', the olea which needs investigation into facts, could not be allowed to be raised for the first time in appeal before this Court. [807 F] Ordinarily an appropriation to gratuity reserve will have to be regarded as a provision made for a contingent liability, for, under a scheme framed by a company- the 1iability to pay gratuity to its employee on determination of employ-ment arises only when the employment of the employee is determined by death, incapacity, retirement or resignation-an event (cessation of employment) certain to happen in the service career of every employee. Moreover, the amount of gratui1y payable is usuaJJy dependent on the employee's wages at the time of determination of his employment and the number of years of service put in by him and the liability accrues and enhances wilh completion of every year of service; but the company can work out on an acturial valuation its estimated liability (i.e. discounted present value of the liability under the scheme on a sden~ tific basis) and make a provision for such liability not all at once but spread over t\ number of years. Jf by adopting such scientific method any appropriation is made such appropriation will constitute a provision representing fairly accurately a known and existing liability for the year in question; if however, an ad hoc sum is appropriated without resorting to any scientific basis such appropriation would also be a provision intended to meet a known liability, though a contingent one, for, the expression 'liability' occurring in cl. (7)(1)(a) of Part III of Sixth Schedule to the Companies Act includes any expenditure contracted for and arising under a contingent liability; but if the sum so appropriated is shown to be in excess of the sum required to meet the estimated 1iability (discounted present value on a scientific basis) it is only the excess that will have to be regarded as a reserve under clause (7) (2) of Part III to the Sixth Schedule. [807 G·H; 808 A·D] In the instant case although the assessee had urged before the authorities below that different treatment for the same item could not be given for purposes of income tax assessment and super profits tax assessment the assessee did not clarify by placing material on record as to whether appropriation was based on any acturial valuation or whether it was an appropriation of an ad hoc amount which has a vital bearing on the question, whether the appropriation could be treated as a provision or reserve. In the absence of proper material the question should be decided by the taxing authorities whether the amount set apart and transferred to gratuity reserve by the assessee company was either a provision or a reserve and if the latter to what extent. [812 C·E] Standard Mills Co. Ltd. v. Commissioner of Wealth.Tax, Bombay. 63, I.T.R. 470 & Work,,,.n of William Jacks & Co. Ltd. v. Management of Jacks & Co. Ltd; Madras, [1971] Supp. S.C.R. 450 followed. Southern Railway of Peru Ltd. v. Owen [1957] A.C. 334 referred to. tag: arefafa fi za get aT fafaeaa ga sare sfaenfea arfafamfsa aris at aglsafe atecaer a sara F waa ge.HAT Slat fH sat aay ge frat Har sala ag area free ateae sata frat far tar sfaareo ar fafaataa faar war 2, wathfasa & art wm emia F waar sar ale ga aad F “arefafa” weeBIg MseHtela ae a TAT Hear gars fHeg ag aerazqse & fa afe fed} aaufa at sfaareo ar fafa oratewan aal & att afe ag anfeaat F gea Haare, aaa aTamet ar frat ara arfaer a ger BWfar seface & at agara eg & “Carefafa” sgl S10Stat aaeqaral ay afeararTHT BY eaTAHae ge, T fe saa 3 hee7H ay ass,sfaa efenta ag gi fe cgay ae afafafas fear are fe arfinaft sarerfir ar fafinsz sfaarco at fafaataa “saafeaa wa”qe & aeata ata 2| afe ag araré at eqseaar arafeaa aarerfarat Got a daar & saafsa wear dar fag afe aacfn wr sofaarey ar fafaataa ofearet & agare seafeaa waa adt ge ay eaat fafaeag sox afme fafaeraval ey emia F cae eu Fa THIZafaarfrea ar fafanifaa aaufa at adl safe atx caeq % fren FRAT Slat are afe arafera cHa aeqa: areferfe Fat sa Tait atamar & fac feara % wat ear i (Fer 11)|| l-7a: gat ee, wera % sqaeae ee A fafaaiaa a aeayfaare HWA go aay Tet ag gfe eat HtraTaFH fag eqaeayawa & eg F-aral att arafaatey Fa cafaaifedt weafrayava fafralfaa ar gam wat a§ arag wad gana aria a ait frmeama fratzn ag & gana gt ag wr oger faa ar, safer THTaf at anvfarfa1 ga art & faare adt gt anat fe 30faarax,1961 ® agar oz fraffed? sect 4 anal at aaa werentatfaea sama feat ot