DIPAK KUMAR SEN, J. ( 1 ) THE Gramophone Co. of India Ltd. , the assessee, was assessed to Companies (Profits) Surtax Act, 1964, for the assessment years 1969-70 to 1972-73, the relevant accounting years ending on the 30th Jane of the calendar years 1968 to 1971. In the assessments for the assessment years 1969-70 and 1970-71, the Income-tax Officer allowed deduction under Section 80-O of the Income-tax Act, 1961, without proportionate deduction in the computation of the capital. In the said assessment years 1969-70 and 1970-71, the Income-tax Officer, in computing the capital of the assessee, allowed the inclusion of the reserve for doubtful debts and advances and for the said assessment year 1970-71, the Income-tax Officer also included an amount under the head "tax equalisation reserve ". ( 2 ) THE Commissioner of Income-tax, West Bengal III, by his letter dated 31st May/1st June, 1974, informed the assessee that he proposed to revise the assessments of surtax for the said assessment years 1969-70 and 1970-71 under Section 16 of the Surtax Act. ( 3 ) IN its reply to the said letter of the Commissioner, dated June 26, 1974, the assessee requested the Commissioner to drop the proceedings under Section 16 and also made representations on merits supporting the assessments already made. ( 4 ) THE Commissioner of Income-tax passed a consolidated order on July 25, 1974, under Section 16 of the Surtax Act rejecting the contentions of the assessee. He held that in the case of the assessee, since its income by way of royalty, etc. , received from foreign companies having been deducted in computing the assessee's total income under the Income-tax Act, rule 4 of the Second Schedule to the Surtax Act would apply in the case of the assessee in the computation of its capital for the purpose of surtax. He also held that the reserve for doubtful debts and advances for the assessment years 1969-70 and 1970-71 should not be regarded as a reserve for computation of capital and for the assessment year 1969-70, the tax equalisation reserve should be treated as a provision and not as a reserve. ( 5 ) THE Commissioner directed the Income-tax Officer to recompute the capital of the assessee for the purpose of surtax by excluding the said reserves. ( 5 ) THE Commissioner directed the Income-tax Officer to recompute the capital of the assessee for the purpose of surtax by excluding the said reserves. He further directed the Income-tax Officer to reduce the capital for both the assessment years proportionately under Rule 4 of the Second Schedule to the Surtax Act in respect of the deductions made under Section 80-0 of the Income-tax Act, 1961, in computing the assessee's total income under the Act. The surtax assessments already made were directed to be revised accordingly. ( 6 ) THE assessee, being aggrieved, preferred appeals from the order of the Commissioner of Income-tax before the Tribunal. ( 7 ) FOR the assessment years 1971-72 and 1972-73, the Income-tax Officer, while computing the capital base of the assessee for the purpose of surtax, did not take into consideration for the computation of capital base of the assessee the following reserves : (a) Tax equalisation reserve. (b) Reserve for doubtful debts and advances. ( 8 ) THE assessee also preferred appeals against the assessments for the said assessment years 1971-72 and 1972-73. The Appellate Assistant Commissioner by his consolidated order dated March 30, 1974, held that the tax equalisation reserve should be included in the capital base under the Second Schedule to the Surtax Act but the receive for doubtful debts and advances should not be so included. ( 9 ) AGAINST the order of the Appellate Assistant Commissioner, both the Revenue and the assessee came up on appeal before the Tribunal which were consolidated and heard together. ( 10 ) FOLLOWING a decision of the Karnataka High Court, it was held by the Tribunal that the Commissioner of Income-tax was not justified in directing the Income-tax Officer to reduce the capital base proportionately under rule 4 of the Second Schedule to the Surtax Act in respect of the deduction granted to the assessee under Section 80-0 of the Income-tax Act, 1961. ( 11 ) FOLLOWING the decision of the Allahabad High Court in CIT v. British India Corporation (P.) Ltd. [1973] 92 ITR 38, the Tribunal held that reserve or reserves for doubtful debts and advances should be included in the computation of the capital base for the purpose of granting statutory deduction as contemplated in Section 2 (8) of the Surtax Act. In respect of the tax equalisation reserve, the Tribunal, following the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. CWT [1966] 59 ITR 767, held that the tax equalisation reserve should also be included in the computation of the capital base. ( 12 ) ON an application of the Revenue under Section 256 (1) of the Income-tax Act, 1961, the Tribunal has referred the following questions as questions of law arising out of its order for the opinion of this court: assessment years 1969-70 and 1970-71 I"whether, on the facts and in the