Masud, J.:— We have delivered a judgment in ITR No. 175 of 1970 [Commissioner of Income-tax v. Calcutta Tramways Co. Ltd.—Since reported in [1978] 112 ITR 643 (Cal)] today, where we have held that, on the facts and in the circumstances of the case, the assessee-company's entries in the balance-sheet as on 31st December, 1961, regarding the sum of £ 9,473 constituted a “reserve” within the meaning of section 34(3)(a) of the Income-tax Act, 1961, and that the assessee-company is entitled to development rebate under section 33 of the Act. In the present reference the same assessee for the same financial year has caused this reference under section 256(1) of the said Act against the decision of the Appellate Tribunal where an alternative contention of the assessee has been, rejected by the Tribunal. The question of law referred to the court in a supplementary statement of case is as follows:

“Whether the credit of a sum of £ 1,00,000 to the renewals and replacement account by debit to the applicant's general revenue account for the year 1961 constitutes credit to a ‘reserve account’ as contemplated by section 34(3) of the Income-tax Act, 1961, so as to justify allowance of development rebate under section 33 of this Act?”

2. Mr. Ginwalla has drawn our attention to the agreement entered into between the assessee-company and the Government of the State of West Bengal incorporated in the Calcutta Tramways Act, 1961.

3. The material portions of clause 4(1) of this agreement read as follows:

“4(1). The company shall apply its revenue in the manner following, that is to say:

(a) Firstly, paying all expenses of maintaining and working the undertaking including debenture interests;

(b) Secondly, paying all Indian and United Kingdom taxes payable by the company;

(c) Thirdly, setting aside in each accounting year in a renewals and replacement reserve account, the sum of 80,000 pound sterling or such greater sum as the directors of the company for the time being may in consultation with the Government consider necessary in the light of experience and in view of the compensation (sic) of the undertaking or increase in the price……”

4. According to him, under the said agreement the assessee is under an obligation to set aside at least a sum of £ 80,000 in the renewals and replacement reserve account every year. But the balance-sheet for the said year expressly shows that the assessee has set aside £1,00,000 under the head “Renewals and Replacement Account” Thus, although only a sum of £ 9,473 is to be set apart as development rebate reserve under section 34(3)(a) of the Income-tax Act, an excess amount of £ 20,000 is lying credited in the “renewals and replacement account”. He has further added that, admittedly, for the purpose of getting development rebate under section 34(3)(a), the specific amount equal to seventy-five per cent, of the development rebate to be actually allowed, was to be utilised for the purpose of the business of the assessee subject to the exceptions mentioned in the said section. Any amount set apart in the “renewals and replacement account” can naturally be used for the purpose of the business of the assessee. He has, therefore, invited us to hold that the conditions under section 34(3)(a) have been complied with and the assessee is entitled to development rebate under section 33.

5. Mr. Pal with Mr. Sengupta, counsel appearing on behalf of the revenue, has, however, asked the court to reject the contention of Mr. Ginwalla on the ground that “reserve account” referred to in section 34(3)(a) must refer to a specific fund other than the sums lying in the “renewals” and” replacement account Counsel has submitted that “renewals and replacement account” contemplates a particular contingency which cannot be identical with the situation contemplated under section 34(3)(a). Relying upon Metal Box Company Of India Ltd. v. Workmen, [1969] 73 ITR 53, 67 (SC), it has been argued that the fallacy of Mr. Ginwalla's argument is that he has not made any distinction between a “provision” and a “reserve. The excess amount of” 20,000 lying credited in the “renewals and replacement account” is earmarked for a specific purpose and the said sum cannot be described as a sum lying deposited under a “reserve account” within the meaning of section 34(3)(a) for the purpose of development rebate. We have already held in our earlier judgment in the other reference that the “reserve account” under section 34(3)(a) of the Income-tax Act does contemplate a “reserve fund” which has to be set apart under a separate head and which could only be used for the purpose of business of the assessee other than:

(a) for distribution by way of dividends and profits;

(b) for remittance outside India as profits or for creation of any asset outside India. In the other reference the amount equal to seventy-five per cent, of the development rebate to be actually allowed has been shown in the balance-sheet to have been expressly debited from the ‘shareholders’ account “and added back under the same account. There the sum of £ 9,473 has been kept under sub-head “special accounts” under “shareholders’ account”. The point to be decided here is whether this sum of £ 9,473 could also be deemed to have been credited as “reserve in the renewals and replacement account”.

