The Judgment of the Court was delivered by

Dipak Kumar Sen, J.:— This reference arises out of the assessment of A.P.V Engineering Co. Ltd., under the Super Profits Tax Act, 1963, in the assessment year 1963–64, the previous year thereto being the calendar year 1962. The facts found and/or admitted in the proceedings are as follows:

In the balance-sheet of the assessee as at 31st December, 1961, a sum of Rs. 3,35,914 was shown under the head “Provision” as “Provision for Taxation less advance payments under provisional assessments”. Under the head “Reserves and Surplus”, another sum of Rs. 11,41,689 was shown as “Manufacturing, Trading and Profit & Loss Account—balance at credit after providing for the proposed dividend for the year ended 31-12-61”.

2. The assessee claimed that the said amounts of Rs. 3,35,914 and Rs. 11,41,689 should both be treated as reserves under r. 1 of the Second Schedule to the S.P.T Act, 1963, and be included in its capital base in the said assessment year. The ITO held that the amounts did not represent reserves inasmuch as one of them was specifically earmarked as a provision to meet a particular liability and the other represented inappropriate profits not transferred to a reserve account. The assessee preferred an appeal from the said assessment. The AAC held that the said amount of Rs. 3,35,914 set apart was a provision against a known liability and the other amount of Rs. 11,41,689 was a mass of undistributed profits without any allocation or appropriation. He confirmed the order of the ITO.

3. On a further appeal to the Income-tax Appellate Tribunal, it was contended by the assessee that, as it had not filed any return at the relevant time and as no tax had been determined, therefore, on the 1st January, 1962, the said sum of Rs. 3,35,914 could not be a provision against any accrued liability but was a free reserve includible in the capital base of the company for computation of super profits tax. The other amount of Rs. 11,41,689 was stated to have been set apart by the directors of the assessee to be carried over to the next accounting year and, therefore, amounted to a reserve.

4. The Tribunal held that the assessee had treated the said amount of Rs. 3,35,914 in its books as a provision for tax liability calculated on actual book profits shown in its own account. This liability had to be discharged in respect of the said accounting year and, accordingly, the item was a pro vision and not a reserve. The Tribunal also held that the unappropriated amount of Rs. 11,41,689 was not a reserve. The appeal of the assessee was accordingly dismissed.

5. On an application of the assessee under s. 256(2) of the I.T Act, 1961, read with s. 19 of the S.P.T Act, 1963, this court directed the Tribunal to draw up a statement of case and refer the following question for the opinion of this court as a question of law arising out of the Tribunal's order:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the provision for income-tax amounting to Rs. 3,35,914 and the balance of unappropriated profit of the year ended 1961 after setting apart all reserves and provisions and declaration of dividend amounting to Rs. 11,41,689 did not qualify as reserves within the meaning of rule 1 of the Second Schedule of the Super Profits Tax Act, 1963?”

6. Whether a provision for taxation is a “reserve” within the meaning of the S.P.T Act, 1963, or not has been considered by this court in two earlier decisions in Braithwaite and Co. (India) Ltd. v. CIT, [1978] 111 ITR 729 (Cal) and the second is-Duncan Brothers & Co. Ltd. v. CIT, [1978] 111 ITR 885 (Cal) which followed the former decision. In both decisions the principles laid down by the Supreme Court in Metal Box Company Of India Ltd. v. Workmen, [1969] 73 ITR 53 : 39 Comp Cas 410, were applied and it was held that a provision for taxation was not a reserve within the meaning of the S.P.T Act, 1963.

7. Mr. Kalyan Roy, learned counsel for the assessee, contended that in spite of the aforesaid decisions he would make further submissions on the question on the basis of a subsequent decision of this court in CIT v. Bum & Co. Ltd., [1978] 114 ITR 565 (Cal), where a Division Bench also considered and construed the S.P.T Act, 1963. Some observations in this judgment according to Mr. Roy indicated a departure from the said two earlier decisions of this court and the matter required reconsideration.

