1. The Judgment of the Court was delivered by Paripoornan, J. - These three references are at the instance of the Commissioner of Income Tax, Kerala II, Ernakulam. The assessee, a public limited company, is the respondent in all the three references. The three assessment years concerned are 1963-64, 1966-67 and 1970-71. We are concerned in these cases with the interpretation of the provisions of Super Profits Tax Act for the year 1963-64 and with the Companies Profits Surtax Act, 1964 for the years 1966-67 and 1970-71. The questions referred to this court for the three assessment years, wherein the broad principles, to be considered are similar, are as follows:

"1. Assessment year 1963-64. - Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in Law in holding that the various amounts shown in the balance sheet of the assessee company as reserves for repayment of loans are to be treated as reserves created by the company and that they are to be taken into account for computing the capital of the company for the purposes of super profits tax for the assessment year 1963-64

2. Assessment year 1966-67. - Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal is right in law in holding that the various amounts shown in the balance sheet of the assessee company as reserves for repayment of loans are to be treated as reserves created by the company and that they are to be taken into account for computing the capital of the company for the purposes of surtax for the assessment year 1966-67

3. Assessment year 1970-71. - Whether on the facts and in the circumstances of the case the income Tax Appellate Tribunal is right in law in holding that the various amounts shown in the balance sheet of the assessee company as reserves for repayment of loans are to be treated as reserves created by the company and that they are to be taken into account for computing the capital of the company for the purpose of surtax for the assessment year 1970-71"

2. The assessee is a public limited company. In order to expand its business it approached the Industrial Finance Corporation of India (hereinafter called the corporation) for a loan. It was sanctioned as per agreement dated 15th February 1958. The total amount sanctioned was Rs. 30 lakhs, which was paid in four instalments. Rs. 8 lakhs was paid on 1st of August, 1958, Rs. 2 lakhs on 1st of September, 1958, Rs. 10 lakhs on 1st of October, 1958, and Rs. 10 lakhs on 1st of November, 1958. The loan was to be repaid by the assessee in 12 equal instalments of Rs. 2 1/2 lakhs each. The 1st instalment was payable by 1st January, 1961 and the other instalments were payable "on the 1st day of the following calendar years". As per the agreement the loan instalment would be paid by 1st of January, 1972.

3. While the loan was under negotiation, the company made provision in its balance sheet for the repayment of the loan which they may get from the corporation. For the year ending 31st March, 1957 they had appropriated out of profits Rs. 2 lakhs and transferred it to a reserve called reserve for I.F.C. loan repayment. To this reserve the assessee continued transferring certain amounts every year out of their profits. A sum of Rs. 2 lakhs was so transferred for the assessment years ending by 31st March, 1958 and 31st March, 1959. A sum of Rs. 1 1/2 lakhs was transferred for the year ending 31st March, 1961. For the subsequent years up to the year ending 31st March, 1969 Rs. 2 1/2 lakhs were transferred for each year. Thus by 31st March, 1969, the reserve carried 27 1/2 lakhs to its credit. Out of this amount, the assessee utilised a sum of Rs. 20 lakhs for the issue of Rs. 20,974 bonus shares during 1966-67. The balance of Rs. 7 1/2 lakhs was transferred to the general reserve during 1969-70 and Rs. 26,218 bonus shares were issued out of the general reserve during the year 1970-71. For the issue of the bonus shares, the assessee obtained necessary consent of the Central Government and the Industrial Finance Corporation.

