The Judgment of the Court was delivered by

Dipak Kumar Sen, J.:— In this reference under section 256(1) of the Income-tax Act, 1961, at the instance of Messrs. Duncan Brothers & Co. Ltd., the assessee, the effect of a provision made for taxation by a limited company on the computation of its capital for the purpose of the Super Profits Tax Act, 1963, and of the Companies (Profits) Surtax Act, 1964, has to be determined. The relevant assessment years are 1963-64 and 1964-65. The accounting years involved are the years ended 31st December, 1962, and the 31st December, 1963.

2. The facts found and/or admitted in this reference may shortly be stated as follows: For the assessment year 1963-64, the assessee had claimed that in the computation of its capital a provision for taxation of the amount of Rs. 16,48,888 should be treated either as a part of capital under the head “other reserves” under rule 1 or as a deduction from cost of investments in terms of clause (ii) of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963. This claim was disallowed by the Income-tax Officer. On appeal, the Appellate Assistant Commissioner held that the said provision was only an amount set apart to meet the liability for taxation, considered as accruing on the last date of the accounting year, and could not be treated as a reserve. But the alternative contention that such a provision fell under clause (ii) of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, was accepted and it was held that the said sum of Rs. 16,48,888 on account of this provision for taxation had to be reduced from the cost of investments in computing the capital base. In respect of the assessment year 1964-65 a sum of Rs. 17,52,920 had been laid out by the assessee as a provision for taxation and the assessee claimed that the said amount should either be treated as a reserve or as a deduction in arriving at the net cost of investments under the provisions of the Companies (Profits) Surtax Act, 1964, for the purpose of computation of the assessee's capital. The Income-tax Officer again disallowed the claim of the assessee but on appeal the Appellate Assistant Commissioner upheld such claim on the alternative ground that it was to be deducted from the cost of investments under rule 2(ii) of the Second Schedule of the Companies (Profits) Surtax Act, 1964.

3. From the orders of the Appellate Assistant Commissioner in respect of both the assessment years 1963-64 and 1964-65, the revenue went up on further appeal before the Appellate Tribunal. The Tribunal held that the provision for taxation made by the assessee in both the assessment years was neither a “fund” nor a “surplus” and could not be a reserve to form part of the capital. Such a provision being made against a perfected debt did not qualify for any deduction as claimed by the assessee. From the order of the Tribunal the following questions have been referred:

For the assessment year 1963-64:

“(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the ‘provision for taxation’ is not a reserve as to form part of the capital under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963?

(2) If the answer to the above question is in the affirmative, whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that in the computation of capital the company was not entitled to the benefit of deduction of the amount of ‘provision for taxation’ from its cost of investments in terms of clause (ii) of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963?”

4. For the assessment year 1964-65:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in the computation of capital the company was not entitled to the benefit of deduction of ‘provision for taxation’ from its cost of investments in terms of clause (ii) of rule 2 of the Second Schedule of the Companies (Profits) Surtax Act, 1964?”

5. Both super profits tax and companies (profits) surtax are leviable on what is known as “chargeable profits” of a company. This chargeable profit is generally the income of a company as assessed under the Income-tax Act, 1961, subject to certain adjustments and deductions as provided in the said statute. One of the items of adjustment is a deduction of a statutory percentage of the computed capital of the company. The rate of the respective taxes also depend on the excess of the chargeable profits over statutory deductions.

6. The Second Schedule to the Super Profits Tax Act, 1963, contains rules for computing the capital of a company for the purposes of super profits tax. Rule 1 is as follows:

“1. Subject to the other provisions contained in this Schedule, the capital of a company shall be the sum of the amounts, as on the first day of the previous year relevant to the assessment year, of its paid up share capital and of its reserve, if any, created under the proviso (b) to clause (vib) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (11 of 1922), or under sub-section (3) of section 34 of the Income-tax Act, 1961 (43 of 1961), and of its other reserves in so far as the amounts credited to such other reserves have not been allowed in computing its profits for the purposes of the Indian Income-tax A;t, 1922 (11 of 1922), or the Income-tax Act, 1961 (43 of 1961), diminished by the amount by which the cost to it of the assets the income from which in accordance with clause (iii) or clause (vi) or clause (vii) of rule 1 of the First Schedule is not includible in its chargeable profits, exceeds the aggregate of—

(i) any money borrowed by it which remains outstanding;

(ii) the amount of any fund, any surplus and any such reserve as is not to be taken into account in computing the capital under this rule.