vat sa ad & toa afaa fae & cafe te_afaea at giifeaa waa aT gear ga any areaid fagear SOare agl fear ar aaar ar att sear afafaeaa ga ag F aryBU BY at H fare F Hear Va st sa waxy, sa ay ¥ aferfaa & waar cx Hues arfara gece Va H grey fataa ATarr 33,68,360 ag at arate gan waar ara ate saaTs aI faeey & fag ca stag art STGAT faaat arat are # fafera weitarit 1 aa: fastaa: ag ease sale dat 8 fe eres ¥ fag freesaS ater gam west ag waa states wea art art wfeg ate|e& arcfefa val arat ar awateee cat alma aa fratfedtarafaal are fre me ater & fafrataat & att H Fat gt feafegit1 (Tet 13)| murata & fara fratfeet seafaat aver aR vet ag THATat fafadtaa wah are cm ata ate adena arfaea ar frag sey& fae feat car sree stat ate ge sae ara THA Tot STaaoratF afr aval ar seat 1 (Fer 14) the!i ff¥. gia atcat sae arefafa e faa fafaasa aarfaralfuca % fac feu ay stare & eT F arat sIeaT aatte faatstat aarfea te aat aarfeal Sl sree aaaHea aT atfaca BITare aang ae cata ® aqare Fat ast seo HarF wa Heamr faaterat acy, aerarar, Far fagfa ar carts are TAIT garS—ag gear (factor at aarfea) tel gt Be HAATY F Basrat fafead er a gedt 21 gah afafeaa aaa erat Fl THA TA:gam fate a aartta & aaa ayaa ¥ Faq gate Gas ATTat ag dar B act oe frat Hwy 2 aa arfaea Bar F sew aeGar elt TT Maga Car F Me agar 2, fag Sra Atal qreHlaTalfacs dinifan grater & arare Te (Farhra aTATe Te Tala agett afar at ge sea adara ger fama aadtzg att baafar & faa on ard adi afag aan asf # a % faegqaea wt andl 2 i ag ease 8 fs afe det darian cafes aTATHTate fafadtaa fear sar & at tar fafratsir seta ay & fareart gfafead, ara ate adara arfuer % eo H soaee Slat 1 fagafe tet aad saurfit et fafeatore fear frat aaifrp Aart &fac arafaa starefeat star & at tar eta fafaatsa aafeahag ce arafers sre afar star BT aaite Ge HLA RETHT aafafaaa at od aga) & wrt 3% qos (7)(1)(*) F arg FrCarfaea” qaarate aaifaa arfaea & fan faq ag ate & rategereg AE any at afta 8, freg afe ga ware fafeatfore ererfer mente erfaea (aaifis aeTe TT Be oes aaATA YET) sY Tewer & faa ating erat & afew fearg are at oat aga ¥ATAT‘at 3% que(7)(ii)&actava anfaar ay st arcfafa ¥ we F STAT| (TAT 17)| freaa Saataedet ag & facfer fe seq we afafran, aaa2 fa 1956 afar at waa are 217 araig % F aha eTdaa at ore faery tet fawrfer & as aeqar ararfaea gearwel lar1 rare aT BTA HT aTeaTT ar arfacs aay eve MarBaa ara & aifes ara afaders F Pacarea faoifear eatarzeur ar fafeaa Hwaate arate a seo & fac deer ofrHT F | wa: fadarn farce ay Bervarcal gree catare far at& see frat A are Be arce A aaa § ar sae saeat He THA@ ate get Tare Tavares st arg at fawrfea a facger at edtarztT oT federal at faafer & aa wae ¥ arate A Deonrat@ 1 ga ser ar fafaeay fe aor aaa wee aega: areata & arag, ga sare fafealfna arate at greafan safe ote caer BYtara F teat Hear sit fe aaa at ofefeafaal ox fadzHAT 8, fata er ds ae arara fad ale ag aataa faa fae vB‘fafaratioa fire ae 2 1 (Fzr 24). ary aera Ht ast Haar F er FH Carefiafa” gee wrae star “Vat AE ot a arat seat % fac wit sre ar fratate & fa vere ¥ <a} are ar feel cats & fre Tas Tal HIT |fat ga art faare wal gtawar fx arefaafas om arerey arcfarfa@t andl & ar fafafase arefafe1 wtfisa Saar ae & fis cae fatsate % fre, arg ae arareor gt ar fafafese, gay cet we atfax at cet ae 8 fe aor araia ates}scterat % ater | fratara & fadaa MS gre andy ar oun ae fafeer azar afraraax afafias,1963 atfeda aqqat Sfaae 1% are geSanefafe”’ cas arate area ar adt i (Fr 25) ' arqdl afafaay, 1956 a are 201 atc saa MATa wtareont & fafraa 87 F sqaeey BY ara-are qst & are car gear B.fe areal & 8 anefafoat gee Ser arate dara & fry famifce gf|,a| Ba|4 we Fe oH a aeg at afer a gfwer sw ate aaa at afte Fgaat ¢ aar saaeal at cata & sia star & fH fates aes erearate & dara at fanrfta & er FH fearwar fafratsacaa:.arefafa aay at ana 1 (Tzr 28)_| arafera faaifed?seqfrat & ary Ft geariea arate wfara faternt aru fac ae fafaatsat“areferfrat” él g ate 2aTHT TSH BY TTTAT Baar IaH Tal ag aa THAT Ht GATHAY Sit al saa aT Taar gar) (Tz 29) warfead fart fafaa adie afamfcar : 1973 st fafar adie qo 860. 1971 & fader raat Ho 10 F areer gee sea ara area 1 faraeaz,. 