4. For all the three assessment years, 1963-64, 1966-67 and 1970-71 the Income Tax Officer held that the amounts appropriated out of the profits and transferred to the reserve called "reserve for I.F.C. loan repayment" were created for the specific purpose and so were in the nature of a provision and so will not be taken into account for computing the capital of the company for the purpose of the super profits tax for the assessment year 1963-64 and for computing the capital of the company for the purpose of the Companies Profits Surtax Act, 1964 for the years 1966-67 and 1970-71. Appeals were filed by the assessee before the Appellate Assistant Commissioner for all the three years. In the appeals for the years 1963-64 and 1966-67 (Annexure B1 and B2) the Appellate Assistant Commissioner agreed with the assessees contention and held that the reserve appropriated out of the profits and transferred to the reserve called, "reserve for I.F.C. loan repayment" will be treated as part of the reserve and such amounts qualified to be treated as part of the capital for the purpose of "standard deduction". But for the assessment year 1970-71 the Appellate Assistant Commissioner took a different view. He found that the reserve actually represented current liabilities as envisaged in the balance sheet to be prepared according to rules of the Companies Act and to the extent the amount was earmarked for repayment, it cannot be treated as a reserve. It was only a mere provision and so cannot be taken into account for the purpose of standard deduction (Annexure Ext. B-3). The department filed second appeals before the Appellate Tribunal for the years 1963-64 and 1966-67 and the assessee filed a second appeal before the Appellate Tribunal for the assessment year 1970-71. The said three appeals were heard together and disposed of by a common order of the Appellate Tribunal dated 13th February, 1976 (Annexure C). The Appellate Tribunal held that the assessee is entitled to the relief claimed and that the reserve made for repayment of loan obtained from Industrial Finance Corporation will be a reserve for the purpose of computation of capital. The Commissioner of Income Tax, Kerala-II thereafter moved the Appellate Tribunal under S.256(1) of the for referring the questions of law which arose out of the order of the Appellate Tribunal to this Court. Being unsuccessful, the Commissioner of Income Tax moved this Court and filed O.P Nos. 124 of 1976, 125 of 1976 and 123 of 1976. In accordance with the directions of this court, the Appellate Tribunal has referred the questions of law stated in paragraph No. 1 supra for the decisions of this court.

5. The short question that falls for consideration is whether the amount appropriated by the assessee out of its profits and transferred to a reserve called "reserve for I.F.C. loan repayment" could be taken into account in calculating the reserves as contemplated by Art.1(iii) of the II Schedule of the Companies (Profits) Surtax Act, 1964. It is common ground that the provisions of Super Profits Tax Act, which is relevant to be construed, for the year 1963-64 are also of similar import. The following statutory provisions are relevant for considering the crucial issue involved in this case:

"S.2(5). Chargeable profits means the total income of an assessee computed under the Income Tax Act, 1961 (43 of 1961), for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule.

"S.2(8). Statutory deduction means an amount equal to ten per cent of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of two hundred thousand rupees, whichever is greater:

Provided that where the previous year is longer or shorter than a period of twelve month, the aforesaid amount of ten per cent or, as the case may be, of two hundred thousand rupees shall be increased or decreased proportionately:

Provided further that where a company has different previous years in respect of its income, profits and gains, the aforesaid increase or decrease, as the case may be, shall be calculated with reference to the length of the previous year of the longest duration;

4. Charge of tax. - Subject to the provisions contained in this Act, there shall be charged on every company for every assessment year commencing on and from the first day of April, 1964 a tax (in this Act referred to as the surtax) in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the Third Schedule.

The Second Schedule 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.

* * * *

(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)."

6. From the aforesaid provisions, it is clear that every company shall be charged, a tax in respect of so much of its chargeable profits of the previous year, as exceed the statutory deduction. "Chargeable profits" is the total income of an assessee computed under the Income Tax Act and adjusted in accordance with the provisions of the 1st Schedule of the Companies (Profits) Surtax Act, 1964. Statutory deduction means an amount equal to 10 per cent of the capital of the company as computed in accordance with the provisions of the Second Schedule or an amount of two hundred thousand rupees, whichever is greater (as per the provisions of the as it stood then). So a company is liable to pay surtax, under the in respect of its chargeable profits, which exceed the statutory deduction. Such statutory deduction is 10 per cent of the capital of the company computed in accordance with the provisions of the Second Schedule. According to the Second Schedule, Art.1(iii), the other reserves of the company will also be taken in, for arriving at the capital of a company. So, if the amount appropriated by the assessee in this case, out of its profits and transferred to the reserve called "reserve for I.F.C. loan repayment" is considered as "other reserves" within the meaning of the Second Schedule, Art.1(iii) of the Companies (Profits) Surtax Act, the standard deduction available will be 10 per cent on the aggregate of the amounts including the amount so appropriated out of the profits and transferred to the said reserve account. The assessing authority took the view that the assessee is not entitled to include the said sum as a reserve since the said reserve was created only for a specific purpose and so in the nature of a provision and cannot be treated as part of the capital basis. The core of the matter is whether the said view of the assessing authority sustained by the Appellate Assistant Commissioner for the year 1970-71 and negatived for the years 1963-64 and 1966-67 and held to be a "reserve" (part of the capital) by the Appellate Tribunal, is justified in law

