Judgment

TULZAPURKAR, J.:- In these Civil Appeals and Tax Reference Cases certain common questions of law arise for our determination and hence all these are disposed of by this common judgment. The common questions raised are whether amounts retained or appropriated or set apart by the concerned assessee company by way of making provision (a) for taxation, (b) for retirement gratuity and (c) for proposed dividends from out of profits and other surpluses could be considered as "other reserves" within the meaning of Rule 1 of the Second Schedule to the Super Profits Tax Act, 1963 (or Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964) for inclusion in capital computation of the Company for the purpose of levying super profit tax? The first three matters concerning Vazir Sultan Tobacco Co. Ltd., Hyderabad, Ballarpur Industries Ltd., and M/s. Bengal Paper Mills Co. Ltd., Calcutta arise under the Super Profits Tax Act, 1963 while the Tax Reference Cases concerning M/s. Echjay Industries Pvt. Ltd., and Hyco Products Pvt. Ltd., Bombay arise under the Companies (Profits) Surtax Act, 1964.

2. Since Civil Appeal No. 860 of 1973 (Vazir Sultan Tobacco Companys case) is comprehensive and comprises all the three items of appropriation it will be sufficient if the facts in this case are set out in detail so as to understand how the questions for determination arise in these matters. Vazir. Sultan Tobacco Co. Ltd. was an assessee under the Super Profits Tax Act. 1963. For the assessment year 1963-64, for which the relevant accounting period was the year which ended 30th Sept., 1962, for computing the chargeable profits of that year for the purpose of levy of super profits tax under the Act, the assessee company claimed that the appropriation of (a) Rs. 33,68,360 for taxation, (b) Rs. 9,08,106 for retirement gratuity and (c) Rs. 18,41,820 for dividends (all of which items were shown under the heading current liabilities and provisions in the concerned balance-sheet as at 30th Sept., 1962) should be regarded as "other reserves" within the meaning of Rule 1 of Second Schedule to the Act and be included while determining its capital. The Super Profits Tax Officer rejected the assessees contention as in his opinion all these items were "provisions" and not "reserves and as such these had to be ignored or excluded from the capital computation of the assessee company and on that basis he determined the capital and the standard deduction and levied super profits tax on that portion of the chargeable profits of the previous year which exceeded the standard deduction. In the appeal preferred by the assessee company against the assessment, the Appellate Assistant Commissioner upheld the assessees contentions and held that those items were reserves" and took them into account while computing the capital of the assessee company. In the further appeal preferred by the Super Profits Tax Officer, the Income-tax Appellate Tribunal accepted the Departments contention and held that these were not "reserves" within the meaning of Rule I of the Second Schedule to the Act and as such these could not enter into capital computation of the assessee company. In the Reference that was made under Section 256 (1) of the Income-tax Act, 1961 read with S. 19 of the Super Profits Tax Act at the instance of the assessee company the following question of law was referred to the Andhra Pradesh High Court for its opinion:

"Whether on the facts and in the circumstances of the case the provisions (a) for taxation Rs. 33,68,360, (b) for retirement gratuity Rs. 9,08,106 and (c) for dividends Rs. 18,41,820, could be treated as reserves for computing the capital for the purpose of super profits tax under Second Schedule to the Super Profits Tax Act, 1963 for the assessment year 1963-64?"

3. The High Court on a consideration of several authorities answered the question in respect of the three items in favour of the Revenue and against the assessee company and held