1990 (11) TMI 77

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....the circumstances of the case, the Appellate Tribunal was right in holding that the amount standing to the credit of the gratuity reserve account to the tune of Rs. 3,51, 000 should not be treated as a provision, but should be treated as a 'reserve' and should, therefore, be taken into account while computing the capital of the assessee-company for surtax purposes ?" For the year ending March 31, 1971, out of the profits for the year, the assessee transferred Rs. 2.51 lakhs to the gratuity reserve account. Likewise, from out of the profits for the year ending March 31, 1972, another sum of Rs. 1 lakh was transferred out of profits. The assessee did not have an approved gratuity scheme and the amounts referred to earlier were ad hoc trans....

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....above referred question of law has been referred to this court. Though, earlier, there had been some difficulty experienced in ascertaining whether sums so set apart really constituted provision or reserve, particularly from the point of view of computation of capital for purposes of surtax assessment, that has since been set at rest by the decision of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559. In that case, the Supreme Court considered whether, among others, amounts retained or appropriated or set apart by the assessee-company by way of making provision for retirement gratuity in a sum of Rs. 9,08,106 could be considered as other reserve within the meaning of rule 1 of the Second Schedule to the Super ....

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....meet easily the situation as and when it arises and when such a provision is made, it is a definite liability if it is done on scientific principles, in which case the provision will be a charge against the profits of the year in which the provision is made, and it would be a "provision" and not a "reserve". (3) To provide for gratuity liability, an employer may adopt any one of the following three courses : (i) He may set apart an ad hoc sum as a "provision" for gratuity ; (ii) he may avail of the services of an actuary and arrive at an actuarial valuation of the estimated liability, i.e., a fairly accurate appraisal of the present cost of future commitment for gratuity and make provision for such a liability for such an amount. (iii) The ....