ARIJIT PASAYAT, C. J. (ORAL) ( 1 ) ACCEPTING prayer for reference made by the Revenue by applications undersection 2561 (1) of the Income-tax Act, 1961 ( the Act for short), the Income-taxappellate Tribunal, Delhi Bench-E ( the Tribunal for short) has referred the followingquestions, pertaining to assessment years 1973-74 and 1974-75, for opinion of thiscourt: "1. Whether on the facts and in the circumstances of the case the Tribunalwas justified in including the dividends of Rs. 7,37,028. 00 and Rs. 27,27,790. 00declared by the assessee company in respect of the assessment years1973-74 and 1974-75 respectively in the capital base on the fist day inrespect of the respective accounting periods relevant to the assessmentyears 1973-74 and 1974-75 for the purpose of computing the chargeableprofits under the Companies (profits) Sur-tax Act, 1964?2. Whether on the facts and in the- circumstances of the case, the Tribunalwas justified in confirming the direction given by the Appellate Assistantcommissioner to the Income-tax Officer that the capital of the assesseecompany was not to be reduced by an amount of Rs. 19,04,304. 00 representingcapital for relief under Section 80-J for each of the assessment years 1973-7. 4 and 1974-75?" ( 2 ) A brief reference to the factual aspects would suffice. Assessee adopts thecalendar year as its period of accounting. The accounts were closed on 3 1/12/1972 and 31/12/1973 respectively for the concerned twoassessment years. Assessee claimed that sum of Rs. 7,37,028. 00 and Rs. 27,27,790. 00, which were ultimately declared as dividend after the annual general meetings heldrespectively on 19/06/1973 and 3/06/1974, qualified for inclusion in thecapital base under the Companies (Profits) Sur-tax Act, 1964 (for short the Sur-taxact ). The Sur-tax Officer, rejected the assessee s claim and excluded the dividendsfor both the years on the ground that the assessee company did not make anyappropriation of profits by making a provision for dividend in the accounts and wasnot thus entitled to lessen the incidence of sur-tax. Relief claimed under Section 80jof the Act while computing the capital also was a subject-matter of dispute. It washeld by the Assistant Appellate Commissioner (AAC for short) that assessee s claimunder Section 80j was allowable. Revenue challenged the ACC s order before thetribunal. Reliefs granted on the aforesaid two scores were assailed. Relief claimed under Section 80jof the Act while computing the capital also was a subject-matter of dispute. It washeld by the Assistant Appellate Commissioner (AAC for short) that assessee s claimunder Section 80j was allowable. Revenue challenged the ACC s order before thetribunal. Reliefs granted on the aforesaid two scores were assailed. Tribunal heldthat when dividend becomes payable out of the general reserve, there was noquestion of making any provision for the dividend which can be deducted from thegeneral reserve for the purpose of determining the capital of the company under thesur-tax Act. It was inter alia observed that in such a case, the liability arisesprospectively and, therefore, there is no question of any relating back to the first dayof the accounting year. It was held that a subsequent approval can relate back to anact which was performed earlier; and if there was no act performed earlier, there isno question of subsequent approval relating back to the same. So far as relief undersection 80j of the Act is concerned, reliance was placed on a decision of thekarnataka High Court in Stumpp, Schuele and Somappa Pvt. Ltd v. Secondincome-tax Officer, Company Circle, Bangalore and Others, 1976 102 ITR 320and Second income-tax Officer, Company Circle, Bangalore and Another s. Stumpp, Schuele and Somappa Private Limited (1977) 106 ITR 399 to sustainrelief granted by the assessee. ( 3 ) LEARNED counsel for the Revenue submitted that approach of the Tribunal iserroneous because the liability arises only retrospectively and there is no question ofit arising prospectively. Relief granted under Section 80j was assailed on the groundthat the provisions have been misinterpreted. Learned counsel for the assesseesupported the conclusions of the AAC and the Tribunal. So far as relief under Section80j is concerned, reliance was placed by him on a decision of the Apex Court insecond Income-tax Officer and Another s. Stumpp Schuele and Somappa P. Ltd. (1991)187 ITR 108 to submit that the relief granted was in order. ( 4 ) IN Indian Tube Co. Private Limited v. Commissioner of Income-tax (1992)194 ITR 102 the Apex Court indicated the distinction between "provisions" and"reserve". If an amount is set aside out of profits and other surpluses, not to meet anyliability, contingency, commitment or diminution in the value of the assets known toexist at the time of the balance-sheet, it is a "reserve". Private Limited v. Commissioner of Income-tax (1992)194 ITR 102 the Apex Court indicated the distinction between "provisions" and"reserve". If an amount is set aside out of profits and other surpluses, not to meet anyliability, contingency, commitment or diminution in the value of the assets known toexist at the time of the balance-sheet, it is a "reserve". The amount set aside out ofprofits and other surpluses to provide for any known liability of which the amount couldbe determined with