The provision for labour retiring gratuity was a reserve eligible for inclusion in the capital computation under the Second Schedule to the Companies (Profits) Surtax Act, 1964.

SABYASACHI MUKHARJI, J.

( 1 ) THIS reference arises from the assessment proceedings under the Companies (Profits) Surtax Act, 1964. We are concerned with the assessment year 1964-65, the relevant previous year ending on 31st March, 1964.

( 2 ) UNDER the Companies (Profits) Surtax Act, 1964, there is a charge of tax on the chargeable profits of the previous year in accordance with the rule set out in the Third Schedule to that Act, "chargeable profits" mean the total income of the assessee computed under the I. T. Act, 1961, for any previous year and adjusted in accordance with the provisions of the First Schedule to that Act. It is not necessary for us to go into the adjustments provided in the First Schedule for the present purpose. Under Section 2 (8) of the said Act there was statutory deduction for an amount equal to 10 per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule to that Act or Rs. 2,00,000, whichever. was greater. In the Second Schedule the computation of capital was shown as follows : (a) Paid up share capital, (b) Development rebate reserve, and (c) Other reserves in so far as the amounts credited to such other reserves had not been allowed in computing the profits for the purpose of income-tax.

( 3 ) THERE are other items to be added and some deductions to be made from the aggregate of the above. For our present purpose it is not necessary to go into these aspects. Only on the net amount remaining after the adjustment of the statutory deduction against the chargeable profits surtax was imposed.

( 4 ) THE assessee-company in the instant case was carrying on business of building railway wagons. In the accounts for the assessment year 1964-65, Rs. 20,60,869 appeared as provision for "labour retiring gratuity" as on the 1st day of April, 1963, that is, the relevant date. The assessee claimed the said amount as reserve for inclusion in the capital computation before the assessing authority. The ITO did not treat this as reserve. The assessee appealed to the AAC, who upheld the order of the ITO. The assessee thereupon appealed to the Tribunal contending that the amount was intended only as reserve and not to cover any imminent or known liability. The contentions of the parties were considered and for the reasons as in the earlier year, the Tribunal treated the amount as reserve and, therefore, upheld the claim for inclusion in the capital computation.

( 5 ) UPON this under Section 256 (1) of the I. T. Act, 1961, the Tribunal has referred the following question to us :"whether, on the facts and in the circumstances of the case, the sum of Rs. 20,60,869 shown by the assessee in its accounts as ' provision for labour retiring gratuity', was a reserve so as to be eligible for inclusion in the capital computation under the Second Schedule to the Companies (Profits) Surtax Act, 1964?"

( 6 ) (THERE is a typographical error in the question at page 4 of the paper-book. The figure should be as we have mentioned above and not Rs. 30,60,869 ).

( 7 ) THE question as to in what sense "reserve" in Rule 1 of the Second Schedule of the Super Profits Tax Act, 1963, should be construed, has recently been discussed by us in the case of CIT and SPT v. Burn and Co. Ltd. I. T. Reference No. 371 of 1970. We further held in any event that the items with which we were concerned in that case were not ascertained with any substantial accuracy and these had not matured with any definiteness which could be allowed as contingent liabilities even on the basis that contingent liability could be treated as different from "reserve" on the basis of the accounting principle. The question that falls for our consideration in the instant case, however, is guided by the Companies (Profits) Surtax Act, 1964, and there has been an Explanation added after Rule 1 of the Second Schedule of that Act. That Explanation reads as follows :"explanation.--For the removal of doubts it is hereby declared that

Click Here to Read the rest of this document