Explanation 1.— A paid-up share capital or reserve brought into existence by creating or increasing (by revaluation or otherwise) any book asset is not capital for computing the capital of a company for the purposes of this Act.

Explanation 2.— Any premium received in cash by the company on the issue of its shares standing to the credit of the share premium account shall be regarded as forming part of its paid-up share capital.

Explanation 3.— Where a company has different previous years in respect of its income, profits and gains, the compulation of capital under rule 1 and rule 2 of this Schedule shall be made with reference to the previous year which commenced first.”

7. The Second Schedule of the Companies (Profits) Surtax Act, 1964, lays down rules for computing capital of a company for the purposes of this surtax. The relevant rules are rules 1 and 2 which are set out as follows:

“1. Subject to the other provisions contained in this Schedule, the capital of a company shall be the aggregate of the amounts, as on the first day of the previous year relevant to the assessment year, of—

(i) its paid-up share capital;

(ii) its reserves, if any, created under the proviso (b) to clause (vib) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (11 of 1922), or under sub-section (3) of section 34 of the Income-tax Act, 1961 (43 of 1961);

(iii) its other reserves as reduced by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or the Income-tax Act, 1961 (43 of 1961);

(iv) its debentures, if any; and

(v) any moneys borrowed by it from Government or the Industrial Finance Corporation of India or the Industrial Credit and Investment Corporation of India or any other financial institution which the Central Government may notify in this behalf in the Official Gazette or any banking institution (not being a financial institution notified as aforesaid) or any person in a country outside India:

Provided that such moneys are borrowed for the creation of a capital asset in India and the agreement under which such moneys are borrowed provides for the repayment thereof during a period of not less than seven years.

Explanation.— For the removal of doubts it is hereby declared that any amount standing to the credit of any account in the books of a company as on the first day of the previous year relevant to the assessment year which is of the nature of item (5) or item (6) or item (7) under the heading ‘RESERVES AND SURPLUS’ or of any item under the heading ‘CURRENT LIABILITIES AND PROVISIONS’ in the column relating to ‘Liabilities” in the “Form of balance-sheet’ given in Part I of Schedule VI to the Companies Act, 1956 (1 of 1956), shall not be regarded as a reserve for the purposes of computation of the capital of a company under the provisions of this Schedule.

2. Where a company owns any assets the income from which in accordance with clause (iii) or clause (vi) or clause (viii) of rule 1 of the First Schedule is required to be excluded from its total income in computing its chargeable profits, the amount of its capital as computed under rule 1 of this Schedule shall be diminished by the cost to it of the said assets as on the first day of the previous year relevant to the assessment year in so far as such cost exceeds the aggregate of—

(i) any moneys borrowed other than the debentures referred to in clause (iv) or moneys referred to in clause (v) of rule (1) and remaining outstanding as on the first day of the said previous year; and

(ii) the amount of any fund, any surplus and any such reserve as is not to be taken into account in computing the capital under rule 1.

Explanation 1.— A paid-up share capital or reserve brought into existence by creating or increasing (by revaluation or otherwise) any book asset is not capital for computing the capital of a company for the purposes of this Act.

Explanation 2.— Any premium received in cash by the company on the issue of its shares standing to the credit of the share premium account shall be regarded as forming part of its paid-up share capital.

Explanation 3.— Where a company has different previous years in respect of its income, profits and gains, the computation of capital under rules 1, 2 and 3 shall be made with reference to the previous year which commenced first.”

