JUDGMENT [ENTITY], J.
1. This judgment will dispose of [CASE NUMBER], as both of them one by the assessee and the other by the revenue arise out of the same facts and the order of the Income-tax Appellate Tribunal, Chandigarh Bench, dated May 26, 1975. The questions of law referred by the Income-tax Appellate Tribunal in these references are as under :
Questions arising out of the assessee's reference application:
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that Rs. 8 lakhs is not a part of reserve within the meaning of [SECTION] to the [ACT] ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that Rs. 3 lakhs is not a part of reserve within the meaning of [SECTION] to the [ACT]?"
Questions arising out of the revenue's reference 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. 2,40,966 and Rs. 2,09,999 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 [SECTION] to the [ACT] ?"
2. The facts giving rise to these two reference applications are that the assessee known as M/s. Oswal Woollen Mills Ltd., Ludhiana, is a company and the assessment year is 1963-64, the previous year being the calendar year 1962. The issue involved relates to the computation of capital under [SECTION] to the [ACT]. The computation of capital is provided in the aforesaid Act because an assessee gets a standard deduction 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 [ACT]. Under [SECTION], capital was to be computed as on the first day of the previous year, viz., January 1, 1962. In the balance-sheet of the company as on December 31, 1961, there was an item of Rs. 11,09,293.07, being credit balance of profit and loss account, and this amount was shown under the head "Reserve and Surplus". It was common ground that no part of this amount was transferred to any reserve account in the books of the company for the calendar year 1961. The assessee, however, claimed that a sum of Rs. 11,00,000 out of this amount had been subsequently transferred to the reserve account and, therefore, this amount should be included in the capital computation. The amount of Rs. 11,00,000 consisted of two items : (1) Rs. 8 lakhs, and (2) Rs. 3 lakhs ; Rs. 5 lakhs was transferred to the reserve account on April 30, 1962, as per resolution passed by the board of directors of the company on March 1, 1962, but it appeared in the balance-sheet as at December 31, 1962, and Rs. 3 lakhs were credited on August 31, 1963, and appeared in the balance-sheet as at December 31, 1963. Before the ITO, the assessee's claim was that since the amount of Rs. 11,09,293 was not used for distribution of dividends in the subsequent year, it should be treated as a reserve. This contention was rejected by the ITO and for that he relied on the Supreme Court judgment in [PRECEDENT].
3. On appeal by the assessee before the AAC, he found that as on January 1, 1962, the amount of Rs. 11,09,293 was only a mass of undistributed profits and it was only later on that Rs. 8,00,000 was transferred to the reserve account. However, he did not deal with the amount of Rs. 3 lakhs specifically.
4. Being aggrieved, the assessee filed a second appeal before the Income-tax Appellate Tribunal and there, apart from claiming these two amounts of Rs. 8,00,000 and Rs. 3,00,000 as "reserve", the assessee sought permission to raise the following additional ground of appeal:
" That the 'provision for taxation' of Rs. 2,40,966 and 'provision for dividends ' Rs. 2,09,999 may also be considered as a part of the capital employed in the business for the purpose of computation of capital and standard deductions."
5. Though the departmental representative objected to this ground being allowed to be raised at that stage because no such ground was taken before the authorities below, yet the learned Tribunal relying upon a judgment of this court in [PRECEDENT] allowed this additional ground to be taken and ultimately accepted the contention of the assessee relying upon a judgment of the Allahabad High Court in [PRECEDENT]. The view taken by the Allahabad High Court was that the " provision for taxation and provision for dividends" should be considered as " reserves " for the purpose of [SECTION] to the [ACT]. Respectfully following that judgment, the Tribunal directed that 'the amount of Rs. 2,40,966, being " provision for taxation", and Rs. 2,09,999, being " provision for dividends ", should be treated as a part of the "reserves " for the purpose of [SECTION] to the said Act. As regards the other contention, claiming the transfer of Rs. 8,00,000 and Rs. 3,00,000 from the profit and loss account to the reserve fund account, the same was not accepted. Thus, the appeal was partly allowed.
6. Feeling aggrieved against this order of the Tribunal, dated 26th May, 1973, both the parties, i. e., the assessee as well as the revenue, made two separate applications for reference, on which the abovementioned questions have been framed and referred to this court.
