IMPORTANT POINT
The provisions for taxation in the present case is set apart to meet a specific liability which would arise at the end of the current accounting year. It cannot, in any manner, be compared to a "fund" of the kind referred to in the Circular No. I.P. (XV-5) of 1988 dated 23.1.88 issued by the Central Board of Revenue or within the meaning of that term in the Rules in question. (p. 208)

JUDGMENT

Mrs. Sujata V. Manohar, J.-This is an appeal from a decision of the Calcutta High Court in a Reference made to it under Section 256(1) of the Income-tax Act, 1961.

2. The assessee is a company and the accounting years involved are the years ending on 31.12.1962 and 31.12.1963 relevant to the assessment years 1963-64 and 1964-65 respectively.

3. For the assessment year 1963-64, the assessee claimed that for the purposes of Super Profits Tax Act, 1963, in the computation of its capital, a provision for taxation made by it to the tune of Rs. 16,48,888/- should be treated either as a part of its capital under Rule 1 of the Second Schedule to the Super Profits Act, 1963 or in the alternative as a deduction from the cost of investment under Clause (ii) of Rule 1 of the Second Schedule to the Super Profits Tax Act, 1963.

4. For the assessment year 1964-65, the assessee made a similar claim in respect of a provision for taxation made by it to the tune of Rs. 17,52,920/-. For this assessment year the relevant provisions which were applicable were under the Companies (Profits) Surtax Act, 1964.

5. The claim of the assessee was disallowed by the Income-tax Officer. In appeal before the Appellate Assistant Commissioner for the assessment year 1963-64, the Appellate Assistant Commissioner held as the provision for taxation was only an amount set apart to meet the liability for taxation which would accrue on the last day of the accounting year, it could not be treated as a reserve and be included in the capital of the assessee under the Super Profits Tax Act, 1963. He however, accepted the alternative contention of the assessee that the provision for taxation fell within Clause (ii) of Rule 1 of the Second Schedule to the Super Profits Act, 1963 and it should be deducted from the cost of investments in computing the capital base of the assessee-company under the Super Profits Tax, 1963.

6. For the assessment year 1964-65, the Appellate Assistant Commissioner similarly held that the provision for taxation cannot be considered as a reserve but it was to be deducted from the cost of investments under Rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

7. The matter was taken in appeal before the Tribunal which came to the conclusion that the provision for taxation made in the two assessment years was not a reserve which would form a part of the capital of the company. It further held that the provision for taxation was also neither a fund nor a surplus. It was a provision against a "perfected debt" and as such it would not qualify for a deduction as claimed by the assessee company.

8. The Tribunal made a Reference to the High Court under Section 256(1) of the Income Tax Act, 1961. The questions of law which arose for determination were as follows:

For the Assessment Year 1963-64

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that `provision for Taxation is not a reserve as to form part of the capital under of Rule 1 of the Second Schedule to the Super Profits Tax Act, 1963 ?"

(2) If the answer to the above question is in the affirmative, whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that in the computation of capital the company was not entitled to the benefit of deduction of the amount of Provision for Taxation from its cost of investments in terms of clause (ii) of Rule - 1 of the Second Schedule to the Super Profits Tax Act, 1963 ?"

For the Assessment Year 1964-65

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in the computation of capital the company was not entitled to the benefit of deduction of `Provision for Taxation from its cost of investments in terms of clause (ii) of Rule 2 of the Second Schedule of the Companies (Profits) Surtax Act, 1964 ?"

9. The Calcutta High Court has answered Question No. 1 for