1982 (7) TMI 58 - HC - Income Tax

Staff Gratuity Reserve not a reserve under Companies Surtax Act. Provision for contingent liability. Case remanded for further proceedings.

The High Court of BOMBAY determined that the Staff Gratuity Reserve did not qualify as a reserve under the Companies (Profits) Surtax Act, 1964. The ... Capital Reserve, Company, Surtax Issues:1. Interpretation of whether Staff Gratuity Reserve constitutes a reserve as per the Companies (Profits) Surtax Act, 1964.Analysis:The High Court of BOMBAY was presented with a reference under s. 18 of the Companies (Profits) Surtax Act, 1964, in conjunction with s. 256(1) of the I.T. Act, 1961. The primary issue revolved around determining if the Staff Gratuity Reserve of Rs. 1,57,967 as on 1st January, 1963, qualified as a reserve under rule I of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The case pertained to the assessment year 1964-65, focusing on the computation of the assessee-company's capital for surtax purposes. The directors had allocated the mentioned sum to the staff gratuity reserve from the profits of the previous year. The Income Tax Officer (ITO) did not include this amount in the company's capital for surtax purposes, a decision upheld by the Appellate Authority. Subsequently, the Income-tax Appellate Tribunal determined that the amount represented a provision for a contingent liability and should be included in the capital for surtax purposes, leading to the current reference.The court referred to the decision in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559, where it was established that an appropriation to a gratuity reserve typically constitutes a provision for a contingent liability. The Supreme Court's ruling emphasized the importance of a scientific basis for such appropriations to accurately represent known liabilities. The High Court concurred that the amount in question was set aside on an ad hoc basis for a contingent liability, aligning with the Supreme Court's interpretation. Despite the respondent's counsel suggesting a remand for further evaluation, the court highlighted its limited jurisdiction in a reference and declined the request. However, the court allowed the assessee to argue, upon remand to the Tribunal, that any portion of the amount exceeding the actuarially calculated liability for gratuity should be included in the company's capital for surtax purposes.Consequently, the court answered the referred question in the negative, favoring the taxing authority. The case was directed back to the Tribunal for further proceedings, with the expectation that the Tribunal and taxing authorities would follow the procedure outlined by the Supreme Court in similar cases. No costs were awarded, considering the circumstances of the case.