1994 (12) TMI 57 - HC - Income Tax

Summary

Issues Involved:
1. Whether the provision for gratuity is a "reserve" under the Second Schedule to the Surtax Act, 1964.
2. Whether the provision for gratuity should be taken into account in the computation of capital for the purpose of the Surtax Act.

Detailed Analysis:

Issue 1: Whether the provision for gratuity is a "reserve" under the Second Schedule to the Surtax Act, 1964.

The court examined if the provision for gratuity shown in the balance sheet could be classified as a "reserve" under the Second Schedule to the Surtax Act, 1964. The Income-tax Officer initially did not consider this provision as a "reserve" for computing capital, relying on an unspecified decision of the court. However, the Appellate Assistant Commissioner accepted the assessee's contention, referencing the decisions in CIT v. Indian Steel Rolling Mills Ltd. [1973] 92 ITR 78 (Mad) and CIT v. Periakaramalai Tea and Produce Co. Ltd. [1973] 92 ITR 65 (Ker), which defined "statutory deduction" and considered retirement gratuity reserves as reserves for calculating capital.

The Tribunal further deliberated on whether the liability towards gratuity was an ascertained liability or a contingent one. It concluded that the liability to pay gratuity is contingent, relying on CIT v. High Land Produce Co. Ltd. [1976] 102 ITR 803 (Ker) and CIT v. K. Gopinathan Nair [1976] 103 ITR 23 (Ker).

The Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 provided guidelines to distinguish between "provision" and "reserve," emphasizing the necessity to understand the true nature and character of the sums appropriated. The court noted that a "provision" is a charge against profit, while a "reserve" is an appropriation of profits. The court also highlighted the importance of the intention and purpose behind the appropriation, as gathered from surrounding circumstances.

Issue 2: Whether the provision for gratuity should be taken into account in the computation of capital for the purpose of the Surtax Act.

The court considered the factual matrix where the provision for gratuity amounting to Rs. 3,03,798 was shown in the balance sheet for computing the standard deduction. The assessee argued that this amount should be considered an item of expenditure liable for deduction. Conversely, the Department contended that any amount shown as "reserve" should be added to capital and not be available for deduction.

The court referred to the decisions in CIT v. Periakaramalai Tea and Produce Co. Ltd. [1973] 92 ITR 65 (Ker) and CIT v. Indian Steel Rolling Mills Ltd. [1973] 92 ITR 78 (Mad), which treated amounts reserved for gratuity as reserves for calculating capital. The court rejected the Department's request for remand, as the factual particulars were clear and did not necessitate further examination.

The court concluded that the Appellate Assistant Commissioner correctly relied on the decisions in CIT v. Indian Steel Rolling Mills Ltd. [1973] 92 ITR 78 (Mad) and CIT v. Periakaramalai Tea and Produce Co. Ltd. [1973] 92 ITR 65 (Ker), and held that the provision for gratuity should be considered for computing the standard deduction.

Judgment:
The court answered the question in favor of the assessee and against the Department, agreeing with the Appellate Assistant Commissioner's view to consider the provision for gratuity for the purpose of computing the standard deduction. The judgment was directed to be communicated to the Income-tax Appellate Tribunal, Cochin Bench, as required under section 260(1) of the Income-tax Act, 1961.