6. There is no doubt that the actual meaning of “renewals and replacement account” is that the amount lying in such account is set apart when renewals and replacements of a plant or machinery are required for the purpose of carrying on the business. It cannot, therefore, be said that the amount set apart under this account cannot be utilised for the purpose of business. Section 34(3)(a) makes it very clear that the amount to be set apart for the development rebate can be utilised for the purpose of the business of the assessee's undertaking other than the said exceptional cases mentioned in the said sub-section. There would have been some force in the contention of counsel for the revenue if there were no sufficient funds lying in the “renewals and replacement account”. In the present case, there is a statutory obligation on the part of the assessee to deposit a minimum sum of £ 80,000 in the “renewals and replacement account But, in fact, in the relevant assessment year, there is a sum of £ 20,000 in excess of the statutory requirement. There is nothing to prevent the assessee to use the said sum of £ 20,000 for the purpose of business other than two classes of exceptions mentioned in section 34(3)(a). If, however, the said sum of £ 20,000 is utilised within 8 years following for purposes mentioned in the two classes of exceptions in section 34(3)(a) or for purpose which is not the purpose of the business of the undertaking, the development rebate would be withdrawn under section 155(5). It is true that any expenditure incurred for renewals and replacements of any plant or machinery cannot be said to be an expenditure not for carrying on the business. On the contrary, such amount, if available, could be used also for the purpose of continuance and development of business. The Supreme Court case, namely. Metal Box Company Of India Ltd. v. Workmen, [1969] 73 ITR 53, relied on by counsel for the revenue, relates to development rebate under the Income-tax Act in the context of the Payment of Bonus Act, 1965. There, the Industrial Tribunal made a distinction between “reserve” and “provision” and allowed Rs. 7,00,000 instead of Rs. 8,87,371 claimed by the company as development rebate. The Supreme Court, however, held that the company should be allowed the development rebate of Rs. 887 lakhs, allowable to it under section 6 of the Bonus Act and not Rs. 7 lakhs, being approximately 75 per cent, of the said sum of Rs. 887 lakhs, which sum is allowable by way of development rebate under section 33 and section 34(3) of the Income-tax Act. At page 61, Shelat J. observed:

“Under section 6(b) of the Bonus Act the company is entitled to deduct out of the gross profits arrived at under section 4, the whole of the development rebate admissible under the Income-tax Act, i.e, the amount, seventy-five per cent, of which comes to Rs. 7 lakhs. The error the Tribunal fell into was in mixing up the development rebate reserve to which the company had to appropriate Rs. 7 lakhs in P. & L. account and the development rebate of Rs. 887 lakhs allowable to it under section 6 of the Act.”

7. Thus, it is made clear by the Supreme Court that under the Bonus Act the company is entitled to deduct bonus out of the gross profits of the company. In that case, the entire sum of Rs. 887 lakhs should have been allowed under section 6 of the Bonus Act. But in section 34(3)(a) of the Income-tax Act only seventy-five per cent, of the said sum of Rs. 887 lakhs has to be set apart in a “reserve account” to enable the assessee to get the development rebate. The Supreme Court has, therefore, held that there was no justification for the Tribunal to allow Rs. 7 lakhs instead of Rs. 887 lakhs as development rebate, inasmuch as, under section 6(b) of the Bonus Act, the company is entitled to deduct, out of the gross profits arrived at under section 4, the whole of the development rebate admissible under the Income-tax Act. There is no scope for any distinction between the words “reserve” and “provision” in the facts and circumstances of the present case before us. The word “reserve” has been defined as “an amount set aside out of profits and other surpluses which is not designed to meet any liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance-sheet”. (Vide Pickles in Book on Accountancy, 3rd edition, at page 184). The sum of Rs. 887 lakhs, in the Supreme Court decision, could not strictly be described as a “reserve “on the simple ground that this amount was set aside for payment of bonus to the employees which was an existing liability of the company. It could, therefore, be properly described as a “provision” and not a “reserve”. In the present case before us, it cannot be said that the amount of £ 1,00,000 is a “provision” and not a “reserve” inasmuch as the said amount has not been set apart to meet any existing liability. Such sum set apart under the “Renewals and Replacement Account “has been shown in the balance-sheet as an amount which might be appropriated for renewal and replacement of a machinery or plant of the assessee-company.