8. It is convenient at this stage to consider in brief the scheme of the S.P.T Act, 1963. The object of this Act was to impose on and from the 1st April, 1963, a special tax called super profits tax on companies on a part of their profits termed as “super profits”, the quantum of normal profits being deemed to be 6% on the capital of the companies. Section 4 of the Act imposed tax on the chargeable profits of companies which would exceed specified standard deductions. Under s. 2(9) of the Act “standard deduction” meant an amount equal to 6% of the capital of the company as computed according to the provisions of the Second Schedule to the Act or Rs. 50,000, whichever would be greater. The First Schedule to the Act laid down rules for computing chargeable profits which broadly consist, inter alia, of the company's income, profits and gains less various amounts including capital gains, compensation under s. 28, royalties, income-tax and super-tax payable in respect of the company's total income except that payable in respect of capital gains and compensation under s. 28.

9. The Second Schedule to the Act contained rules for computing the capital of a company for the purposes of the said Act, inter alia, 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 (XI of 1922), or under sub-section (3) of section 34 of the Income-tax Act, 1961 (XLIH 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 Act, 1922 (XI of 1922), or the Income-tax Act, 1961 (XLIII 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 (viii) 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; 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 this rule…

3. Where a part of the income, profits and gains of a company is not includible in its total income as computed under the Income-tax Act, its capital shall be the sum ascertained in accordance with rules 1 and 2, diminished by an amount which bears to that sum the same proportion as the amount of the aforesaid income, profits and gains bears to the total amount of its income, profits and gains.”

10. The first contention of Mr. Roy is that in computing the capital of a company for the purpose of the S.P.T Act, 1963, all items which come within the dictionary meaning of the term “reserve” should be included. This contention was advanced on the authority of Century Spinning & Manufacturing Co. Ltd., [1953] 24 ITR 499 (SC). In that case, for the year ended 31st December, 1945, the accounts of the assessee showed a profit. After providing for depreciation and taxation a balance of Rs. 5,08,637 in the asses-see's balance-sheet was carried over to the 1st January, 1946. On the 28th February, 1946, the directors of the assessee recommended that the said balance be appropriated for payment of a dividend of Rs. 4,92,426 and that the remaining Rs. 16,211 be carried forward to the next year's account. The recommendation was accepted by the shareholders of the assessee on the 3rd April, 1946. On these facts, the Bombay High Court held that the amount of Rs. 5,08,637 fulfilled all the tests of “reserve” and should be included for the purpose of computation of capital under the Business Profits Tax Act, 1947, the relevant provisions whereof were more or less similar to those of the S.P.T Act, 1963. The High Court found that Rs. 5,08,637 which could have been distributed as dividend was not so. distributed but kept back by the directors which converted the amount into a “reserve”.

11. On appeal, the Supreme Court held that it was not correct that the directors of the company had kept back the amount, as they had no power to distribute the same but could only recommend distribution thereof as dividend. The Supreme Court noted regln. 99 of the First Schedule of Table A of the Indian Companies Act, 1913, which provided as follows:

“The directors may, before recommending any dividend, set aside out of the profits of the company such sums as they think proper as a reserve or reserves which shall, at the discretion of the directors, be applicable for meeting contingencies, or for equalising dividends, or for any other purpose to which the profits of the company may be properly applied…”

12. The Supreme Court's observations on the said regulation was as follows (p. 505):

“The Regulation suggests that any sum out of the profits of the company which is to be made as a reserve or reserves must be set aside before the directors recommend any dividend. In this case the directors while recommending dividend took no action to set aside any portion of this sum as a reserve or reserves. Indeed they never applied their mind to this aspect of the matter. The balance-sheet drawn up by the assessee as showing the profits was prepared in accordance with the provisions of the Indian Companies Act. These provisions also support the conclusion as to what is the true nature of a reserve shown in a balance sheet.”

13. The Supreme Court noted the provisions of ss. 131(a) and 132 of the Indian Companies Act, 1913, which imposed upon the directors of a company an obligation to include in every balance-sheet a report as to the state of the company's affairs, inter alia, showing the amount recommended to be paid by way of dividend and the amount proposed to be carried to the “reserve fund”, “general reserve” or “reserve account”. The Supreme Court noted further that the Indian Companies Act, 1913, prescribed a form in which the balance-sheet of a company had to be drawn up.

14. On the basis of the aforesaid, the Supreme Court concluded that the amount claimed to be a “reserve” in that case was in fact a mass of undistributed profits which was not earmarked to constitute a “reserve”. On the meaning of the expression “reserve”, the Supreme Court observed as follows (p. 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, 513).

