The distinction between a provision and a reserve is that a provision is an amount retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy, while a reserve is an amount set aside out of profits and other surpluses, not designed to meet a liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance-sheet.

( 1 ) THE point involved in this case is whether certain amount set apart for payment of gratuity to the retiring labourers would be a "provision" or "reserve" for the purpose of capital computation under the Second Schedule of the Super Profits Tax Act, 1963. The reference in question arises from the assessment proceeding under the Super Profits Tax Act, 1963, for the assessment year 1963-64. The relevant previous year ended on 31st March, 1963.

( 2 ) UNDER the aforesaid Act, tax should be levied on the chargeable profits of the previous year in accordance with the rates set out in the Third Schedule to that Act. "chargeable profits" mean the total income of the assessee computed under the I. T. Act, 1961, for any previous year and adjusted in accordance with the provisions of the First Schedule. The super profits tax is levied only on the balance remaining after adjustment of the balance-sheet deduction against the chargeable profits.

( 3 ) THE assessee is a company carrying on the business of building railway wagons. In the assessment year 1963-64, a sum of Rs. 19,57,258 appeared as provision for labour retiring gratuity as on 1st April, 1962, the relevant date, and it continued in the balance-sheet as on 31st March, 1963, and 31st March, 1964, with some slight modification covering some actual payments made therefrom. The assessee claimed the said amount as a reserve before the assessing authority for inclusion in the capital computation. The assessing authority, however, took the view that a "reserve" would consist of funds which were not encumbered and not assigned and specifically set apart for meeting as at the date of the balance-sheet. The assessing authority, accordingly, opined that the said amount was meant to be used for the specific contingency already foreseen, though not quantified. So, the claim preferred by the assessee was disallowed.

( 4 ) THERE was an appeal before the AAC, who also held that it was an amount set apart for disbursement against a known liability and that it was only a "provision" and not a "reserve".

( 5 ) THE assessee preferred an appeal to the Tribunal. It was contended on behalf of the assessee that the payment to the employees was circumscribed by certain conditions and as the amount was not payable merely because a person retired, it could not have been taken as a mere provision. The contention of the appellant assessee was upheld by the Tribunal holding that the gratuity payable was circumscribed by conditions and that no person was absolutely or unconditionally entitled to it. In short, it was held by the Tribunal that the sum set apart was only a "reserve" and not a mere "provision".

( 6 ) ON the aforesaid facts, the following question of law is referred for opinion:"whether, on the facts and in the circumstances of the case, the sum of Rs. 19,57,268 shown by the assessee in its accounts as ' provision for labour retiring gratuity' was a reserve so as to be eligible for inclusion in the capital computation under the Second Schedule to the Super Profits Tax Act, 1963?"

( 7 ) THE expression "reserve" has not been defined in the S. P. T. Act, 1963. But it is the admitted case of both the parties that there is a clear-cut distinction between a "provision" and a "reserve". If any amount is retained by way of providing for "any known liability of which the amount cannot be determined with substantial accuracy"; the same will have to be regarded as "provision" and, consequently, if any amount is retained which is not designated by way of providing for any known liability the same could be regarded as "reserve". In elaborating the arguments in support of such distinction Mr. Pal, the learned counsel for the revenue, refers to the decision of the Supreme Court in Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53 at page 67 ; 39 Comp Cas 410, 425. Their Lordships observed as follows :"the distinction between a provision and a reserve is in commercial accountanc