8. Reliance has also been placed by counsel for the revenue on Indian Overseas Bank Ltd. v. Commissioner Of Income Tax, Madras , [1970] 77 ITR 512 (SC) in support of his contention that the alleged inclusion of £ 9,473 under the “Renewals and Replacement Account” in the balance-sheet is not sufficient compliance with the conditions mentioned in section 34(3)(a) of the Income-tax Act. There is no doubt that the facts in the said decision are distinguishable from the facts of the present case. In that case, the assessee-company had transferred a sum of rupees six lakhs from the profit and loss account to the reserve fund. The assessee being a banking company, it had to maintain such reserve fund under section 17 of the Banking Companies Act, 1949. The amount to be transferred to the reserve fund under the said section is mandatory and the sum required to be transferred is a sum equivalent to not less than twenty per cent, of the net profits and every banking company would continue to maintain such reserve fund in that way until the amount of the said fund is equal to the amount of its paid up capital. Admittedly, the said sum of rupees six lakhs was sufficient to meet the requirements of section 17 of the Banking Companies Act, 1949, as well as proviso (b) to section 10(2)(vib) of the Indian Income-tax Act of 1922, which happens to be substantially identical with the provision of section 34(3) of the Income-tax Act, 1961. It was the assessee's case that it should be entitled to a development rebate inasmuch as the amount required to be deposited in a reserve account under the Indian Income-tax Act of 1922 has been included in the “reserve fund” created by the assessee under section 17 of the Banking Companies Act. The development rebate in the Supreme Court case was claimed on the basis of a reserve fund of rupees six lakhs in compliance with section 17 of the Banking Companies Act. Maintenance of such a reserve is mandatory on the part of every banking company. Under the said Act, the reserve of a sum equal to not less than twenty percent, shall have to be created out of the net profits of each year. Mr. Ginwalla has contended that the amount to be transferred to “reserve account” under proviso (b) to section 10(2)(vib) is to be debited before the profit and loss account is made up or completed, whereas, under the Banking Companies Act, the reserve has to be created out of the net profits of each year. It may be stated here that the sum to be deposited under the Banking Companies Act in that case must not be less than twenty per cent, of the net profits which would amount to Rs. 1,37,876 but it could be more. Thus, although in that case twenty per cent, of such profits amounting to Rs. 1,37,876 was to be deposited, the amount actually deposited was rupees six lakhs which sum is sufficient to meet the requirements of the Banking Companies Act and also the Income-tax Act. But section 17 has used the words “not less than twenty per cent.” which means that the excess sum amounts to “reserve” under section 17 of the Banking Companies Act. In that case, the Supreme Court has, therefore, decided that such amount in excess of the minimum deposit under the Banking Companies Act cannot be construed as deposit in the “reserve account” under proviso (b) to section 10(2)(vib); on the same analogy, in this case also, £ 20,000 is the minimum sum to be deposited under the statutory agreement. But the statutory agreement itself provides that a larger sum may also be deposited under the “Renewals and Replacement Account”. Thus the excess sum of £ 20,000 on the ratio of the Supreme Court case cannot be held to be a compliance with the conditions of section 34(3)(a).

9. We are conscious of the fact that the amount to be deposited under the Banking Companies Act was to be set apart and not appropriated until the amount of the said fund becomes equal to the paid up capital, whereas the amount that has been deposited in the balance-sheet under “Renewals and Replacement Account” could be used for business. Thus, the excess sum of £ 20,000 cannot be said to be a sum which cannot be appropriated towards the business of the assessee-company. Be that as it may, the fact remains that in Indian Overseas Bank Ltd. v. Commissioner Of Income Tax, Madras , [1970] 77 ITR 512, the Supreme Court has held that the excess amount under the mandatory reserve fund there, cannot be designated as “reserve” under the “Reserve Account “as set out in the relevant provisions of the Income-tax Act, on the contrary, it has been held that the said excess sum being a sum deposited under section 17 of the Banking Companies Act, cannot be held to be a sum kept in the reserve account under the Income-tax Act. In the present case also, the excess sum of £ 20,000 can be construed as a sum deposited under “Renewals and Replacement Account” in compliance with the statutory agreement in section 4(1)(c) and, therefore, it cannot be said that the said excess sum of £ 20,000 has been shown there as a sum to be-deposited in a “reserve account” under section 34(3)(a).

10. Lastly, it may be added that in this case, expressly, a sum of £ 9,473 has been set apart in the balance-sheet towards “development rebate reserve account” under the head “Special Accounts” and, therefore, by implication such amount cannot also be held to be included in “general reserve “also. Therefore, the answer to the question is answered in the negative and against the assessee.

11. Parties will bear their respective costs.

S.K Mukherjee, J.:— I agree.