Ajit Singh Bains, J.:— The judgment will dispose of I.T.R No. 6 of 1974 and I.T Ref. No. 7 of 1974, as both these references arise out of the same facts. The questions of law referred by the Income-tax Appellate Tribunal (hereinafter called “the Tribunal”), in these references, are recapitulated below;

Question arising out of the assessee's application:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount of Rs. 8 lakhs did not form part of the reserves as on April 1, 1962, for purposes of computation of capital under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963?”

Questions arising out of the Commissioner's application:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing the additional ground to be raised for the first time before it?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amounts of Rs. 71,808 and Rs. 1,24,974, respectively, for ‘provision for taxation’ and ‘provision for dividends’ could be treated as ‘reserve’ to be included in the computation of the assessee's capital under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963?”

2. The facts giving rise to these references are that the assessee is a company and for the assessment year 1963-64, the previous year is 1962-63, commencing from 1st April, 1962, and ending on 31st March, 1963. The dispute relates to the computation of capital under r. 1 of the Second Schedule to the S.P.T Act, 1963 (hereinafter called “the Act”). The computation of capital is provided in this Act and an assessee gets a standard deduction at the rate of 6% of the capital computed or Rs. 50,000 whichever is greater from the “chargeable profits”. This Act was in force only for the assessment year 1963-64 and was later on substituted by the C. (P.) S.T Act, 1964. Under r. 1 of the Second Schedule of the Act, capital was to be computed as on the first day of the previous year, i.e, the 1st April, 1962. In the balance-sheet of the assessee-company as on 31st March, 1962, there was an item of Rs. 8,19,455 being the credit balance, of “profit & loss account “and this was shown under the head “Reserve and surplus”. Admittedly, no part of this amount was transferred to any reserve account in the books of the company during the accounting year ending on March 31, 1962. A resolution was passed by the shareholders on 29th September, 1962, to the following effect;

“Further resolved that a sum of Rs. 8,00,000 out of accumulated profits be and is hereby transferred to general reserve.”

3. On this basis, the assessee claimed before the ITO that Rs. 8 lakhs should be considered as a part of the reserves as on 1st April, 1962. The ITO rejected this contention. Dissatisfied by the order of the ITO, the assessee filed an appeal before the AAC which also met the same fate. The assessee further appealed to the Tribunal but with no success. Hence, the aforementioned question on the assessee's application. During the course of appeal the assessee sought permission to raise an additional ground of appeal which is in the following terms:

“That the amount of Rs. 1,24,974 standing under the head ‘Provision for Dividend’ and Rs. 71,808 standing under the head ‘Provision for Taxes’ may be considered as a part of capital employed in the business under rule 1 of the Second Schedule of the S.P.T Act, 1963.”

4. The additional ground was opposed by the revenue on the plea that it could not be allowed to be taken at that stage but the Tribunal repelled this contention and allowed the assessee to take the additional ground. It decided that the amount of Rs. 71,808 being the provision for taxation and Rs. 1,24,974 being the provision for dividends should be treated as a part of the reserve for the purpose of r. 1 of the Second Schedule to the Act. Hence, the other two questions are raised by the revenue.

5. First, I shall deal with question No. 1. Mr. B.S Gupta, learned counsel for the assessee, contended that the Tribunal was not right in law in holding that Rs. 8 lakhs did not form part of the reserves as on 1st April 1962, for the purposes of computation of capital under r. 1 of the Second Schedule of the Act. His contention is that even if no provision was made in the balance-sheet for the accounting period ended on March 31, 1962, for such reserves, the shareholders were competent to make such reserves in their meeting held on 29th September, 1962, as they are the final authority in such matters under the Companies Act. For his contention he relied on CIT v. Mysore Electrical Industries Ltd., [1971] 80 ITR 566, wherein their Lordships of the Supreme Court have observed as under (headnote);

“… rejecting the contention of the department, that the determination of the directors to appropriate the amounts to the three items of reserve on August 8, 1963, had to be related to April 1, 1963, viz., the beginning of the accounts for the new year, and had to be treated as effective from that day. The three items had to be added to other items for the computation of the capital of the respondent as on April 1, 1963, under rule 1 of Schedule II to the Companies (Profits) Surtax Act, 1964.”

