Gratuity reserve treated as capital: future contingent liability without actuarial ascertainment was held to be a reserve, not a provision.

An amount set apart for future gratuity payments was treated as a reserve, not a provision, for capital computation under the Super Profits Tax Act, 1963. The Court held that a gratuity liability arising on death, retirement, resignation or similar future events is contingent and not an existing liability in praesenti. Because the amount had not been actuarially ascertained as a present liability and was not charged against current profits, it remained part of the company's funds held for future use. It was therefore includible in capital under the Second Schedule, and the reference was answered in favour of the assessee.

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Issues: Whether the gratuity reserve of Rs. 3,35,000 created by the assessee-company in earlier years formed part of its capital under the Second Schedule to the Super Profits Tax Act, 1963.

Analysis: The expression "reserve" was not defined in the Super Profits Tax Act, 1963, and had to be construed in the setting and object of the statute. The Court distinguished between a provision made against a liability already existing in praesenti and an amount retained for a future liability. A gratuity payable on death, retirement, resignation, or similar future events was held to be a contingent future liability, not an existing liability. The Court further held that the treatment of an amount in the company's books as a gratuity reserve, without actuarial ascertainment of the present value of the liability and without charging it as a current provision against profits, indicated that the amount remained part of the company's funds held for future use. The majority of High Court decisions on similar gratuity allocations were followed.

Conclusion: The gratuity reserve was a reserve and not a provision, and it was includible in the capital computation under the Second Schedule to the Super Profits Tax Act, 1963.

Final Conclusion: The reference was answered in favour of the assessee, with the gratuity reserve treated as part of capital for surtax purposes.

Ratio Decidendi: For capital computation under the Super Profits Tax Act, 1963, an amount set apart for a future contingent gratuity liability, not actuarially ascertained and not charged as a present liability against profits, is a reserve and not a provision.

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