15. In Webster's New International Dictionary, second edition, page 2188, ‘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’.”

16. Mr. Roy next cited another decision of the Supreme Court in First National City Bank v. CIT, [1961] 42 ITR 17, where an American banking company following the American system of accounting, conforming to the instructions in Treasury Rules of the U.S.A, transferred balance of its profits to an account headed “Undivided Profits” after making provisions for expenses, taxes, dividends and reserves and under the said Treasury Rules treated the same as part of its capital available for future use in its business. The Supreme Court held that in deciding whether a particular fund constituted a reserve or not the system of accounting followed was relevant. The amount designated as undivided profits though “not allocated by a resolution of the directors was still a fund created under the requirement of law which treated it as a part of the capital and, therefore, the same must be considered to be a part of the reserve of the company.

17. Mr. Roy next cited another decision of the Supreme Court in CIT v. Standard Vacuum Oil Company, [1966] 59 ITR 685, where sums set apart by a non-resident company incorporated in the U.S.A under the heads “Capital paid in surplus” and “Earned surplus” were claimed to be reserves within the meaning of the Business Profits Tax Act, 1947. Affirming the judgment of this court, the Supreme Court held that “capital paid in surplus” was either paid up share capital within the meaning of r. 3 of the Business Profits Tax Act or represented reserves as not being allowed in computing the profits of the company for the purpose of the Indian I.T Act, 1922. The fund “earned surplus” was also held to fulfil the test of a “reserve” as understood in Indian law and as laid down in Century Spinning & Manufacturing Co. Ltd., [1953] 24 ITR 499 (SC). Under the American system of accounting the accumulated profits were not and could not be carried forward in the account but had to be specifically allocated to a fund known as “earned surplus “to be utilised for the purposes of business of the company in subsequent years.

18. Mr. Roy next contended that the distinction between the respective concept “reserve” and “provision” as laid down in the Companies Act, 1956, was of no relevance in construing the expression “reserve” in the S.P.T Act, 1963. A “reserve” and a “provision” as understood in the Companies Act, 1956, according to Mr. Roy, would both be deemed and construed to be a “reserve” under the S.P.T Act, 1963.

19. On the authority of Century Spinning & Mfg. Co. Ltd., [1953] 24 ITR 499 (SC), and the analysis therein of regln. 99 of the Indian Companies Act, 1913, Mr. Roy submitted that’ profits available to a company at the end of a year could be dealt with by its directors in only three ways: (a) the directors could recommend dividend out of such profits; (b) thereafter the directors could appropriate and set apart a sum or sums out of such profits for any purpose which would thereby become a reserve or reserves; and (c) the balance remaining would be the undistributed profits of the company carried over to the next year as undistributed profits. Obviously, neither the amount recommended for dividend nor the amount carried over as undistributed profits could be a reserve; but otherwise all amounts set aside or set apart by the directors for any purpose and in any manner would be a reserve within the meaning of the Second Schedule to the S.P.T Act, 1963, though it might come within the definition of a provision in the Companies Act, 1956, or though it might be held to be a “provision” under the principles of accountancy. The distinction between a reserve and a provision in the Companies Act, 1956, was relevant only for the form of the balance-sheet of a company and for no other purpose. The expression “reserve” was a generic term of wide import and included a “provision” within its ambit.

20. Mr. Roy referred to Pt. III of Sch. VI of the;Companies Act, 1956, to show that the distinction drawn between a provision and a reserve was extremely limited in scope.

Interpretation

“7.(1) For the purposes of Parts I and II of this Schedule, unless the context otherwise requires,—

(a) the expression ‘provision’ shall, subject to sub-clause (2) of this clause, 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 5

(b) the expression ‘reserve’ shall not, subject as aforesaid, 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 in this sub-clause the expression ‘liability’ shall include all liabilities in respect of expenditure contracted for and all disputed or contingent liabilities.

(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 the commencement of this Act; or

(b) any amount retained by way of providing for any known liability;

is in excess of the amount which in the opinion of the directors is reasonably necessary for the purpose, the excess shall be treated for the purposes of this Schedule as a reserve and not as a provision.”