7. Question No. 1 arising out of the assessee's reference application is :
" Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that Rs. 8 lakhs is not a part of the reserve within the meaning of [SECTION] to the [ACT]? "
8. Before dealing with this question, it may be stated that the [ACT], enacted by Parliament, imposes a special tax on certain companies. [SECTION] charges the tax on every company for every assessment year from April 1, 1963, in respect of so much of the chargeable profits of the previous year as exceeded the standard deduction at the rates specified in the Third Schedule. The expression "standard deduction " is defined in [SECTION] as " an amount equal to six per cent, of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of fifty thousand rupees, whichever is greater". The Second Schedule contains rules for computing the capital of a company for the purpose of super profits tax, and [SECTION] declares :
"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 [ACT], or under [SECTION] of the [ACT], 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 [ACT], or the [ACT], diminished by the amount by which the cost to it of the assets the income from which in accordance with [SECTION] or [SECTION] or [SECTION] 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 ".
9. For the purpose of [SECTION], the reserves of the company must be added to its paid up capital.
10. While disallowing the amount of Rs. 8,00,000, the learned Tribunal observed :
" The learned counsel for the assessee had pleaded that under [SECTION] of the [ACT] (erroneously mentioned for [SECTION]) the directors were authorised to create reserves. We do not doubt the authority of the directors to create reserve, before recommending any dividends, but the sanction of the directors must have the sanction of the shareholders. In this case we are not satisfied that the shareholders, while adopting the balance-sheet for the year 1961, approved the transfer of Rs. 8,00,000 from the profit & loss account to the reserve fund account. "
11. From these observations it is quite clear that the learned Tribunal rejected the claim of the assessee on the ground that though the board of directors had the authority to create " reserve ", yet it must have the sanction of the shareholders in its general meeting. In the order the Tribunal has also reproduced the resolution of the board of directors, passed on 1st March, 1962, which reads :
" Further it is unanimously resolved that a sum of Rs. 8,00,000 (Rs. eight lakhs) of the accumulated profits be credited to the reserve fund account. "
12. Now, the question for our determination in this case is, whether this resolution of the board of directors was sufficient to create a reserve without the sanction of the shareholders. For that purpose a reference to [SECTION], of the [ACT], is necessary, which are as under :
" 85. The company in general meeting may declare dividends, but no dividend shall exceed the amount recommended by the board.
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 may be 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. "
13. A reading of both the regulations together makes it quite clear that the declaration of dividend is to be made by the shareholders of the company in its general meeting whereas to set aside out of the profits of the company, such sums as it thinks proper as a reseve shall be at the discretion of the board. The reason seems to be obvious. Once any amount is declared as dividend, it is to be paid to the shareholders and is thus no more available to the company for its business and, therefore, this declaration is required to be made by the shareholders of the company in its general meeting whereas setting aside any sum as a reserve remains with the company for its use.
14. We have heard the learned counsel for the parties. The learned counsel for the revenue, in support of his contention that the sanction of the shareholders of the company is necessary, referred to [SECTION] and [SECTION] of the [ACT], as well as to [SECTION] thereof. He also cited the Supreme Court authority, reported as [PRECEDENT]. We do not find that this helps the revenue in any way. No judgment dealing with the matter directly has been cited. [SECTION] of the [ACT] provides the authentication of the balance-sheet and profit and loss account by the board of directors. The business of the company is controlled by the board of directors and they are in the best position to know the affairs of the company and to act in the interests of the company. Thus, in our opinion, the learned Tribunal was wrong in holding that the sanction of the board of directors creating the reserve must have the sanction of the shareholders. There is no such requirement of any law under the [ACT]; rather [SECTION] thereof read with [SECTION] prescribes the board's powers and restrictions thereon. The learned counsel for the revenue then argued that in any case the entry of Rs. 8,00,000 in accordance with the resolution of the board dated 1st March, 1962, was passed on 30th April, 1962, transferring Rs. 8,00,000 from the profit and loss account to the reserve fund account and was not shown in the balance-sheet for the year ending 31st December, 1961. According to him, it could not be held that this amount was a "reserve" on the crucial date. On the other hand, Mr. [ENTITY], learned counsel for the assessee, has referred to [PRECEDENT], also a judgment of the Supreme Court. It has been observed therein thus (p. 569):
" It is well known that the accounts of the company have to be made up for a year up to a particular day. In this case that day was the 31st March, 1963. If it was reasonably practicable to make up the accounts up to the 31st March, 1963, and present the same to the directors of the respondent on April 1, 1963, they could have made up their minds on that day and declared their intention of appropriating the said and other sums to reserves of different kinds. But the fact that they could not do so for the simple reason that the calculation and collection of figures of all the items of income and expenditure of the company for the year ending March 31, 1963, was bound to take some time, cannot make any difference to the nature or quality of the appropriation of the profits to reserves as determined by the directors after the 1st of April, 1963. Their determination to appropriate the sums mentioned to the three separate classes of reserves on the 8th August, 1963, must be related to the 1st of April, 1963, i. e., the beginning of the accounts for the new year and must be treated as effective from that day. "
15. Applying these observations to the facts of the present case, it is quite clear that the entry made on 30th April, 1962, in pursuance of the resolution of the board of directors, passed on 1st March, 1962, transferring Rs. 8,00,000 from the profit and loss account to the reserve fund account, relates back to 1st January, 1962, i.e., the beginning of the accounts for the new year and must be treated as effective from that date. In this view of the matter, we hold that the learned Tribunal was not justified in law in holding that Rs. 8,00,000 is not a part of reserve within the meaning of [SECTION] to the [ACT]. Thus, the answer to this question is against the revenue and in favour of the assessee.