circumstances of the case, and on a correct interpretation of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the Tribunal was correct in holding that a diminution of the capital, in proportion to the deduction allowed under Section 80-0 of the Income-tax Act, 1961, in computing the total income of the assessee under the latter Act, was not permissible ? "assessment years 1969-70, 1970-71, 1971-72 and 1972-73:" Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that amount set apart as "reserve for Doubtful Debts and Advances" and "tax Equalisation Reserve" were "reserves" within the meaning of Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, and should be included in computing the capital of the assessee under the said Schedule ? " ( 13 ) AT the hearing before us, the learned advocate for the assessee submitted that the controversy raised by the common question referred for the assessment years 1969-70 and 1970-71 is covered by a decision of this court in CIT v. Schrader Scovill Duncan Ltd. A Division Bench of this court held in that case that the deductions contemplated under Section 80-1 and Section 80j of the Income-tax Act, 1961, could not be described as incomes " not includible in the total incomes " within the meaning of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, and that the capital computed under the said Act should not be proportionately reduced having regard to the said deductions allowed under the said Sections 80-I and 80j. The Division Bench came to the said conclusion following a decision of the Supreme Court in the case of Cloth Traders (P.) Ltd. v. Addl. The Division Bench came to the said conclusion following a decision of the Supreme Court in the case of Cloth Traders (P.) Ltd. v. Addl. CIT and also the decisions of several other High Courts. Following the principles laid down in the said decision, we answer the said question in the affirmative and in favour of the assessee. ( 14 ) ON the common question referred for the assessment years 1969-70 to 1972-73, the learned advocates appearing for the parties cited the following decisions: (a) CIT/spt v. Eyre Smelting Pvt. Ltd. Here, a Division Bench of this court considered whether provision made in the accounts of the assessee for bad and doubtful debts under two separate heads being " Debts outstanding for a period exceeding six months and considered doubtful "and" Advances recoverable in cash or in kind or value to be received unsecured and considered doubtful" was to be treated as a reserve for the purpose of the computation of capital under the provisions of the Super Profits Tax Act, 1963. It was held that the amount set apart in that case did not have the characteristics of a reserve as laid down by the Supreme Court in the case of Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SCJ and also in CIT v. Century Spinning and Manufacturing Co. Ltd. but that the said amounts had all the characteristics of a provision. It was held that the said amounts should be treated not as a reserve but as a provision for the purpose of the computation of capital; (b) Upper Ganges Sugar Mills Ltd. v. CIT: In this case, a Division Bench of this court considered whether adjustment made in respect of excess depreciation charged in earlier years could not be treated as part of the capital for the purpose of determining the statutory deduction under Section 2 (8) of the Companies (Profits) Surtax Act, 1964. It was found that the assessee had been claiming depreciation following the written down value method up to an assessment year but in the assessment year in question, the assessee changed its method and adopted the straight line method and the excess depreciation was adjusted in the manner as computed under Section 205 (2) (b) of the Companies Act, 1956. The Income-tax Officer had included the excess depreciation adjusted in the general reserve. The Income-tax Officer had included the excess depreciation adjusted in the general reserve. The Commissioner reversed the decision of the Income-tax Officer and directed that the said adjustment should be excluded from the computation of capital. On an appeal, the Tribunal held that a reserve brought into existence by creating or increasing by revaluation or otherwise of its book assets should not be considered to be capital for computation under rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The decision of the Tribunal was upheld by this court. This decision does not appear to be of any particular relevance to the disputes in this reference ; (c) Vazir Sultan Tobacco Co. Ltd. v. CIT: In this case, the Supreme Court again considered and construed the expression "provisions" and "reserves" in the context of the Companies (Profits) Surtax Act, 1964. The Supreme Court observed as follows (at pages 570, 571):" Though the term 'provision ' is defined positively by specifying what it means, the definition of ' reserve ' is negative in form and not exhaustive in the sense that it only specifies certain amounts which are not to be included in the term ' reserve '. In other words, the effect of reading