8. Mr. Kalyan Roy, appearing on behalf of the assessee, contended in respect of the questions referred for the assessment year 1963-64 that the provision for taxation made in respect of the said year by the assessee fulfilled all the tests and conditions of a “reserve” and ought to have been taken into account for the purpose of computation of its capital under the Super Profits Tax Act, 1963. In support of his contentions he cited a number of decisions. He strongly relied on the decision in Commissioner of Income-tax v. Century Spinning and Manufacturing Co. Ltd., [1953] 24 ITR 499 (SC). In that case, the Supreme Court considered and construed the concept of a “reserve” in the background of the Business Profits Tax Act, 1947. The Supreme Court explained the term “reserve” as follows (page 503):

“The term ‘reserve’ is not defined in the Act and we must resort to the ordinary natural meaning as understood in common parlance. The dictionary meaning of the word ‘reserve’ is:

‘1(a) to keep for future use or enjoyment; to store up for some time or occasion; to refrain from using or enjoying at once.

(b) To keep back or hold over to a later time or place or for further treatment.

6. To set apart for some purpose or with some end in view; to keep for some use.

11. To retain or preserve for certain purposes’ (Oxford Dictionary, vol. VIII, p. 513).

In Webster's New International Dictionary, second edition, page 2118, ‘reserve’ is defined as follows:

‘1. To keep in store for future or special use; to keep in reserve; to retain, to keep, as for oneself.

2. To keep back; to retain or hold over to a future time or place.

3. To preserve’.”

9. The Supreme Court found in the facts of that case that originally the directors of the company had earmarked a sum for distribution of dividend and in subsequent meetings of the company it was not decided to make it a “reserve”. It was held that the said sum constituted a mass of undistributed profits and did not constitute a reserve.

10. Mr. Roy next cited the decision in the case of Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax, [1966] 59 ITR 767 (SC), for the definition of the expression “debt owed”. The Supreme Court held in that case that the liability to pay income-tax was a debt within the meaning of section 2(m) of the Wealth-tax Act and such debt arose on the valuation date during the accounting year.

11. Two other cases, namely, Commissioner of Income-tax and Business Profits Tax v. Vasantha Mills Ltd., [1957] 32 ITR 237 (Mad) and the Indian Steel and Wire Products Ltd. v. Commissioner of Income-tax, [1958] 33 ITR 579 (Cal) were also cited by Mr. Roy. In the former case, the Madras High Court in discussing the method of computation of capital for the purpose of the Business Profits Tax Act, 1947, followed the decision of the Supreme Court in the case of Century Spinning and Manufacturing Co. Ltd., [1953] 24 ITR 499 and held that by applying such definition a sum of Rs. 9,00,000 set apart for income and excess profits taxes could be held to constitute a “reserve” within the meaning of rule 2(1) of the Second Schedule of that Act.

12. In the case of Indian Steel and Wire Products Ltd., [1958] 33 ITR 579 (Cal), this court considered the concept of “reserve” in the context of the Business Profits Tax Act. P.B Chakravartti J, as he then was, observed in his judgment as follows (page 584):

“In the case of Commissioner of Income-tax v. Century Spinning and Manufacturing Co. Ltd., [1953] 24 ITR 499, the Supreme Court had occasion to point out how and when reserves were created. They observed that someone possessed of the requisite authority must make a declaration or give some indication that the manner of the disposal of or the destination of the amount in question is that it is being carried to reserve. That was looking at the question of the creation of a reserve from the procedural point of view. We are concerned in this case with the nature of a reserve. If I may refer to the definition given in Murray's Oxford Dictionary, to which the Supreme Court also referred, but only to give the various meanings of the word ‘reserve’ as a verb, the meaning as a noun is given as follows:

‘Something stored up, kept back, or relied upon, for future use or advantage; a store or stock’.

An illustration of such use of the word ‘reserve’ is drawn from Political Economy by Rogers and the following sentence is quoted:

‘It is a maxim in business that a man…… should have a hoard or reserve from which he can draw, when the times are untoward.’

Apart from the dictionary meaning of the word ‘reserve’ I think it can hardly be disputed that nothing can be reserved unless it has been reserved or laid by or stored for use or application in a future contingency which is anticipated as certain or likely. In the actual administration of companies also a part of the surplus profits is removed from the immediate business of the company by way of a provision against future contingencies and a reserve is thus created, although after being carried to the reserve, the amount in question may be invested or re-employed in the business, if the articles so permit.”