16. Question No. 2 arising out of the assessee's application :
" Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that Rs. 3,00,000 is not a part of reserve within the meaning of [SECTION] to the [ACT]?"
17. As regards the answer to this question, it is quite clear that with respect to this amount of Rs. 3,00,000 the board of directors passed a resolution on 29th June, 1963, for the first time, whereas the accounts for the year 1961 were passed in the year 1962, when a sum of Rs. 8,00,000 was credited to the reserve fund account. Therefore, the Tribunal rightly decided that this amount of Rs. 3,00,000 could not be considered as a part of the "reserve" as on 1st January, 1962. Thus, the answer to this question is in favour of the revenue and against the assessee.
18. Question No. 1 arising out of the revenue's reference application :
" 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 ? "
19. In view of the decision of this court in [PRECEDENT], the learned Tribunal rightly allowed the additional ground of appeal to be taken. The judgment of the Gujarat High Court in [PRECEDENT], relied upon by the learned counsel for the revenue, was also noted by the Tribunal. As regards the view of this court referred to above, it has again been reiterated in [PRECEDENT]. In view of these earlier authorities of this court, we hold that the Tribunal was right in law in allowing the additional ground to be taken for the first time before it. Thus, the answer to this question is in favour of the assessee and against the revenue.
20. Question No. 2 arising out of the revenue's reference application :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amounts of Rs. 2,40,966 and Rs. 2,09,999, respectively, for provision for taxation and provision for dividends could be treated as 'reserves' to be included in the computation of the assessee's capital under [SECTION] to the [ACT]?"
21. The Tribunal allowed these two amounts to be treated as "reserve", relying upon the judgment of the Allahabad High Court in [PRECEDENT]. It was held therein that the "provision for taxation" and "provision for dividends" should be considered as reserves for the purpose of [SECTION] to the [ACT]. The learned counsel for the revenue argued that in view of the recent authority of this court in [PRECEDENT], the "provision for taxation" and "provision for dividends" cannot be treated as "reserve" within the meaning of [SECTION] to the [ACT]. He also cited another authority of this court in [PRECEDENT] in this respect. Some other High Courts have also taken the same view as in the judgments in [PRECEDENT], [PRECEDENT] and [PRECEDENT]. On the other hand, the learned counsel for the assessee has relied upon a judgment of the Calcutta High Court in [PRECEDENT]. The hon'ble judges in that case have differed from the view taken by the Bombay High Court in [PRECEDENT] and have taken the view that the expression "reserve" in [SECTION] meant reserve in the ordinary sense and need not be considered in contradistinction to "provision". However, we are not inclined to agree with the view taken by the Calcutta High Court in [PRECEDENT] and we concur with the view taken by this court in [PRECEDENT].
22. The learned counsel for the assessee also tried to argue that there is no finding that these two amounts, i. e., the "provision for taxation" and "provision for dividends" were made for discharging an existing liability. Under the circumstances, it was not warranted, since the Tribunal relied upon the Allahabad High Court judgment in [PRECEDENT], in which it was held that the "provision for taxation" and "provision for proposed dividends" by a company are entitled to be treated as " reserve " for the purpose of [SECTION] to the [ACT], and included these amounts in the computation. We are not inclined to agree with the views taken by the Allahabad and Calcutta High Courts and, relying upon the judgments of this court and other High Courts, we hold that the Tribunal was wrong in holding that the amounts of Rs. 2,40,966 and Rs. 2,09,999, respectively, for "provision for taxation "and" provision for dividends" should be treated as a part of the " reserve " for the purposes of [SECTION] to the [ACT]. Accordingly, this question is answered in the negative, i. e., in favour of the revenue and against the assessee. The references are disposed of accordingly.
[ENTITY], J.
I agree.