21. Part I of the said Schedule contained only the form of the balance-sheet and Part II thereof dealt with only requirement as to profit and loss account.

22. Mr. Roy next referred to s. 217 of the Companies Act, 1956, the material part whereof reads as follows:

“Board's report.—(1) There shall be attached to every balance-sheet laid before a company in general meeting, a report by its board of directors, with respect to—

(a) the state of the company's affairs;

(b) the amounts, if any, which it proposes to carry to any reserves in such balance-sheet;

(c) the amount, if any, which it recommends should be paid by way of dividend;……”

23. Mr. Roy submitted that the said section made no distinction between a provision and a reserve and supported his contention that such distinction was confined to Parts I, II and III of Schedule VI of the Act.

24. Mr. Roy lastly drew our attention to regln. 87 of the Companies Act, 1956, the material part of which reads as follows:

“87. (1) The board may, before recommending any dividend, set aside out of the profits of the company such sums as it thinks proper as a reserve or reserves which shall, at the discretion of the board, be applicable for any purpose to which the profits/of the company maybe properly applied, including provision for meeting contingencies or for equalising dividends; and pending such application, may, at the like discretion, either be employed in the business of the company or be invested in such investments (other than shares of the company) as the board may, from time to time, think fit.

(2) The board may also carry forward any profits which it may think prudent not to divide, without setting them aside as a reserve.”

25. Mr. Roy submitted that this regulation indicated that a reserve set apart could be used for any purpose and that a reserve included provisions for meeting contingencies.

26. Mr. Roy next placed the decision of the Supreme Court in Metal Box Company Of India Ltd. v. Workmen, [1969] 73 ITR 53 : 39 Comp Cas 410, for the purpose of distinguishing the principles laid down therein. The dispute in that case arose in the computation of bonus payable to the employees in accordance with the Bonus Ordinance in the accounting year ending on 31st March, 1965. The company computed the amount of bonus payable under the said Ordinance by first deducting from its gross profits various amounts, whereafter the available surplus allocable was determined. It was contended by the workmen that the company had wrongfully reduced the gross profits and, consequently, the available surplus, by deducting from its gross profits provisions respectively for gratuity and doubtful debts. It was not disputed that a sum being the estimated liability under two separate gratuity schemes framed by the company respectively in 1960 and 1964–65 had been deducted from the gross receipts in the profit and loss account. The workmen contended that only amounts actually paid could be deducted and the gross receipts could not be debited for an estimated liability. It was contended further that if an estimated liability was debited, the appropriation would amount to a reserve and under the Bonus Act had to be added back while working out the gross profits. On the other hand, it was contended on behalf of the company that on the principles of accountancy the debits for the estimated gratuity were perfectly legitimate.

27. The Supreme Court posed to itself the following question which according to it arose in the case (p. 62):

“Two questions, therefore, arise, (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. If it is a reserve, obviously the amount has to be added back while computing the gross profits. But in that event the company would be entitled to interest thereon at 6 per cent, per annum under item 1(iii) of the Third Schedule to the Act. In the case of an assessee maintaining his accounts on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy.”

28. In resolving this controversy the Supreme Court observed as follows (p. 67):

“The next question is whether the amount so provided is a provision or a reserve. 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 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, 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, p. 192; Part III, clause 7, Schedule VI to the Companies Act, 1956, which defines provision and reserve.)”

29. Mr. Roy submitted that what the Supreme Court had in fact decided on the facts was that the amounts of estimated gratuity as debited were to be treated as current liability. According to Mr. Roy the Supreme Court also held that the amounts debited could not be a reserve because if it was a reserve it had to be added back while computing the gross profits. It was also not a provision because in terms of the definition adopted by the Supreme Court from the text books of accountancy and the Companies Act, a provision was one of which the amount could not be determined with substantial accuracy. The Supreme Court had, however, found that the amounts in question as debited were on actuarial principles ascertainable with substantial accuracy.

30. Mr. Roy contended that the distinction made in the case of Metal Box Company of India Ltd., [1969] 73 ITR 53 (SC), between a provision and a reserve had no relevancy for the purposes of the S.P.T Act, 1963.

