The term "reserve" in rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, means a specified amount set apart for a specific purpose by a company, before distribution of dividends, which is available for future use of the company.

RAMANUJAM J.

The assessee is a public limited company. Its accounts for the year ending on 31st March, 1962, relevant for the assessment year 1962-63, were considered by the board of directors on 19th July, 1962. The profit in that year amounted to Rs. 12, 39, 139. After making certain provisions towards tax, gratuity, etc., there was a balance of Rs. 5, 88, 365. The board of directors recommended the following appropriations Rs

Transfer to development rebate reserve : 55, 000

Proposed dividend

Preference 35, 746

Ordinary 4, 87, 858

5, 78, 604

This left a balance of Rs. 9, 760. The provisions made towards tax liability and actual payments of tax were as under

Rs

Provision as on 1-4-1961 4, 00, 000

Provision made during the year, 4, 30, 000

---------------- 8, 30, 000 ----------------- Less : Advance tax for 1962-63 1, 08, 507

Provisional tax paid for 1961-62 3, 93, 851

5, 02, 358

The provision for taxation as on March 31, 1961, was Rs. 2, 91, 493 as against the actual tax liability for 1961-62 of Rs. 2, 85, 343 leaving a surplus of Rs. 6, 150. The appropriations towards gratuity were as under

Rs

Provision for gratuity as on 1-4-1961 2, 20, 181

Addition during the year 22, 178

2, 42, 359

Less : Payments during the year 9, 765

2, 32, 594

In working out the capital base for the purpose of ascertaining the amount of standard deduction under the Super Profits Tax Act, 1963, the assessee included the following sums apart from the capital of Rs. 53, 82, 682

Rs. Development rebate reserve 1, 30, 950

General reserves 33, 104

Repairs and renewal reserve 1, 55, 174

Balance in the profit and loss account 9, 761

Provision for taxation 3, 27, 643

Proposed dividend 5, 23, 604

Reserve for gratuity 2, 32, 595

The Super Profits Tax Officer considered the development rebate reserve and the general reserve as capital and rejected the claim in respect of the other items for the reason that they were merely provisions for specific liabilities and would not constitute reserves under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963The assessee appealed to the Appellate Assistant Commissioner. He held that the sum of Rs. 1, 55, 174 representing the reserve for repairs and renewals should be regarded as reserve and included it in the computation of capital. He, however, agreed with the Super Profits Tax Officer in respect of the other items

On further appeal to the Tribunal, it held that the assessee was entitled to treat the sum of Rs. 2, 32, 595 representing the provision for gratuity as a reserve. It also held that the excess provision for taxation in 1961-62 to the extent of Rs. 6, 150 would also be a reserve

At the instance of the revenue, the following questions have been referred to this court under section 19(1) of the Super Profits Tax Act, 1963

1.

"Whether on the facts and in the circumstances of the case, the sum of Rs. 2, 32, 595 represented reserves as contemplated under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963 ?

2. Whether, on the facts and in the circumstances of the case, the sum of Rs. 6, 150 was not part of reserve under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963 ?" *

It is necessary at this stage to refer to the relevant provisions of the Super Profits Tax Act, 1963. Section 4 levies a tax called "super profits tax" on every company for every assessment year commencing on and from 1st day of April, 1963, in respect of so much of its chargeable profits of the previous year as exceed the standard deduction at the rate or rates specified in the Third Schedule. Section 2(5) defines "chargeable profits" as the total income of an assessee computed under the Income-tax Act, 1961, for any previous year and adjusted in accordance with the provisions of the First Schedule. Section 2(9) defines "standard deduction" as meaning an amount equal to 6% of the capital of the company as computed in accordance with the provisions of the Second Schedule or an amount of Rs. 50, 000, whichever is greater. Schedule