1984 (2) TMI 12 - HC - Income Tax

Retirement Gratuity Treatment Ruling: Provisions vs. Reserves Clarified

The High Court held that the retirement gratuity amounts were not entirely to be treated as reserves under the Companies (Profits) Surtax Act, 1964. ... Company, Surtax Issues:1. Whether the retirement gratuity amounts were to be treated as 'reserve' under the Companies (Profits) Surtax Act, 1964.Analysis:The judgment pertains to a case stated under section 256(1) of the Income-tax Act, 1961, involving assessment years 1964-65 and 1965-66. The main issue was whether the 'Retirement Gratuity Reserves' appearing in the books of the assessee were to be included in the capital computation for assessment under the Companies (Profits) Surtax Act, 1964. The amounts in question were shown as provision for service gratuity in the balance-sheets, not as lump sum appropriations. The Income-tax Officer treated them as provisions, while the Appellate Assistant Commissioner held them to be reserves. The Tribunal upheld the latter view, leading to the reference question on the treatment of these amounts as reserves.The judgment cites the decision in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559, emphasizing that appropriations to gratuity reserves are typically considered provisions for contingent liabilities. The Supreme Court's ruling in that case clarifies the distinction between provisions and reserves based on actuarial valuation and scientific basis. Following this precedent, the High Court concludes that the entire amounts in question cannot be treated as reserves under the Companies (Profits) Surtax Act, 1964. However, it notes that parts of these amounts may qualify as provisions, while others may be reserves.The High Court directs the Tribunal to determine which portions of the amounts are reserves and which are provisions, in line with the Supreme Court's guidance. The Tribunal is instructed to compute the assessee company's capital accordingly, providing both the assessee and the Department an opportunity to present relevant material. The judgment concludes by stating that each party will bear their own costs related to the reference, emphasizing the need for a detailed assessment of the nature of the amounts in question before finalizing the capital computation.