31. Lastly, Mr. Roy cited Bum & Co. Ltd., [1978] 114 ITR 565 (Cal). In this case the question was whether provisions for “Provident Institution”, “Long service bonus” and “Bonus” and also “Taxation Contingency Reserve” would be treated as “reserves” for the purposes of the S.P.T Act, 1963. In answering that question a Division Bench of this court posed to itself and considered a more fundamental question, viz., whether the expression “reserve” in r. 1 of the Second Schedule to the S.P.T Act, 1963, was to be understood in its ordinary commercial sense or in the sense in which it was understood in commercial accountancy. If the expression “reserve” was understood as in commercial accountancy then it had to be construed in contradistinction to the expression “provision”. The court came to the conclusion that the expression “reserve” in the S.P.T Act, 1963, should be understood in its ordinary sense and not in contradistinction to provision in accordance with the principles of accountancy for the following reasons:

(a) The expression “reserve” was understood in its ordinary meaning by the Supreme Court and accordingly construed in Century Spinning & Manufacturing Co. Ltd., [1953] 24 ITR 499 (SC).

(b) In r. 1 of the Second Schedule of the S.P.T Act, 1963, the expression “other reserves” excluded the amounts appropriated which have been allowed in the computation of profits for the purpose of the Indian I.T Act, 1922, or the I.T Act, 1961. This indirectly indicated that whatever set apart was not allowed in such computation must be a reserve.

(c) When the S.P.T Act, 1963, was enacted, Parliament had before it the pronouncement of the Supreme Court in Century Spinning & Manufacturing Co. Ltd., [1953] 24 ITR 499, where the expression “reserve” was construed in a similar context. Therefore, it would be legitimate to think that having had the advantage of judicial exposition if Parliament chose to use the same expression, i.e, “reserve”, it was intended that the expression would have the same meaning as judicially expounded.

(d) In the Expln. to r. 1 of the Second Schedule of the C.(P.) S.T Act, 1964, it has been added as follows:

“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.”

32. The introduction of this Explanation shows that prior thereto there was some doubt as to the law and that in case of doubt construction of a statute should be in favour of the taxpayer and not of the revenue. The earlier decisions of this court in Braithwaite and Co. (India) Ltd., [1978] 111 ITR 729 (Cal) and Duncan Brothers and Co. Ltd., [1978] 111 ITR 885 (Cal), though cited, were not expressly differed or dissented from. The court, however, did not base the decision solely on the meaning of the expression “reserve”, as construed by it, but held further that the items concerned were contingent liabilities which could not be ascertained with any substantial accuracy and, therefore, they could not be considered to be provisions even in the sense as understood in commercial accountancy and such items were held to be “reserves”.

33. Mr. Roy relied on this judgment and invited us to apply the meaning and construction of the expression “reserve” indicated therein in the instant case.

34. Mr. Ajit Sengupta, learned counsel for the revenue, contended on the other hand that looking at the scheme of the S.P.T Act, 1963, it could not be said that a provision for an accrued and ascertainable liability and, in particular, a provision for taxation as in the instant case should be treated as part of the “reserves” of a company. In computing the chargeable profits, the gross profits had to be reduced by the amounts of income-tax and super-tax payable by the company under r. 2 of the First Schedule of the statute and, therefore, the statute should not be construed in such a way which would lead to a double benefit, viz., by addition to the capital of the amounts set apart as provisions and also deduction of the same amounts as income-tax and super-tax from chargeable profits.

35. Mr. Sengupta submitted further that under the Companies Act and the prevailing accountancy practice and principles, first, the tax liability accrued was deducted from net profits, and only after such deduction the balance was available for (a) distribution of dividend, (b) creation of reserves, and (c) finally carrying over to the next accounting year as unappropriated profits. He submitted that taxation had to be considered and provided for and appropriation made accordingly before any reserve could be created.

