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Issues:
- Inclusion of gratuity reserve amount in the computation of capital employed for surtax under the Companies (Profits) Surtax Act, 1964. Analysis: The High Court of Gujarat was tasked with determining whether the gratuity reserve amount should be included in the computation of capital employed for surtax under the Companies (Profits) Surtax Act, 1964. The case involved assessment years 1965-66, 1966-67, and 1968-69, with the assessee being a limited company engaged in the manufacture of medicines. Initially, the Surtax Officer did not consider the amount in the gratuity reserve account as part of the capital to be computed. However, the Appellate Assistant Commissioner disagreed and directed the inclusion of the gratuity reserve amount in the capital calculation. The Revenue then appealed to the Tribunal, which ruled in favor of including the gratuity reserve in computing the company's capital for surtax purposes. The High Court referred to the Supreme Court's decision in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559, which established that an appropriation to a gratuity reserve should generally be considered a provision for a contingent liability. The liability to pay gratuity to employees arises upon certain events like death, retirement, or resignation, making it a known and existing liability. The Court emphasized that the method of appropriation, whether scientific or ad hoc, is crucial in determining whether the amount should be treated as a provision or a reserve. If the appropriation exceeds the estimated liability, only the excess should be considered a reserve. The Court noted the absence of material regarding the basis of the appropriation in the present case and highlighted the importance of actuarial valuation in such determinations. Consequently, the High Court decided to remand the matter to the Tribunal for further consideration in line with the principles outlined by the Supreme Court in Vazir Sultan Tobacco Co. Ltd.'s case [1981] 132 ITR 559. The Court emphasized the need for the Tribunal to assess whether the appropriation of the gratuity reserve amount was based on actuarial valuation or an ad hoc basis to determine its classification as a provision or a reserve. The reference was disposed of with directions for the Tribunal to decide the matter based on the principles established by the Supreme Court.
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