Amounts set aside for specific liabilities do not qualify as reserves for the purpose of computing the capital base under the Companies (Profits) Surtax Act, 1964.

( 1 ) THE following questions are involved in this reference under section 256 (2) of the Income-tax Act, 1961 :" (1) On the facts and circumstances of the case, whether the Tribunal is justified in law in holding that the reserve for taxation for Rs. 8,46,948 (rupees eight lakhs forty-six thousand nine hundred and forty-eight only) and dividend reserve for Rs. 17,47,647 (rupees seventeen lakhs forty-seven thousand six hundred and forty-seven only) do not qualify as reserve for computation of capital base under the Explanation to the Second Schedule of the Companies (Profits) Surtax Act, 1964 ? (2) On the facts and circumstances of the case, whether the Tribunal is justified in law in holding that the reserve for taxation for Rs. 8,46,948 (rupees eight lakhs forty-six thousand nine hundred and forty eight only) and dividend reserve for Rs. 17,47,647 (rupees seventeen lakhs forty-seven thousand six Hundred and forty-seven only) do not rank in for consideration as reserve on proper interpretation of Part I of Schedule VI to the Companies Act, 1956 ? (3) On the facts and circumstances of the case, whether the Tribunal is justified in law in holding that the reserve for taxation for Rs. 8,46,948 (rupees eight lakhs forty-six thousand nine hundred and forty-eight only) and dividend reserve for Rs. 17,47,647 (rupees seventeen lakhs forty-seven thousand six hundred and forty-seven only) was set apart for any specific liability and as such not eligible for consideration as reserve for the purposes of computation of capital base under the Companies (Profits) Surtax Act, 1964?"

( 2 ) THE assesses is a company. The assessment year is 1965-66. The relevent previous year ended on March 31, 1965. For the purposes of the Companies (Profits) Surtax Act, 1964 (hereinafter stated as "the Act"), the relevant date is April 1, 1964.

( 3 ) AFTER providing for depreciation and development rebate, the assessee suffered losses in the earlier year and this year as well and transferred certain amounts from its reserves for the purposes of appropriations and proposed dividends.

( 4 ) ON April 1, 1964, the two amounts mentioned in the aforesaid questions appeared on the liabilities side of the balance-sheet of the assessee. The Income-tax Officer excluded the aforesaid amounts from the computation of the capital of the assessee for the purposes of working out the "statutory deduction" deductible from the chargeable profits of the assessee under Rule 1 of the Second Schedule to the Act. The appeal filed by the assessee was allowed by the Appellate Assistant Commissioner. Then the appeal filed by the department was allowed by the Appellate Tribunal.

( 5 ) IN the accounting year 1961-62 the States of Madras and Kerala, respectively, claimed sales tax from the assessee on its inter-State sales. The assessee contested those claims and the proceedings arising thereunder are still pending. The assessee was also assessed to sales tax by the State of West Bengal in that accounting year and filed appeals from the assessment orders. Rs. 23 lakhs was shown by the assessee as "provisions for taxation" in its balance-sheet for that year.

( 6 ) IN the balance-sheet for the next year Rs. 8,46,948'03 was shown as "reserve for taxation transferred from provisions for taxation" and this identical amount was shown as "reserve for taxation" in its balance-sheet for the accounting year 1963-64.

( 7 ) IN the balance-sheet for the accounting year 1963-64, under the head "contingent liabilities and claims against the company not acknowledged as debts", it is, inter alia, stated that the High Court has decided against the State of West Bengal and the State of West Bengal might go on appeal to the Supreme Court.

( 8 ) THE Tribunal found that the amount of liability arising out of the aforesaid inter-State sales of the assessee could not be determined with substantial accuracy in view of the pendency of those matters and the sum of Rs. 8,46,948 was provided for to mee