36. In support of his contentions Mr. Sengupta cited Spicer and Pegler's Book Keeping & Accounts, 17th Edn. (at p. 313) which suggested the following form of P & L A/c.:—

Profit before taxation:

After accounting for: …

Depreciation, etc. …

United Kingdom taxation basedon the profits for the year …

Corporation tax (45 per cent.)…

Income-tax on surplus franked investment income …

Profit after taxation:

Deduct appropriations: …

General Reserve …

Proposed dividends (gross)—payable November 30th, 1969

Unappropriated profit for the year

37. Mr. Sengupta finally submitted that the instant case was covered by the previous decisions of this court in Braithwaite & Co. (India) Ltd., [1978] 111 ITR 729 (Cal) and Duncan Brothers & Co. Ltd., [1978] 111 ITR 885 (Cal). “He drew our attention to the latter case where almost identical submissions had been advanced by Mr. K. Roy on behalf of the assessee which were rejected by the court. The subsequent decision of this court in Burn & Co. Ltd., [1978] 114 ITR 565 (Cal), according to Mr. Sengupta, did not assist the assessee in the instant case as it was distinguishable on facts and had also followed the earlier cases. It could not be held that the earlier decision in Braithwaite & Co. (India) Ltd., [1978] 111 ITR 729 (Cal) or Duncan Brothers & Co. Ltd., [1978] 111 ITR 885 (Cal) was no longer good law.

38. We make it clear at the outset that the judgment in Burn & Co. Ltd., [1978] 114 ITR 565 (Cal) creates no difficulty in the instant case. The judgment neither dissents nor differs from the earlier decisions. In fact, it is specifically stated at the conclusion of the judgment that there is no departure from the views expressed in other decisions of this court. Therefore, to the extent that the observations in this judgment cannot be reconciled with the earlier decisions in Braithwaite and Co. Ltd., [1978] 111 ITR 729 (Cal) and Duncan Brothers and Co. Ltd., [1978] 111 ITR 885 (Cal) they have to be treated as obiter.

39. We, however, propose to deal with all the contentions urged by Mr. Roy on the question.

40. It does not appear to us that the decision of the Supreme Court in Century Spinning & Manufacturing Co. Ltd., [1953] 24 ITR 499 was based solely on the ordinary or dictionary meaning of the expression “reserve”. The Supreme Court specifically considered the Indian Companies Act, 1913, referred to s. 131 and regln. 99 thereof and came to the conclusion that the item in dispute was not a reserve as understood in the Indian Companies Act, 1913. It was not necessary for the Supreme Court in that case to further distinguish between the concepts “provision” and “reserve” inasmuch as no controversy had arisen on that point. In that case also, in fact, provisions had been made by the directors for depreciation and taxation before there was a recommendation for dividend and such provisions had not been claimed to be “reserves”.

41. It is also to be noted that in the Indian Companies Act, 1913, no differentiation had been made between “provision” and “reserve” as in the subsequent Companies Act of 1956 and the Supreme Court in Century Spinning & Manufacturing Co. Ltd., [1953] 24 ITR 499 “did not consider the later Companies Act. The distinction between the said two concepts was first mooted in the English Companies Act of 1948. The following passage from “Accountancy” by William Pickles, 4th edn., make the position clear (at p. 717)

“The lack of uniformity and looseness in the past in the employment of the term ‘reserve’ have tended not only to create confusion in the mind of the student but to difficulties in the proper understanding of the financial position of businesses as shown in their balance-sheets. The matter has now been considerably clarified by the Companies Acts, 1948 and 1967, and although the requirements of the Acts (which will be stated in detail in a later chapter) apply ‘only to limited companies

1. Reserves are 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 are 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.

42. It follows, therefore, that:

1. Any amount set aside for the purposes described in (2)(a) and (b) (above) in excess of estimated requirements must be regarded as a reserve, and

2. Sums set aside to meet known liabilities of which the amount can be determined with substantial accuracy do not fall within the definition of a provision and should, therefore, be described as accruals or accrued liabilities.

43. Reserves are in effect part of the undistributed profits of the business and, therefore, part of the proprietorship, whereas provisions and accruals are a diminution of proprietorship in the form of a liability or diminution of an asset. The former are broadly appropriations of, the latter charges against, profits.”

44. Similar observations also appear in Spicer and Pegler's Book-keeping and Accounts, 15th edn., at page 38:

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

45. 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 or reserve funds are shown as part of the proprietor's interest.”

46. The following further observations occur 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.”

47. These definitions, which were originally introduced in the English Companies Act, 1948, appear to have been incorporated verbatim in the Companies Act, 1956, in Pt. III of Sch. VI thereto.

