Gratuity reserve treated as provision, not reserve, where no actuarial excess was shown for surtax capital computation.

An appropriation to a gratuity reserve is ordinarily a provision for contingent liability, not a reserve, and an ad hoc transfer without scientific or actuarial valuation does not qualify for inclusion in capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964. Only any excess over a proper actuarial liability may potentially be treated as a reserve. On the facts, the amount set apart for expected gratuity liability was not shown to exceed the actuarially computed liability, so it was excluded from the company's capital for surtax purposes.

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Issues: Whether the staff gratuity reserve of Rs. 1,57,967 as on 1 January 1963 constituted a reserve within rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, so as to be included in the company's capital for surtax purposes.

Analysis: The relevant principle was that an appropriation to gratuity reserve is ordinarily to be treated as a provision for a contingent liability. Where the amount is set apart on an ad hoc basis without any scientific or actuarial valuation, it is not a reserve. Only where a provision exceeds the amount required on a proper actuarial basis can the excess potentially be regarded as a reserve. On the facts found, the sum in question had been transferred merely to meet the expected gratuity liability and was not shown to represent any excess over an actuarially computed liability.

Conclusion: The amount did not constitute a reserve and was not includible in the company's capital for surtax purposes. The answer was against the assessee and in favour of the Revenue.

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