Gratuity reserve treated as capital reserve where no actual liability was shown, making it includible in capital computation.

A sum described as "gratuity reserve" was held to be a reserve, not a provision for a definite gratuity liability, where it was carried forward unchanged in the balance-sheet and had no correlation with any actual or estimated liability. On that basis, the amount was includible in the computation of capital under the relevant Second Schedules to the super profits tax and surtax enactments. The governing principle is that an ad hoc allocation for gratuity, without linkage to a quantified or reasonably estimated liability, is treated as a reserve for capital computation purposes.

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Issues: Whether the amount described as "gratuity reserve" was a reserve includible in the computation of capital under the relevant Second Schedules to the super profits tax and surtax enactments.

Analysis: The amount of Rs. 1,70,000 was carried forward unchanged in the balance-sheet across the assessment years, indicating that it was set apart in an ad hoc manner without correlation to any actual or estimated gratuity liability. On that footing, the amount was treated as a reserve rather than a provision for a definite liability, and therefore fell to be included in the computation of capital under the applicable rules.

Conclusion: The amount was includible in the computation of capital and the issue was answered in favour of the assessee.

Ratio Decidendi: A sum set apart as gratuity reserve without linkage to an actual or estimated liability is a reserve and not a liability provision, and is includible in capital computation under the relevant super profits tax and surtax rules.

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