48. The contention of Mr. Roy that the definitions of the expressions “reserve” and “provision” in Pt. III of Sch. VI are confined only to the balance-sheet and not to the rest of the Companies Act, cannot be accepted. The definitions in Pt. III of Sch. VI of the Companies Act refer to the form of the balance-sheet which every company has to conform to. It is in the background of a balance-sheet in this form that the directors of a company have to make their report to the shareholders as to the “reserve” of the company under s. 217 of the Companies Act, 1956. The expression “reserve” as introduced in 217 is followed by the words “as in the balance-sheet”.

49. A clear distinction between a reserve and a provision has also been made in regln. 87 of the Companies Act, 1956. In the said regulation, it is specifically stated that “reserves” would include “provisions for contingency”. A provision for contingency is a provision for a liability which may or may not occur. Such a provision is not for a known liability the amount of which is ascertainable accurately. By specifically including “provision for contingency” in the expression “reserve” it appears that other categories of provisions including provisions for ascertained or ascertainable liability or provisions for accrued liability whose amount cannot be ascertained have been specifically excluded from the ambit of the expression “reserve”.

50. The distinction between a “reserve” and a “provision” introduced in the Companies Act, 1956, is in our opinion not confined to Pt. III of Sch. VI. No doubt, when the S.P.T Act, 1963, was promulgated the decision of the Supreme Court in Century Spinning & Manufacturing Co. Ltd.'s case, [1953] 24 ITR 499 had already been published, but when Parliament promulgated the S.P.T Act, 1963, the Companies Act, 1956, was also in the statute book. In view of the clear distinction made in the Companies Act between a “provision” and a “reserve”, it can also be assumed that when Parliament used the expression “reserve” in the Act of 1963, it was aware of the distinction made in an existing statute dealing with an identical object, i.e, joint stock companies between the concepts of a “provision” and a “reserve”. The S.P.T Act, 1963, was meant to apply only to companies and not to other categories of assessees.

51. The object of the Act was to impose a tax on a certain part of commercial profits of joint stock companies. In our opinion, it would be more appropriate to construe the words and expressions in such a statute according to their commercial sense and not by their dictionary meaning.

52. Even according to the dictionary, one of the basic tests of a reserve, is that it is set apart for a future use. Making a provision for known liability appears to us to be a use of the fund “in presenti” and not “in futuro”. It would be unrealistic to treat the amount earmarked for payment of a known liability to be something set apart for future use. In any event, such an amount cannot be treated as part of the capital of the company employed in the business.

53. The Explanation to r. 1 of the Second Schedule to the C.(P.) S.T Act, 1964, introduced for removal of doubts has to be read in the context of that statute. Unless a subsequent statute specifically refers to an earlier statute, or is a statute enacted for explaining the earlier statute, it would be inappropriate to construe the earlier statute solely with the aid of such subsequent statute.

54. It appears to us that the Companies Act, 1956, the regulations thereunder, the prescribed form of the balance-sheet, the clauses in Sch. VI of the Companies Act, 1956, contained in Pt. III thereof and the definitions of the expressions “reserve” and “provision”, read with the decision of the Supreme Court in Metal Box Co. of India Ltd.'s case, [1969] 73 ITR 53 (SC), leave little room for doubt as to how the expression “reserve” should be construed in the context of the S.P.T Act, 1963.

55. For the reasons above, following the earlier decisions of this court in Braithwaite and Co. (India) Ltd.'s case, [1978] 111 ITR 729 (Cal) and Duncan Brothers & Co. Ltd.'s case, [1978] 111 ITR 885 (Cal), we hold that the provision for taxation in the present case cannot qualify as a “reserve” within the meaning of r. 1 of the Second Schedule of the S.P.T Act, 1963.

56. It only remains for us to consider the nature of the other amount of Rs. 11,41,689. Even accepting the contentions of Mr. Roy in their entirety this amount cannot be held to be a “reserve”. After providing for taxation, reserves and dividend this amount was left unappropriated and without being set. apart for any purpose. We hold that this amount was unappropriated profits and not reserve. Accordingly, we answer the question referred in the affirmative and in favour of the revenue. In the facts and circumstances, there will be no order as to costs.

Banerji, J.:— I agree.