Reserve classification for surtax capital depends on actual character; excess gratuity provision alone may count as reserve.

For surtax capital computation, an amount qualifies as reserve only if it retains that character under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. Applying the Supreme Court ruling in Vazir Sultan Tobacco Co. Ltd. v. CIT, the dividend reserve was not includible as reserve. The gratuity appropriation was also not wholly includible; the matter was remanded to determine whether it exceeded the actuarially ascertained gratuity liability, in which event only the excess would be treated as reserve and included in capital. The reference was thus answered against the assessee on both questions, subject to that limited remand issue.

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Issues: (i) Whether the dividend reserve of Rs. 3,50,000 was includible as reserve in the computation of the assessee-company's capital for the assessment year 1967-68 under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964; (ii) Whether the gratuity reserve of Rs. 4,00,000 was includible as reserve in the computation of the assessee-company's capital for the assessment year 1967-68 under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Issue (i): Whether the dividend reserve of Rs. 3,50,000 was includible as reserve in the computation of the assessee-company's capital for the assessment year 1967-68 under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The question was answered in the light of the binding Supreme Court decision in Vazir Sultan Tobacco Co. Ltd. v. CIT, which governed the character of the amount as reserve for surtax purposes.

Conclusion: The amount was not includible as reserve and the issue was answered in the negative, in favour of Revenue.

Issue (ii): Whether the gratuity reserve of Rs. 4,00,000 was includible as reserve in the computation of the assessee-company's capital for the assessment year 1967-68 under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The same Supreme Court decision was applied. The matter was sent back to determine whether the appropriation towards gratuity reserve exceeded the actuarially determined gratuity liability. Any excess was to be treated as reserve and included in capital under the statutory rule.

Conclusion: The amount was not wholly includible as reserve; the issue was answered in the negative, in favour of Revenue, subject to determination of any excess on remand.

Final Conclusion: The reference was answered against the assessee on both questions, and the Tribunal was required to decide only the limited question whether any excess of the gratuity provision over the actuarial liability had to be treated as reserve.

Ratio Decidendi: For surtax computation, an amount is includible as reserve only to the extent it retains the character of reserve, and where a gratuity appropriation exceeds the actuarially ascertained liability, only the excess can be treated as reserve.

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