13. On the above authorities, Mr. Roy contended that the provision for taxation in the instant case came squarely within the definition of the word “reserve” as explained by the Supreme Court and the other courts. The Super Profits Tax Act, 1963, did not mention any special categories under the head “provisions” and the concept of provisions should be included in the broader conception of a “reserve”. He contended that in fact in the context of this Act the expressions “provisions” and “reserve” were interchangeable terms. Only in the subsequent Act, i.e, the Companies (Profits) Surtax Act, 1964, in the Explanation to rule 1 of the Second Schedule a distinction was sought to be made between a provision and a “reserve” but this distinction was not made in the earlier Act of 1963.

14. Mr. Roy further sought to distinguish a decision of the Supreme Court in the case of Metal Box Company Of India Ltd. v. Workmen, [1969] 73 ITR 53. In this case, the Supreme Court was concerned with computation of the gross profits under the Payment of Bonus Act, 1965. In the facts of that case, ascertained sums, being an estimated liability under the gratuity schemes framed by the company concerned, had teen deducted from the gross receipts from the profit and loss account. This estimation was done on actuarial valuation. The sums so settled and set apart were intended to be utilised from year to year for payment of actual liabilities incurred in the particular years under the said gratuity schemes. Payments so made in any year were not again deducted from the profit and loss account.

15. The Supreme Court considered the following questions at page 62:

“(1) Whether it is legitimate in such a scheme of gratuity to estimate the liability on an actuarial valuation and deduct such estimated liability in the P. & L. account while working out its net profits; and (2) if it is, whether such appropriation amounts to a reserve or a provision.”

16. The Supreme Court held that even if such estimated liability under the gratuity schemes amounted to a contingent liability and was not a debt within the meaning of the Wealth-tax Act, if the same could be properly ascertained and its present value fairly discounted it could be deductible from the gross receipts of the company while preparing the profit and loss account. The Supreme Court observed as follows— See [1969] 73 ITR 53, 67, 68:

“The distinction between a provision and a reserve is in commercial accountancy fairly well known. Provisions made against anticipated losses and contingencies are charges against profits and, therefore, to be taken into account against gross receipts in the P. & L. account and the balance-sheet. On the other hand, reserves are appropriations of profits, the assets by which they are represented being retained to form part of the capital employed in the business. Provisions are usually shown in the balance-sheet by way of deductions from the assets in respect of which they are made whereas general reserves and reserve funds are shown as part of the proprietor's interest (see Spicer and Pegler's Book-keeping and Accounts, 15th edition, page 42). An amount set aside out of profits and other surpluses, not designed to meet a liability, a contingency, commitment or diminution in value of assets known to exist at the date of the balance-sheet is a reserve but an amount set aside out of profits and other, surpluses to provide for any known liability of which the amount cannot be determined with substantial accuracy is a provision: (See William Pickles Accountancy, second edition, page 192; Part III, clause 7, Schedule VI to the Companies Act, 1956, which defines provision and reserve).”

17. Mr. Roy contended that in this case the Supreme Court only decided whether a particular provision was deductible from profit and loss account or not. The Supreme Court was not really concerned whether a provision for the purpose of other statutes was a concept categorically different from the concept of a reserve. He submitted that in the instant case the provision for taxation had not been deducted from the profit and loss account but had been set aside from the profits worked out in the profit and loss account. He contended that the particular distinction made by the Supreme Court in Metal Box's case, [1969] 73 ITR 53 was not applicable in the facts of the instant case.

18. In support of his contention Mr. Roy relied on several passages from authorities on accountancy. He cited a passage from the well-known treatise on ‘Book-keeping and Accounts’ by Spicer and Pegler, 15th edition, at page 38, as follows:

“Provisions made against anticipated losses and contingencies are charges against profits, since the true profits can only be ascertained after such provisions are made, whereas reserves are appropriations of profits, the assets by which they are represented being retained to form part of the capital employed in the business.

Provisions are usually shown in the balance-sheet by way of deductions from the assets in respect of which they are made, whereas general reserves and reserve funds are shown as part of the proprietor's interest.”