6. By this judgment, their-Lordships of the Supreme Court affirmed the judgment of the Mysore High Court in Mysore Electrical Industries Ltd. v. Commissioner of Surtax, [1971] 80 ITR 571. In this case, the directors of the assessee-company on the 8th August, 1963, in their report to the general body of shareholders proposed to appropriate the amount to the three items of reserve for development rebate, dividend reserve and reserve for super profits tax which was affirmed by the shareholders out of the profits of the year ending 31st March, 1963. In that situation it was held that the three items had to be related to 1st April, 1963, i.e, the beginning of the accounts for the new year. In deciding this matter, the Supreme Court also referred to the judgment of the Bombay High Court in CIT v. Aryodaya Ginning and Manufacturing Co. Ltd., [1957] 31 ITR 145, and also that of the Madras High Court in CIT v. Vasantha Mills Ltd., [1957] 32 ITR 237. While the judgment of the Bombay High Court was approved, that of the Madras High Court was not approved. In the Bombay High Court case, the directors made certain appropriations which included Rs. 11,08,000 to the reserve fund and Rs. 1,50,000 to dividend reserve fund. The report of the directors was made on April 27, 1949, and a general meeting of the shareholders held on 27th June, 1949, adopted the report and the recommendation of the directors. The company was assessed to business profits tax chargeable under the Business Profits Tax Act for the accounting period from 1st January to 31st December, 1948, and the question which arose for determination was as to what was the capital of the company for the accounting period. The contention of the company was that its paid-up capital should be increased by the amount of reserves constituted by the recommendation made by the directors and accepted by the shareholders. This contention of the company was accepted by the ITO and the Appellate Tribunal. The revenue challenged the orders and a reference was made to the Bombay High Court contending that as the reserve was not sanctioned till 27th June, 1949, it could not be looked at or considered as reserves on a day prior thereto. This contention of the revenue did not find favour with the learned judges of the Bombay High Court and it was held that the resolution of 27th June, 1949, had a retrospective effect inasmuch as it referred to the profits of the year ending on 31st December, 1948, the appropriations to be made in the balance-sheet as on that date and the reserves which should be constituted and shown in the balance-sheet as on 31st December, 1948. The High Court further observed that when one looked at the balance-sheet of the year ended 31st December, 1948, the amounts mentioned were shown respectively in the reserve fund and the dividend reserve fund and the shareholders by passing a resolution on 27th June, 1949, did not decide that these amounts should constitute reserves as from that date but they accepted the recommendation of the directors that these amounts should constitute reserves as on 31st December, 1948. This decision was approved by their Lordships of the Supreme Court. The Madras High Court dissented from the view expressed by the Bombay High Court on the ground that there could be no reserve until there was allocation in fact by a person having the requisite authority to order that allocation. The facts of the Madras High Court case were that in the balance-sheet of the assessee-company for the calendar year 1945, a sum of Rs. 2 lakhs was shown as appropriated to the reserve account and a sum of Rs. 9 lakhs was shown as reserve for the payment of income-tax and excess profits tax. This allocation was made by a resolution of the board of directors at a meeting held on March 14, 1946, and the shareholders meeting to consider the directors' report was held on April 15, 1946. The articles of association of the company gave an absolute discretion to the directors to allocate sums of money to the reserves before they recommended a dividend. For the chargeable accounting period 1st April, 1946, to 31st December, 1946, the assessee-company claimed that in computing its capital, for the purposes of abatement under r. 2(1) of Sch, II to the Business Profits Tax Act, these two sums should be included in the reserves. The decision of the Madras High Court, however, was not approved by the Supreme Court in the case above referred. There is no quarrel about the principles of law laid down by their Lordships of the Supreme Court, but the facts of the present case are distinguishable from that of the Supreme Court case in CIT v. Mysore Electrical ‘Industries Ltd., [1971] 80 ITR 566, the Bombay High Court case in CIT v. Aryodaya Ginning and Mfg. Co. Lid., [1957] 31 ITR 145 as well as the Madras High Court case in CIT v. Vasantha Mills Ltd., [1957] 32 ITR 237. The principle of law as laid down in CIT v. Century Spinning and Manufacturing Co. Ltd., [1953] 24 ITR 499 (SC) is applicable to the facts of the present case.

7. The facts of the aforesaid case are that for the year ending 31st December, 1945, the profit of the assessee-company, whose accounting year was the calendar year, was a certain sum according to the P & L account. After making a provision for depreciation and taxation, the balance of Rs. 5,08,637 was carried to the balance-sheet. This sum was not allowed in computing the profits of the assessee for purposes of income-tax. In February, 1946, the directors recommended that out of that amount a sum of Rs. 4,92,426 should be distributed as dividend and the balance of Rs. 16,211 was to be carried forward to the next year's account. This recommendation was accepted by the shareholders in their meeting on 3rd April, 1946, and the amount was shortly afterwards distributed as dividend. In computing the capital of the assessee-company on 1st April, 19, 46, under the Business Profits Tax Act, 1947, the assessee claimed that the sum of Rs. 5,08,637 and the profit earned by it during the period 1st January, 1946, to 1st April, 1946, should be treated as “reserves” for the purpose of r. 2(1) of Sch. II. The High Court accepted the contention of the assessee and held that the sum of Rs. 5,08,637 must be treated as a reserve for the purpose of r. 2, but the profit made by the assessee during the period, 1st January, 1946, to 1st April, 1946, could not be included in the reserves. On appeal by the revenue, their Lordships of the Supreme Court held that the sum of Rs. 5,08,637 and the profit earned by the assessee during the period aforementioned did not constitute reserves within the meaning of r. 2(1) of Sch. II.

