TaxTMI 
TaxTMI 
1983 (1) TMI 36
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....t in holding that the sum of Rs. 8,50,000 appearing in the accounts under the head 'Provision for gratuity' should be included as a 'reserve ' in the computation of the capital base for the purpose of surtax assessment for the assessment year 1964-65 ? " The assessment year concerned in this reference relates to the year 1964-65 for the relevant previous year ended December 31, 1963. In the balance-sheet as on December 31, 1962, the assessee made a provision for gratuity in the sum of Rs. 8,50,000. The ITO held that since the amount had been set apart with the specific idea of meeting the assessee's liability of paying gratuity to the employees, it cannot be regarded as a " reserve ". The Tribunal, in appeal, however, held that it was a ....
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.... for gratuity is made in the balance-sheet of an amount equal to the discounted present value of the assessee's commitment to pay gratuity to its workmen, drawn up on the basis of an actuarial valuation it must be held as a provision strictly so-called and, therefore, the amount cannot be regarded as a reserve. The Supreme Court proceeded to deal with another kind of case where an ad hoc sum is appropriated from the credit balance in the profit and loss account, which is not based on any actuarial report and which does not represent the present discounted value of the assessee's commitment to pay gratuity to the workmen. In this kind of case, the ad hoc amount can be regarded only as a contingent liability. While the Supreme Court referred ....
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....rcumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs. 1,83,382 cannot be taken as a reserve for purposes of capital computation ? " This sum of Rs. 1,83,382, according to the Tribunal, only represented a notional figure, being the difference between the value of the depreciable assets according to the assessee's books of account and the corresponding written down value arrived at for the same assets for the purpose of income-tax. The Tribunal pointed out that the figure of Rs. 1,83,382 does not appear anywhere in the accounts of the assessee, either as a provision or as a reserve. In the circumstances, the Tribunal held that the assessee was not entitled to treat this amount as a reserve. The learned....
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....for question whether such reserves answer the rigorous modern test of " true and fair " representation of the financial affairs of the company in the balance-sheet. In any case, whatever merits " secret reserves " may have in commercial circles and corporate enterprise, they cannot be taken into account in the matter of capital computation under the Second Schedule to the Surtax Act. The provisions in the said Schedule contemplate an overt act of creating reserves either generally or under special nomenclatures. That, as we understand Vazir Sultan's case [1981] 132 ITR 559 (SC), is the ruling of the Supreme Court. Apart from the principles which we have mentioned above, there is direct decision of a Division Bench of this court in Englis....
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....at, every year, the assessee has been appropriating amounts from the profit and loss account and crediting them to the account called " Provision for bad debts ". Whenever, in any year, bad debts had to be written off, the write-off has been done by utilising the amount in the account standing by the name of " provision for bad debts ". However, where after the write-off of bad debts during a particular year, the account " provision for bad debts " showed credit balance, the assessee used to transfer the entire credit balance to the profit and loss account of that year. For instance, in the provision for " bad debts " as on December 31, 1964, there was an opening balance of Rs. 62,274. But the debts actually written off came to Rs. 53,763. ....
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....eard of a reserve being created by appropriation from the credit balance in the profit and loss account. But it is quite a novel kind of reserve, which is a two way traffic, as it were, and which transferred its own credit balance in the reserve account back to the profit and loss account. For these reasons, we hold that the sum of Rs. 49,177 figuring in the balance-sheet as on December 31, 1962, cannot be treated as a part of the company's reserve for the purpose of computation under the Second Schedule to the Surtax Act. Our answer to the relevant question of law referred to us must, therefore, be against the assessee. Before parting with this case, we may observe that our attention was invited to some earlier decisions of courts be....