certainity, is a "provision". The position has been elaboratelydealt with any an eminent under William Pickles in his book "accountancy" (2ndedition at page 192 ). Creating a reserve out of the profit is a stage distinct in point offact and anterior in point of time to the stage of making a recommendation forpayment of dividend by the general body of the shareholders. A conjoint reading ofthe scheme of the Sur-tax Act and the Companies Act, 1956 (in short the Companiesact) suggests that the appropriation made by the board of directors by recommendingpayment of dividend, in the nature of things, does not constitute a "reserve". Theresolution by the general body of the shareholders to declare dividend out of profits ata particular percentage crystalises into a liability, and subsequent payment relatesback to the relevant date, namely, the closing of the accounting year during which theliability had arisen. ( 5 ) reserve has to be clearly distinguished from provision". As per the clarificationcontained in Part III of Schedule VI of the Companies Act, reserve does not include"any amount written of or retained by way of providing for depreciation, renewals ordiminution in the value of assets or retained by way of providing for any knownliability". On the ether hand provision is an "amount written off or retained by way ofproviding for depreciation, renewals or diminution in the value of assets or retainedby way of providing for any known liability of which the amount cannot be determinedwith substantial accuracy". If a provision has been made for an amount in excess ofwhat is considered by the Directors as reasonably necessary for the purposes, theexcess should be treated as a reserve. and not a a provision. Thus, if there is aprovision for taxation of Rs. 5,00,000. 00 whereas only Rs. 3,00,000. 00 are necessary forthis purpose, Rs. 2,00,000. 00 should be treated as a reserve and not as a provison. and not a a provision. Thus, if there is aprovision for taxation of Rs. 5,00,000. 00 whereas only Rs. 3,00,000. 00 are necessary forthis purpose, Rs. 2,00,000. 00 should be treated as a reserve and not as a provison. ( 6 ) DISTINCTION between "provision" and "reserve" was discussed in Metal Box Co. India Ltd. v. Their Workmen AIR 1969 SC 612 . The Apex Court observed "thedistinction between a provision and a reserve is in commercial accountancy fairlywell known. Provisions made against anticipated losses and contingencies arecharges against profits and therefore, to be taken into account against gross receiptsin the Pandl account and the balance-sheet. On the other hand, reserves areappropriations of profits, the assets by which they are represented being retained toform part of the eapital employed in the business. Provisions are usually shown in thebalance-sheet byway of deductions from the assets in respect of which they aremade whereas general reserves and reserve funds as shown as part of the proprietor sinterest. ( 7 ) THE distinction made by William Pickles as indicated, above was noted by thesupreme Court in Vazir Sultan Tobacco Co. Ltd. Vs. Commissioner of Income Tax AIR 1981 SC 2105 . Itwas held that on a plain reading of these terms "provision" was defined positively byspecifying what it meant, whereas "reserve" was defined in a negative form and wasnot exhaustive in the sense that it only specifies certain amounts which was notincluded in the term "reserve". The Court said: "in other words, the effect of readingthe two definitions together is that if any retention or appropriation of a sum falls withinthe definition of "provision" it can never be a "reserve", but it does not follow that if theretention or appropriation is not a "provision" it is automatically a "reserve" and thequestion will have to be decided having regard to the true nature and character of thesum so retained of appropriated depending on several factors including the intentionwith which and the purpose for which such retention or appropriation has been madebecause the substance of the matter is to be regarded and in this context the primarydictionary meaning of term reserve may have to be availed of. But it is clear beyonddoubt that if any retention or appropriation of a sum is not a provision, that is to say, ifit is not designed to meet depreciation, renewals or diminution in value of assets orany known liability, the same is not necessarily a reserve". ( 8 ) In Karamchand Premchand Vs. CIT, Madras, AIR 1993 SC 1613 it was heldthat an. amount set apart for proposed dividend and profit/sharing bonus cannot beregarded as reserves but the amount set apart from pension scheme is a provision . An amount credited to depreciation fund which was in excess of the amount actuallyallowed as depreciation in the assessment would constitute a reserve within themeaning of Sur-tax Act. ( 9 ) THE above being the position, answer to the first question has to be in thenegative i. e. in favour of the Revenue and against the assessee. ( 10 ) SO far as the second question is concerned, as accepted by learned counsel, inview of decision of the Apex Court in Second Income-tax Officer and Another Vs. Stumpp Schuele and Somappa P. Ltd. (1991 ) 187 ITR 108 answer to the secondquestion has to be in the affirmative i. e. in favour of the assessee and against the Revenue. The reference is accordingly disposed of.