The main legal point established in the judgment is the interpretation of the meaning of 'reserve' in the context of capital computation under the C. (P.) S. T. Act, 1964, and the inclusion of reserves for depreciation on investments and doubtful debts based on the specific facts of the case.

( 1 ) THE assessee is a limited company and the instant reference under Section 256 (1) of the I. T. Act, 1961, read with Section 18 of the C. (P.) S. T. Act, 1964, relates to the assessment years 1964-65, 1965-66 and 1966-67. For these assessment years, the assessee-company claimed before the ITO that in the computation of capital under Schedule II to the C. (P.) S. T. Act, 1964, the reserves for depreciation on investments amounting to Rs. 3 lakhs should be included in the capital computation for all the three years. Similarly, for the assessment years 1965-66 and 1966-67, the assessee-company claimed that reserves for doubtful debts should be included in the capital computation. The ITO, however, did not accept this claim. Being aggrieved, the assessee preferred an appeal before the AAC. The AAC dealing with the said contention observed, inter alia, as follows: " The issue raised is the Income-tax Officer's not including the undermentioned reserves in the computation of the capital basis for working out the standard deduction for these three assessments :--

Rs. Rs. Rs.

For depreciation on investments 3,00,000 3,00,000 3,00,000

For doubtful debts -- 2,67,813 1,95,127

Special Reserve under proviso (ii) to rule 1, clause II of the First Schedule to the Super Profits Tax Act, 1963

Reserve 1964-65 1965-66 1966-67

-- 3,50,000 --

( 2 ) THE reserve for depreciation on investments was not included in the computation of the capital base on the ground that it represented a kind of a provision and did not constitute a reserve. The word 'reserve' has been interpreted to mean 'something specifically kept apart for future use or for specific action'. The word 'reserve' thus invariably bears the sense of a reservation of finance for long term use when employed in the context of accounting. If the reserve for depreciation is judged by this important criterion, it has to be accepted to be a reserve even if it is created with the object of preserving a company's position against future losses occurring as a result of depreciation in the value of the investment it owns.

( 3 ) HOWEVER, there is another factor which strengthens the appellant's case in support of the inclusion of this reserve in the computation of its capital base. On 30-6-1963 and 30-6-64, the dates on which the appellant's previous years relevant to the assessment years 1964-65 and 1965-66 ended, the market value of the investments was substantially more than their book value not taking into account the unquoted shares. The position which can be easily ascertained from the appellant's printed account in respect of these two years was as follows :--"book value Market value Rs. Rs. 30-6-63 90,56,734 1,06,07,229 30-6-64 93,38,519 1,05,43,261 The figures with regard to the position as on 30-6-65 (relevant assess ment year 1966-67) could not be ascertained because the printed accounts were not immediately available in the course of the hearing. But this, as I have indicated, is an additional factor which strengthens the appellant's case. In any case, the figures of the book value and the market value on the investments as on 30-6-63 and 30-6-64 indicate that the market value of the investments was greater than the book value of the investments. As such, there was no need for the appellant to provide for the deprecia tion in the value of investments during these years. "

( 4 ) ANOTHER argument was put forward by the assessee and that was this: If the dividend equalisation reserve qualified to be a reserve includible in the capital base of the assessee-company, there was no reason why a reserve to meet the contingency of future loss should not qualify to be such a reserve. The AAC found considerable force in this argument. So far as the reserve for doubtful debts was concerned, it was urged, the assessee had created reserves for doubtful debts on an ad hoc basis year after year. The quantum of the debts which, after proper scrutiny ap