19. The same book was cited for the following observations at pages 270, 271 and 306.

“The following definitions are given in Part IV of the Eighth Schedule for use in relation to matters required by that Schedule to be disclosed in the balance-sheet and profit and loss account:

(1)(a) the expression ‘provision’ shall, subject to (2) below, mean any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy;

(b) the expression ‘reserve’ shall not, subject to (2) below, include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability (and the expression ‘liability’ shall include all liabilities in respect of expenditure contracted for and all disputed or contingent liabilities);

(c) the expression ‘capital reserve’ shall not include any amount regarded as free for distribution through the profit and loss account, and the expression ‘revenue reserve” shall mean any reserve other than a capital reserve;

(2) Where:

(a) any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, not being an amount written off in relation to fixed assets before 1st July, 1948; or

(b) any amount retained by way of providing for any known liability is in excess of that which in the opinion of the directors is reasonably necessary for the purpose, the excess shall be treated as a reserve and not as a provision.

It will be recognised from the above definitions that the meaning-given to the expression ‘provision’ is much narrower than that usually attributed to it in framing accounts. For the purposes of the Companies Act, the word ‘provision’ must not be used, as it is commonly used in practice, to describe amounts set aside to provide for prospective or even potential losses or liabilities; it must only be employed to indicate known depreciation or diminution in the value of assets, and known liabilities, the amount of which, however, cannot be estimated with reasonable accuracy. If the amount of a known liability can be estimated with substantial precision, it must be classified as a liability, and not as a provision. The sum which it is customary and prudent to set aside for the purpose of meeting United Kingdom income-tax based on the current year's profits must not be called a provision since it is not a liability at the date of the balance-sheet but is an amount set aside to provide for a liability which will arise in the following year.

The practice has, therefore, arisen and has been subject of recommendations by the Institute of Chartered Accountants to base the charge for income-tax made in the accounts on the profits earned during the period covered by those accounts, even though the liability does not arise in that period—in other words, the accounts are charged with an amount set aside for future income-tax. As this amount is not in fact a liability at the date of the balance-sheet, it should not be grouped with current liabilities, but should be shown as an amount set aside, or as a reserve for, future income-tax. The institute recommend that, whether described as a reserve or not, an amount set aside for future income-tax should be shown separately and should not be aggregated with reserves.”

“Accountancy” by William Pickles, second edition, was also cited for a passage at page 184 as follows:

“As a preliminary to closer study, reserves and provisions may be defined as follows:

(1) Reserves— amounts set aside out of profits and other surpluses which are not designed to meet any liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance-sheet.

(2) Provisions— amounts set aside out of profits and other surpluses to provide for—

(a) depreciation, renewals or diminution in value of assets, or

(b) any known liability of which the amount cannot be determined with substantial accuracy.”

20. An unreported decision of a Division Bench of this court in Income-tax Reference No. 262 of 1969 [Braithwaite & Co. (India) Ltd. v. Commissioner of Income-tax—Since reported in [1978] 111 ITR 729 (Cal)] was brought to our notice and sought to be distinguished by Mr. Roy. In this case, the same question as in the instant reference was mooted before the court which applied the law as laid down in the decision of the Supreme Court in Metal Box's case, [1969] 73 ITR 53, and held that a provision for taxation was not a reserve within the meaning of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963.

21. Mr. Roy contended that in that case learned counsel appearing on behalf of the assessee had virtually conceded the point as would appear from the judgment itself. He relied on the arguments of the learned counsel on behalf of the assessee noted in the judgment as quoted below— See [1978] 111 ITR 729, 734:

“Mr. Bajoria, learned counsel appearing on behalf of the assessee, has submitted before us that the word ‘reserve’ has not been defined in the Act and the said word must, therefore, be given its ordinary dictionary meaning. It is Mr. Bajoria's contention that this interpretation is clearly indicated by the decision of the Supreme Court in the case of Commissioner of Income-tax v. Century Spinning and Manufacturing Co. Ltd., [1953] 24 ITR 499. Relying on the said decision Mr. Bajoria contends that the ordinary meaning of the word ‘reserve’ as given in the dictionary and as noted by the Supreme Court is:

(1) To keep for future use or enjoyment; to store up for some time or occasion; to refrain from using or enjoying at once.

