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Issues: (i) Whether dividend declared after the first day of the relevant previous year had to be deducted from the balance of the general reserve on that day while computing statutory deduction under the Companies (Profits) Surtax Act, 1964. (ii) Whether the assessee's debenture redemption reserve and gratuity reserve constituted reserves includible in the computation of capital under the Companies (Profits) Surtax Act, 1964.
Issue (i): Whether dividend declared after the first day of the relevant previous year had to be deducted from the balance of the general reserve on that day while computing statutory deduction under the Companies (Profits) Surtax Act, 1964.
Analysis: The answer was governed by the principle laid down by the Supreme Court on the treatment of reserves for surtax purposes. On the agreed position, the dividend declared after the relevant date was required to be taken into account in the manner indicated by the controlling precedent.
Conclusion: The issue was answered in the affirmative and against the assessee, in favour of the Revenue.
Issue (ii): Whether the assessee's debenture redemption reserve and gratuity reserve constituted reserves includible in the computation of capital under the Companies (Profits) Surtax Act, 1964.
Analysis: The issue was concluded by applying the court's earlier decisions in the assessee's own matters. The reserves were held to be includible, but in the case of gratuity reserve only the amount in excess of the actuarially determined gratuity liability could be treated as a reserve.
Conclusion: The issue was answered in the negative and against the assessee, in favour of the Revenue, subject to exclusion of any part of the gratuity reserve not in excess of the actuarial liability.
Final Conclusion: Both referred questions were answered against the assessee and in favour of the Revenue, with a limited remand-like direction to verify the excess, if any, in the gratuity reserve while giving effect to the answer.
Ratio Decidendi: For surtax computation, the character of a reserve must be determined according to the legal principles governing that head of account, and a gratuity reserve counts as a reserve only to the extent it exceeds the actuarially determined gratuity liability.
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