7. The Appellate Tribunal in its consolidated order (Annexure C) held as follows:

"The company had created a reserve account in which certain moneys had been transferred by them out of the taxed profits. The reserve account is styled Reserve for repayment of loan from I.F.C.I.. This appeared for the first time in the accounts for the year ended 31st March, 1957, i.e. even before the loan was taken from the Corporation. In that year, i.e. for the year ended 31st March, 1967, Rs. 2 lakhs was set apart. It was increased by the following amount:

Amount set apart in the year ended 31-3-1957 Rs. 2 lakhs

Amount set apart in the year ended 31-3-1958 Rs. 2 lakhs

Amount set apart in the year ended 31-3-1959 Rs. 2 lakhs

Amount set apart in the year ended 31-3-1960 ..

Amount set apart in the year ended 31-3-1961 Rs. 1 1/2 lakhs

Amount set apart in the year ended 31-3-1962 Rs. 2 1/2 lakhs

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Total Rs. 10 lakhs

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We have already stated that the assessee had to repay these amounts by annual instalments. The first instalment for repayment fell in 1960. Each year they had repaid Rs. 2 1/2 lakhs with the result Rs. 7 1/2 lakhs had been repaid by 31st March, 1962. These repayments have not been made out of the funds set apart in the reserve account. The funds have not been touched at all for this purpose. On the other hand, the Appellate Assistant Commissioner had found and it is also supported by records that these funds were actually used for some other purposes in the year 1967, i.e., for the issue of bonus shares. From these facts we draw an inference that although the reserve is ostensibly for the repayment of loan I.F.C.I. in fact it is not. As facts show, it came into existence even before the loan was negotiated, the repayment of the instalments of the loans was not from these funds and the ultimate user of the funds was also for an entirely different purpose. We therefore, conclude that this reserve has nothing to do with the repayment loan from I.F.C.I. Since this is a reserve created out of taxed profits by an appropriation approved is in no way different from a general reserve. We, therefore, think that the treatment given to this reserve should be exactly like any other reserves created by the company."

(emphasis supplied)

8. We are of opinion that the above reasoning and conclusion of the Appellate Tribunal is justified on the facts and circumstances of the case. In Commissioner of Income Tax, Kerala v. Periakaramalai Tea and Produce Co. Ltd. (1973 (92) ITR 65 [LQ/KerHC/1972/183] ) a Bench of this Court had occasion to consider what is meant by the term reserves" and what reserves can be taken into account in the computation of capital for the purposes of assessment under the Companies (Profits) Surtax Act, 1964, Schedule II, R.1. One of us. Subramonian Poti, J. (now Chief Justice), after an exhaustive consideration of the relevant statutory provisions and decisions of courts observed:

"It appears to us in the light of what has been said by the Supreme Court in the decisions to which we have adverted that a reserve is any sum of money which has been kept back for future use whether the purpose for which it is so kept back be general or specific. Naturally, therefore, there is nothing strange if some specific purpose is indicated in the reservation, since a reserve for a specific purpose is as much a reserve as for a general purpose."

(emphasis supplied)

The Appellate Tribunal adverted to the above test laid down by this court and after adverting to the facts of the case concluded that the amount of Rs. 10 lakhs set apart from the year ended by 31st March, 1957 to 31st March, 1962 is a "reserve". The Appellate Tribunal said:

"Applying this test we find that Rs. 10 lakhs is a reserve. - It is not meant for any specific purpose or any accrued liability which was already in existence. We, therefore, uphold the order of the Appellate Assistant Commissioner on this point." (para 6 of Annexure C)

(emphasis supplied)

We are of opinion that the above reasoning and conclusion of the Appellate Tribunal is justified.