(2) To keep back or hold over to a later time or place or for further treatment.

(3) To set apart for some purpose or with some end in view; to keep for some use.

(4) To retain or preserve for certain purposes.’

It is the contention of Mr. Bajoria that on the basis of the aforesaid meaning of the word ‘reserve’, the amounts in question clearly come within the meaning of the word ‘reserve’ as these are amounts set apart for future use or enjoyment and these are also amounts set apart for some purpose or with some end in view to keep for some use. Mr. Bajoria has contended that the same meaning has been given to the word ‘reserve’ by the Supreme Court in the case of Commissioner of Income-tax v. Standard Vacuum Oil Co., [1966] 59 ITR 685. Mr. Bajoria has also relied on the decision of this court in the case of Indian Steel and Wire Products Ltd. v. Commissioner of Income-tax, [1958] 33 ITR 579 (Cal). Relying on the aforesaid decisions Mr. Bajoria contends that in construing the word ‘reserve’ the ordinary dictionary meaning should be given to the said word and by giving the ordinary dictionary meaning to the expression ‘reserve’, these items should certainly be held to constitute ‘reserve’. Mr. Bajoria has very fairly submitted that if the ordinary meaning is not given to the word ‘reserve’ but if the said word is construed with reference to the provisions in the company law or the principles of commercial accountancy, the items claimed in the instant case cannot be considered to be ‘reserve’ but they will in that case become ‘provisions It is, however, Mr. Bajoria's contention that the Supreme Court has deliberately chosen not to give to the word ‘reserve’ the meaning in which it is understood in company law or in commercial accountancy but the Supreme Court has held that the said word should receive the ordinary dictionary meaning. Mr. Bajoria contends that in view of the said decision of the Supreme Court these items which may be otherwise considered to be provisions on the principles of commercial accountancy or under the provisions of the Companies Act and they may be so understood by businessmen, but for the purpose of this particular statute these items should constitute ‘reserve’……”

22. It does not appear to us that Braithwaite's case, [1978] 111 ITR 729 (Cal) was decided by this court on concession alone. Detailed arguments were advanced on either side and cases cited before us were cited and considered in that case.

23. After reviewing the law and on due consideration of the submissions on behalf of the parties it was held that the item, namely, “provision for taxation” could not be held to constitute a “reserve” as the item was really a provision for payment of an existing liability. A decision of the Allahabad High Court in the case of Commissioner of Income-tax v. Hind Lamps Ltd., [1973] 90 ITR 487 was followed in Braithwaite's case, [1978] 111 ITR 729 (Cal). The Allahabad High Court had held that a provision for taxation could not be a “reserve” within the meaning of the Super Profits Tax Act, 1963, and that to constitute a “reserve” within the meaning of that Act the amount must be specifically kept apart for future use or contingency. This court followed the Allahabad High Court and also held that an amount provided for meeting an accrued existing liability cannot be said to have been set apart for meeting a contingency which may arise in future and cannot, therefore, constitute a “reserve”.

24. The prior decision of the Division Bench of this court is binding on us and we follow the same and we answer question No. 1 in respect of the assessment year 1963-64 in the affirmative and in favour of the revenue.

25. Question No. 2 for the assessment year 1963-64 and the only question in respect of the assessment year 1964-65 are substantially the same. The language of clause (ii) of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, and the language of clause (ii) of rule 2 of the Second Schedule of the Companies (Profits) Surtax Act, 1964, are more or less identical. The point in dispute is whether the provision for taxation in the said assessment year constitutes a fund within the meaning of the said rules so that in the computation of capital of a company the company can have the benefit by reduction of capital.