8. In the case in hand, the previous year of the company ended on 31st March, 1963, and under r. 1 of the Second Schedule to the Act, the capital is to be computed as on the first day of the previous year, viz., 1st April, 1962. For the year which ended on 31st March, 1962, there is an item of Rs. 8,19,455 being credit balance of P & L account and this amount is shown under the head “Reserve & Surplus”. Admittedly, no part of this amount was transferred to any reserve account in the books of the company during the accounting year ending March 31, 1962. However, the claim of the assessee is that the shareholders in their annual general meeting held on 29th September, 1962, approved the transfer of Rs. 8,00,000 to the general reserve and that this amount should be related back to 1st April, 1962. The entry regarding the transfer of Rs. 8,00,000 to the reserve account was made on 29th September, 1962, and this figure appeared under the head “General Reserve” in the balance-sheet as on 31st March, 1963. The transfer of Rs. 8 lakhs to the reserve account was not made in the books of account of the company during the accounting year ended on 31st March, 1962, but it was done so only in the books of account for the year ending 31st March, 1963. Further, the resolution of the shareholders is only to the effect that “a sum of Rs. 8 lakhs out of the accumulated profits be and is hereby transferred to general reserve”. The resolution does not indicate that it is to be related back to the previous year nor was there any recommendation of the directors to that effect. The resolution also does not indicate in which context it was passed, whether in that meeting the balance-sheet as on March 31, 1962, was before the shareholders or not. There is no quarrel about the authority vesting in the shareholders in the matter but they have also not indicated whether the amount of Rs. 8 lakhs would relate back to the accounting year ending 31st March, 1962. Even subsequently no entry of correction was made in the balance-sheet and the amount of Rs. 8 lakhs is shown in the accounting year ended 31st March, 1963. Hence, it seems that the shareholders themselves did not want to relate back this amount to the previous year. The balance-sheet in question does not show the amount of Rs. 8 lakhs as having been transferred to the reserve account and on 1st April, 1962, the amount of Rs. 8,19,455 was only a mass of undistributed profits. Hence, I hold that on the facts of the present case the ratio of the Supreme Court case in CIT v. Mysore Electrical Industries Ltd., [1971] 80 ITR 566 is not applicable and instead the ratio of the Supreme Court decision in CIT v. Century Spg. & Mfg. Co. Ltd., [1953] 24 ITR 499 (SC) is applicable.

9. For the reasons recorded above, I am of the considered view that the Tribunal was right in holding that the amount of Rs. 8 lakhs did not form part of the reserves as on 1st April, 1962, for the purposes of computation of capital under r. 1 of the Second Schedule to the Act. Hence the question arising out of the application of the assessee is answered in the affirmative, against the assessee and in favour of the revenue.

10. Coming to the second question, it was urged by the learned counsel for the revenue that the Tribunal was in error in law in allowing the additional ground to be raised by the assessee for the first time before it, i.e, at the time of hearing the appeal. I do not find merit in this contention. An additional ground can be raised at the Tribunal stage in view of r. 11 of the Income-tax (Appellate Tribunal) Rules, 1963 (hereafter called “the Rules”). Rule 11 of these Rules is in the following terms:

“11. Grounds which may betaken in appeal.— The appellant shall not, except by leave of the Tribunal, urge or be heard in support of any ground not set forth in the memorandum of appeal, but the Tribunal, in deciding the appeal, shall not be confined to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal under this rule:

Provided that the Tribunal shall not rest its decision on any other ground unless the party who may be affected thereby has had a sufficient opportunity of being heard on that ground.”

11. From the reading of this rule it is plain that the Tribunal has the discretion to allow the new ground to be raised before it. The same view was taken in an earlier decision of our own High Court in CIT v. Ram Sanehi Gian Chand, [1972] 86 ITR 724 and by the Bombay High Court in CIT v. Hazarimal Nagji & Co., [1962] 46 ITR 1168. In this view of the matter it is held that, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing the additional ground to be raised for the first time before it. Accordingly, the question is answered against the revenue and in favour of the assessee.

