1973 (5) TMI 1 - HC - Income Tax

Court rules provision for gratuity and excess tax as reserves under Super Profits Tax Act.

Commissioner of Income-Tax, Madras Versus Indian Steel Rolling Mills Limited.

The court held that both the amounts set apart for gratuity (Rs. 2,32,595) and the excess provision for taxation (Rs. 6,150) should be treated as reserves ... Super Profits Tax Act, 1963 - amounts set apart for payment of gratuity and excess provision for taxation -1. ' Whether on the facts and in the circumstances of the case, the sum of Rs. 2,32,595 represented reserves as contemplated under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963 ? 2. Whether, on the facts and in the circumstances of the case, the sum of Rs. 6,150 was not part of reserve under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963 ? ' Issues Involved:1. Whether the sum of Rs. 2,32,595 represented reserves as contemplated under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963.2. Whether the sum of Rs. 6,150 was part of the reserve under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963.Issue-wise Detailed Analysis:Issue 1: Whether the sum of Rs. 2,32,595 represented reserves as contemplated under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963.The court examined the nature of the sum of Rs. 2,32,595, which was set aside for gratuity payments to employees. The payment of gratuity was governed by a scheme that provided for a retiring gratuity based on the length of service and the last drawn salary or wages. The court noted that the company was under a liability to pay gratuity as per the scheme, and to meet this indefinite and unascertainable liability, a reserve had been created. This reserve was used by the company for its business purposes, indicating that it represented the company's own funds in the form of a reserve.The court rejected the revenue's argument that the sum should be considered a current liability or provision because it was shown under current liabilities and provisions in the balance sheet. The court emphasized that the manner in which the balance sheet is prepared does not determine whether an amount is a reserve for the purposes of the Super Profits Tax Act.Citing precedents such as Commissioner of Income-tax v. Century Spinning and Manufacturing Co. and Commissioner of Income-tax v. Standard Vacuum Oil Co., the court held that a reserve is a sum specifically set apart for future use or a specific occasion before the distribution of dividends to shareholders. The court concluded that the amount set apart for gratuity, being a contingent and future liability used for business purposes, should be treated as a reserve.Issue 2: Whether the sum of Rs. 6,150 was part of the reserve under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963.The court addressed the nature of the Rs. 6,150, which was an excess provision for taxation. The assessee argued that an excess provision should be treated as a reserve, as it is used for the business of the company. The court referred to a circular by the Central Board of Revenue, which treated an excess provision in the development rebate reserve account as coming under 'other reserves' in rule 1 of Schedule 2.The court cited Commissioner of Income-tax v. Security Printers of India (P.) Ltd., where provisions made for bonus, taxation, and proposed dividends were treated as reserves. The court concluded that the excess provision for tax, being available for use in the company's business, rightly constituted a reserve.Conclusion:The court held that both the amounts set apart for gratuity (Rs. 2,32,595) and the excess provision for taxation (Rs. 6,150) should be treated as reserves under rule 1 of the Second Schedule to the Super Profits Tax Act, 1963. The court answered both questions in favor of the assessee and awarded costs to the assessee from the revenue, with counsel's fees set at Rs. 250.