26. Mr. B.L Pal, learned counsel, contended on behalf of the revenue that the expression “fund” in the relevant rules was to be understood in its context. According to him such context has to be determined by “comparison between costs of certain assets mentioned in rule 2 and the aggregate of two items in sub-rules (i) and (ii)”. According to Mr. Pal it followed on such comparison that a “fund” was to be understood to be “a source of payment of cost for some assets but not an amount already earmarked for a particular liability”. An amount already earmarked for a particular liability (as in the instant case by way of a provision for tax) cannot be available for any other purpose and cannot be stated to be a source for payment of any other cost.

27. What Mr. Pal really sought to contend was that the “fund” contemplated in the said rules must be a free or unfrozen fund available for any purpose to the company. In support of his contentions Mr. Pal relied on an English decision in the case of Allchin (H.M Inspector of Taxes) v. Corporation of South Shields, [1942] 25 TC 445 (CA). In this case, Lord Greene M.R in his judgment considered the concept of “payment out of a fund. The concept of “fund” as such was not in issue. It was observed in his judgment at page 456 of the report as follows:

“Much of the obscurity which surrounds this matter is due to a failure to distinguish the two senses in which the phrase ‘payment out of a fund’ may be used. The word ‘fund’ may mean actual cash resources of a particular kind (e.g, money in a drawer or at a bank) or it may be a mere accountancy expression used to describe a particular category which a person uses in making up his accounts. The words ‘payment out of’ when used in connection with the word ‘fund’ in its first meaning connote actual payment, e.g, by taking the money out of the drawer or drawing a cheque on the bank. When used in connection with the word ‘fund’ in its second meaning, they connote that, for the purposes of the account in which the fund finds a place, the payment is debited to that fund, an operation which, of course, has no relation to the actual method of payment or the particular cash resources out of which the payment is made.

Thus, if a company makes a payment out of its reserve fund—an example of the second meaning of the word ‘fund’— the actual payment is made by cheque drawn on the company's banking account, the money in which may have been derived from a number of sources. The phrase ‘reserve fund’ only has a meaning as indicating the item in the company's accounts to which it decides to debit the payment. It will be seen, therefore, that to speak of an actual payment being made out of a fund in the second sense is really a misuse of language. A fund in the second sense is merely an accountancy category; it has a real existence in that sense, but not in the sense that a real payment can be made out of it as distinct from being debited to it. Unless these two meanings of the phrase ‘payment out of a fund’ are kept distinct, much confusion of thought must ensue. A real payment cannot be made out of an imaginary fund—per Lord Macmillan in the Central London Railway case, [1936] 20 TC 102, 146 (HL).”

28. It does not appear to us that this English decision helps the contentions of the revenue. It was accepted in this decision that the expression “fund” could be an expression of accountancy, viz., a particular category of entry which a person uses in making up accounts. Lord Greene also noted that a “fund” could actually mean actual cash resources. It does not follow from this judgment that the expression “fund” means only a free or an unfrozen fund.

29. Mr. Kalyan Roy, on behalf of the assessee, also relied on this English decision. Mr. Roy further cited the text book “Accountancy” by William Pickles. At page 187 of the second edition of this book, the observations are as follows:

“Reserve Fund.— The word ‘fund’ is now frequently employed in substitution of the word ‘account’, whether it is represented by specifically earmarked investment or not. It is recommended that the term ‘reserve fund’ should only be used where a reserve is in fact specifically represented by readily reliable and earmarked assets.”

30. Mr. Roy did not dispute that the expression “fund” had to be construed in the context of the section but he submitted that the section did not indicate or lay down that there has to be an enquiry as to the purpose of a fund in order to determine the meaning of the expression. He contended that in the instant case the amount shown in the accounts by way of a provision for taxation fulfilled all the tests of a “fund” as laid down in the judgment of Lord Greene and in the text book cited.

31. It appears that the contentions on this question on behalf of the assessee are of some substance. To accept the alternative contentions of the revenue we would have to introduce and read into the relevant rules words which are not there. There is no reason why in construing a fiscal statute we should do so.

32. We note that it was nobody's case that the item “provision for taxation” did not at all constitute a “fund”. We answer both these questions, viz., question No. 2 for the assessment year 1963-64 and the only question for the assessment year 1964-65, in the negative and in favour of the assessee.

33. In view of the divided success, there will be no order as to costs.

Deb, J.:—I agree.