12. Coming to the last question, whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amounts of Rs. 71,808 and Rs. 1,24,974, respectively, for “provision for taxation” and “provision for dividends” could be treated as “reserve” to be included in the computation of the assessee's capital under r. 1 of the Second Schedule to the Act, The expression “reserve” means any amount which is set apart for a contingency, i.e, for an unknown future liability, the nature of which is not known at the time of preparation of the balance-sheet whereas the expression “provision” means any amount which is kept apart for a known liability. This is by and large the distinction between these two expressions. For answering the present question we are concerned with the provision of tax for Rs. 71,808 and the provision for dividends for Rs. 1,24,974. This has been treated by the Tribunal as “reserve”. The Tribunal while considering it as “reserve”, followed the judgment of the Allahabad High Court in CIT v. Security Printers of India (P.) Ltd., [1972] 86 ITR 210, wherein the provision for dividends and the provision for taxes were held to be “reserves” for the purposes of r. 1 of the Second Schedule to the Act. In the instant case, the “provision for taxation” and the “provision for dividends” were kept for a known liability. Hence, these cannot be treated as “reserves”. The provision for taxation is only an estimate of tax which after the actual assessment can be less or more. In the present case, Rs. 71,808 is the provision for tax. If the actual tax paid comes to be lesser than this amount, the residual amount can be treated as “reserves It is for the authority to find out. But since it is a provision for a known liability it cannot be treated as “reserves”. With utmost respect to the learned judges of the Allahabad High Court, I am unable to agree with the proposition that the provision for tax is a “reserve” for the purposes of r. 1 of the Second Schedule to the Act. Similarly, the provision for dividends is also intended for a known liability which is not uncertain or contingent. Therefore, the provision for tax at Rs. 71,808 and the provision for dividends at Rs. 1,24,974 in the instant case cannot be treated as “reserves” within the meaning of r. 1 of the Second Schedule to the Act. In Nagammal Mills Ltd. v. CIT, [1974] 94 ITR 387 (Mad), it was held that the provision for dividends and the provision for taxes were not “reserves In Madras Auto Service v. CIT, [1978] 112 ITR 540 (Mad), also it was held that the provision for dividends was not a “reserve Again, in Orient Paper Mills Ltd. v. CIT, [1978] 113 ITR 550 (Cal), it was held that the provision for taxation and the provision for dividends could not be treated as “reserves” as the entry in the balance-sheet was for meeting the current liability. Similar was the view expressed in CIT v. Mafatlal Chandulal & Co. Ltd., [1977] 107 ITR 489 (Guj) and Hotz Hotels Pvt. Ltd. v. CIT, [1975] 101 ITR 596 (HP).

13. Mr. Gupta, learned counsel for the assessee has relied upon an authority of the Calcutta High Court in Commr. of I.T & S.P.T v. Burn and Co. Ltd., [1978] 114 ITR 565 (Cal), wherein it was observed (headnote):

“Even if the question is considered on the principle that the expression ‘reserve’ has to be understood in contradistinction to ‘provision in order to be a provision, it must be a provision for a liability, which is a known liability, though the actual amount might not be quantified. A contingent liability which cannot be ascertained with any substantial accuracy may be considered to be a ‘provision’ in contradistinction to ‘reserve’ but not mere possibility of an obligation which has not matured into a liability.”

14. In this case, there was an item “taxation contingency reserve” in the balance-sheet. Then it was held by the court that since this item was not a provision for taxation of the year in question, it was a reserve as there was no known liability for the same. The other item in the balance-sheet was the provision for bonus. The court observed (headnote):

“Bonus was payable after the annual general meeting of the company and also after settlement had been arrived at between the company and the union. There was no statutory liability for bonus. The third item was provision for provident institution and long service bonus.”

15. In regard to this, the court observed: This reserve was to cover the payment to those employees, who had joined the provident fund before 1925, and for payment to them as and when they retire. But who would be retiring and what would be their amount was not known. It was not merely a question of there being no quantification. Whether there would at all be any liability was also not known. Therefore, the court held that this also could not be considered to be a provision but a “reserve”. But the facts of this case are distinguishable from that of the present case. In the present case, as observed earlier, there is a provision for taxation and also a provision for dividends which are the liabilities of the current year. There is no clear indication that the amount has been separated from the general mass of profits as reserve in the balance-sheet and from the surrounding circumstances also there is no indication that both these amounts are kept as “reserves”. For the reasons recorded above, the Tribunal was not right in law in holding that the amounts of Rs. 71,808 and ‘Rs. 1,24,974, respectively, for “provision for taxation” and “provision for dividends” be treated as “reserve” to be included in the computation of the assessee's capital under r. 1 of the Second Schedule to the Super Profits Tax Act, 1963. Accordingly, this question in answered in the negative, i.e, in favour of the revenue and against the assessee.

16. The references are disposed of accordingly.