1972 & feria at aren & fares at Te acter | Seaz 1978 at fafas aitt do 1614 (qa eto) 1974 & masz fade fo 454 F HARA Ba eMATATaria 26 arg, 1976 % facia ate eafara fata geBHe Ht TE Tae || 1980 et gafasited fadtad Wo 57 (1977 & fate gataa frétera (fafa) Fo 4602 & saya) 1969 % araaz fade xo 195 F saRET eee UAT Rearte 11 44, 1974 % froia atxait area F faresat ag attr 1977 & we fade are do 2 at 3 1972-73 % fade artat do 1223ate 1224 (gree),[1971-72 & aasrt atta Fo 24 Ate 25 (yeas)] FH araHr attaafrsem,gragearadio“at” are darefearwargrastarfafae, 1961: at ere 267 & ats arant fader|aut 1978 & wt fads aTaat do 5 1976-77 & fawa ax maar Fo 36 (qeak) & vaya1977-78 & fade mat Fo 225 (H'48) ¥ orerez ote afeacey,Beas qe carts are date feat war arqaz afafraq, 1962 aMW 257 w ater gat fare | atta at ate awat Yo Ferrera ate atfo ato (fafae arta xo 860/73 ¥) awagyaatarat at atawast docao fark, staxz(fafact attr 1614/78 %)aa aa, THT Fae He afrewar factaaz st ate &RATTap(qafaaterfacies:;Ho 57/80 %)OOeitarat at ateTit Fo sto EIST HIT Fo Ao(1977 Sar fate oma | aaFo 2 atx 3 H) aMtaret et ate &watt Ure FoAx, Ato UTS(1978 & we fate amaramare itz Bo Ho TAFo 5 7)|sera at ate &wist ao cto lak ate; Bo(fafaa atte Fo 860/73 #)wenger gat Fart vo garemerat wt att % wt att % att % %FATT To gurfat merat wt att % wt att % att % %(1978 a fafea. atteHo 1614 #) Temata(1977 Temata(1977ate a ® az fata do 2 at wae do wadar. ate FATTvo quifat|| seat at ate 8(#z free aAarHo 5/1978 H) - amet weeao Aaa,afiata fag ate gard cogariedt ‘qeaeiat at mz 2 TAT To Go Agar ale Fo FoTT sean eararnn facia cae [1982],3.3%0 fire to qearnh mats (az faa ATAaT Ho 5/1978 at |aqrarare at agua facta eatenferaicr dio Ho AAMT." % fear The appropriations of an amount by the Board of Directors by way of providing for proposed dividend would not constitute 'provision', for, the appro· priations cannot be said to be by way of providing for any known or existing liability, none having arisen on the date when the Directors made recommenda-tion much less on the relevant date after the first day of the previous year relevant to the assessment year in question. This by itself would not convert the appropriations into "reserves•·. [813 E·F] The tests and guidelines laid down by this Court in this respect are : (1) the true nature and character of the appropriation must be determined with reference to the substance in the matter, which means that one must have regard to the intention with which and the purpose for which appropriation has been made such intention and purpose being gathered from the surrounding circumstances. A mass of undistributed profits cannot automatically become a reserve. Some body possessing the requisite authority must clearly indicate that a portion thereof has been earmarked or separated from the general mass of profits with a view to constituting it either a general reserve or a specific reserve; (2) the surrounding circumstances should make it apparent that the amount so earmark· ed or set apart is in fact a reserve to be utilised in future for a specific purPose on a specific occasion; (3) a clear conduct on the part of the Directo1s in setting apart a sum from out of the mass of undistributed profits avowedly for the purpose of distribution of dividend in the same year would run counter to a~y intention of making that amount a reserve, (4) the nomenclature accorded to any particular fund which is set apart from out of the profits would not be material or decisive of the matter; and (5) if any amount set apart from out of the profits is going to make up capital fund of the assessee and would be available to the assessee for its business purposes it would become a reserve liable to be included in the capital computation of the assessee under that Act. [815 F·H, 817 G] The relevant provisions of the Companies Act clearly show that Jcreating reserves out of the profits is a stage distinct in point of fact and anterior in point of time to the stage of making recommendation for payment of dividend and the scheme of the provisions suggests that appropriation made by the Board of Directors by way of recommending a payment of dividend cannot in the nature of things be a reserve. [818 F-G] Judged in the light of the above guidelines the ~·appropriations made by the Directors for proposed dividend in the case of the concerned assessee companies did not constitute 'reserves' and the :concerned amounts so set apart would have to be ignored or excluded from capital computation. [818 H] Standard Mills Co. Ltd. v, Commissioner of Wealth-tax Bombay, 63 I.T.R. 470, Metal Box Co. of India Ltd. v. Their Workmen, 73 ITR 67, First National City Bank v. Commissioner of Income-Tax, 42 ITR 67 & Commissioner of Income-tax (Central), Calcutta v. Standard Vacuum Oil Co., 59 !TR 685 followed.