9. Counsel for the revenue contended that the reserve in the instant case was earmarked for repayment of the loan and that it was only a provision and cannot be a general reserve and so different from a general reserve. For one thing, the Appellate Tribunal has found that the reserve in the instant case, styled as "reserve for repayment of loan from I.F.C.I." appeared even before the loan was taken from the Corporation, and although it was ostensibly so named, in fact, it was not, for the repayment of the loan from I.F.C.I. and that the reserve had nothing to do with the repayment of the loan. The Appellate Tribunal also held that the reserve created in this case out of the "taxed profits", by an appropriation approved, is in no way different from a general reserve. These findings of fact, are not assailed by the revenue and it is not open to the revenue in these proceedings to contend that the reserve created in the instant case is not a general reserve or in any way different from a general reserve. Moreover, the Appellate Tribunal adverted to the test as to what constitutes "a reserve" for the purpose of computation of capital under the Companies Profits Surtax Act, 1964, Schedule II, R.1 as laid down by this court in the decision in Commissioner of Income Tax v. Periakaramalai Tea and Produce Co. Ltd. (1973 (92) ITR 65 [LQ/KerHC/1972/183] ) and applying the test came to the conclusion that Rs. 10 lakhs set apart in the different assessment years is a reserve. We are unable to accept the contention of the counsel for the revenue that the sum of Rs. 10 lakhs, so set apart, is only a "provision" and not a reserve. We may add, that broadly stated "a provision" is only a transitory one, and a "reserve" is a permanent of quasi permanent one and in that view of the matter, it cannot be said that in this case when the assessee appropriated a substantial amount out of its taxed profits, and transferred it to a reserve every year, it was only, in the nature of "transitory provision" or it was in the nature of a transitory arrangement and the said provision cannot be called a "reserve". The counsel for the revenue invited our attention to the decision of the Supreme Court in Vazir Sultan v. Commissioner of Income Tax, (1981 (132) ITR 559 [LQ/SC/1981/393] ), and referred to certain passages in the said decision, at pp. 579, 580, 582 and 596. We have perused through the said observations with care and we do not find anything in the said decision of the Supreme Court which militates against the test laid down by this court in the decision reported in Periakaramalai Tea and Produce Companys case (1973 (92) ITR 65 [LQ/KerHC/1972/183] ) at pp. 73 and 74, extracted earlier in the judgment. We hasten to add that this court laid down the test in 92 I.T.R. 65 (73, 74) as to what constitute "other reserves" for the purpose of the Companies Profits Surtax Act, 1964, Schedule II, R.1, on the basis of the earlier decisions of the Supreme Court in C.I. T. v. Centuary Manufacturing Company Ltd. (24 ITR 499) [LQ/SC/1953/79] , National City Bank v. C.I.T. (42 ITR 17) [LQ/SC/1961/4] Standard Mills Company v. Commissioner of Sales Tax (63 ITR 470) [LQ/SC/1966/243] Kesoram Industries and Cotton Mills v. Commissioner of Income Tax (59 ITR 767) [LQ/SC/1965/337] and other decisions of High Courts. The observations contained in the recent decision of the Supreme Court in Vazir Sultans case (1981 (132) ITR 559 [LQ/SC/1981/393] ), referred to by counsel for the revenue do not militate against the observations contained in the earlier decisions of the Supreme Court referred to above. Incidentally, we may also mention the following passage occurring in the Law of Surtax in India, by M. M. Bhagawat, (1983 edition) at page 24:

"The Supreme Court has recently affirmed the decision of Kerala High Court in C.I.T. v. Periakaramalai Tea and Produce Co. Ltd. (1973 (92) ITR 65 [LQ/KerHC/1972/183] ) in which case the court held that a reserve is a sum of money which has been kept for the future use by the assessee whether the purpose for which it is so kept back is general or specific." (The reference to the Supreme Court decision has not been given).

10. In the result, we hold that the decision of the Appellate Tribunal is correct. Accordingly the questions referred to this court are answered in the affirmative and in favour of the assessee company and against the revenue. There shall be no order as to costs.

A copy of this judgment under the seal of the High Court and the signature of the Registrar will be forwarded to the Income Tax Appellate Tribunal, Cochin Bench as required by law.