1985 (2) TMI 35

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....e capital of the assessee for determining the statutory deduction, the assessee had included an amount of Rs. 3,73,080 shown as forfeited dividend in its capital. The ITO held that forfeited dividends did not have the character of reserve as they were in the nature of liabilities and, therefore, excluded the same in computing the capital of the assessee. On appeal, the AAC upheld the assessment following a decision of the Allahabad High Court. On further appeal by the assessee, the Income-tax Appellate Tribunal, following its earlier decision in the case of the assessee for the assessment year 1963-64, affirmed the order of the AAC. The present reference is at the instance of the assessee under s. 256(1) of the I.T. Act, 1961, read....

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....r the Revenue, however, contended that the above decision was concerned with the Super Profits Tax Act, 1963, and was not necessarily an authority in respect of the said Act. He submitted further that the Supreme Court has thereafter further laid down the law in the matter in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559. He cited the said decision of the Supreme Court in support of his contention. The Supreme Court, in the case before it, considered, inter alia, whether provisions (a) for taxation, (b) for retirement gratuity, and (c) for proposed dividends, made out of the profits and other surpluses, would be considered as reserves within the meaning of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, or rule 1....

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.... reasonably necessary for the purpose, the excess shall have and the purpose for which such appropriations had been made. (p. 579) ...... the true nature and character of the appropriation must be determined with reference to the substance of the matter ; obviously this means that one must have regard to the intention with which and the purpose for which appropriation has been made, such intention and purpose being gathered from the surrounding circumstances. In that behalf, the following aspects mentioned in the judgment provide some guidelines: (a) a mass of undistributed profits cannot automatically become a reserve and that somebody possessing the requisite authority must clearly indicate that portion thereof has been earmarked or separ....