the two definitions together is that if any retention or appropriation of a sum falls within the definition of ' provision ', it can never be a reserve but it does not follow that if the retention or appropriation is not a provision, it is automatically a reserve and the question will have to be decided having regard to the true nature and character of the sum so retained or appropriated depending on several factors including the intention with which and the purpose for which such retention or appropriation has been made because the substance of the matter is to be regarded and in this context, the primary dictionary meaning of the term ' reserve ' may have to be availed of. But it is clear beyond doubt that if any retention or appropriation of a sum is not a provision, that is to say, if it is not designated to meet depreciation, renewals or diminution in value of assets or any known liability, the same is not necessarily a reserve. . . (at page 573 ). But it is clear beyond doubt that if any retention or appropriation of a sum is not a provision, that is to say, if it is not designated to meet depreciation, renewals or diminution in value of assets or any known liability, the same is not necessarily a reserve. . . (at page 573 ). There could be no dispute about the principle that if provision for a known or existing liability is made in excess of the amount that would be reasonably necessary for the purpose, the excess shall have to be treated as a reserve and, therefore, would be includible in the capital computation. . . . . . (at p. 579 ). The question whether the concerned amounts in fact constituted ' reserves' or not will have to be decided by having regard to the true nature and character of the sums so appropriated depending on the surrounding circumstances particularly the intention with which and the purpose for which such appropriations had been made. . . . . . (at p. 581) (a) a mass of undistributed profits cannot automatically become a reserve and that somebody possessing the requisite authority must clearly indicate that a portion thereof has been earmarked or separated from the general mass of profits with a view to constituting it either a general reserve or a specific reserve, (b) the surrounding circumstances should make it apparent that the amount so earmarked or set apart is in fact a reserve to be utilised in future for a specific purpose and on a specific occasion. '' ( 15 ) IN the instant case, it has been found by the Tribunal that when a debt or advance is more than six months old, a percentage of the same is set apart out of the current year's profit as a reserve. When the recovery is extremely doubtful, 100% of the debt is debited to the profit and loss account. The Tribunal found that the amounts have in earlier years been treated as " reserve " for the purpose of the Super Profits Tax Act. So far as the Tax Equalisation Reserve was concerned, it was found by the Appellate Assistant Commissioner that the said reserve was created for the first time in the accounts of the assessee for the year ending on June 30, 1966. So far as the Tax Equalisation Reserve was concerned, it was found by the Appellate Assistant Commissioner that the said reserve was created for the first time in the accounts of the assessee for the year ending on June 30, 1966. Additions have been made to this account every year thereafter on the basis of the book value of the assets and the written down value as per the income-tax assessment. No withdrawals have been made from this reserve since its inception. The Appellate Assistant Commissioner found that the assessee had provided funds separately for taxation which were utilised for payment of tax liability from year to year. The Tribunal appears to have accepted the submissions of the assessee that the Tax Equalisation Reserve was not created for meeting any taxation liability and had nothing to do with any taxation liability of the assessee, in the present or in the future. ( 16 ) ON the aforesaid finding and following the law laid down by the Supreme Court in Vazir Sultan Tobacco Co, Ltd. 's case [1981] 132 ITR 559, it appears to us that the amount set apart under the head "tax Equalisation Reserve" is wholly in excess of the amount that may be reasonably necessary for meeting the known or existing tax liability and this excess is to be treated as a reserve and included in the capital computation. ( 17 ) WE answer the common question for the said assessment years 1969-70 to 1972-73 in the affirmative to the extent as above and in favour of the assessee. ( 18 ) THE said question so far as it concerns the "reserve for doubtful debts and advances" cannot be answered as there is no finding whether the amount set apart under this head is in excess of what may be reasonably necessary to meet a known or expected liability. We remand the matter to the Tribunal to be disposed of in accordance with the principles laid down by the Supreme Court in Vazir Sultan Tobacco Co. Ltd. 's case [1981] 132 ITR 559. The Tribunal will, if necessary, call for further evidence in the matter. .