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Issues:
1. Whether the leave/retirement gratuity should be considered for computation of capital for surtax purposes under the Companies (Profits) Surtax Act, 1964. 2. Determination of whether the amounts credited to the gratuity account were based on actuarial valuation or an ad hoc amount. 3. Consistency in treatment of amounts claimed as deduction in income-tax proceedings and inclusion in capital base for surtax purposes. Analysis: Issue 1: The case involved a question referred by the Income-tax Tribunal regarding the inclusion of leave/retirement gratuity in the capital base for surtax purposes under the Companies (Profits) Surtax Act, 1964. The Tribunal allowed the inclusion based on a decision of the Bombay High Court, which was affirmed by the Supreme Court, overruling the Commissioner's exclusion of the amounts from the capital base. The High Court remanded the matter to determine if the amounts should be included based on actuarial valuation or ad hoc appropriation, following the principles laid down by the Supreme Court in a previous case. Issue 2: The High Court emphasized the importance of determining whether the amounts credited to the gratuity account were arrived at on a scientific basis through actuarial valuation or were ad hoc amounts. Citing the Supreme Court's decision, it explained that if the appropriation was based on actuarial valuation, it constituted a provision, while an ad hoc sum would also be considered a provision for a known liability. Any excess amount would be treated as a reserve. The High Court directed the taxing authority to apply these principles to decide the inclusion of the amounts in the capital base for surtax purposes. Issue 3: Regarding the consistency in treatment of amounts claimed as deductions in income-tax proceedings and inclusion in the capital base for surtax purposes, the High Court noted the argument raised by the assessee's counsel but stated that the Supreme Court had not expressed an opinion on this contention in a previous case. The High Court directed the taxing authority to examine the relevancy of this question in light of the rules contained in the Second Schedule to the Act while determining the inclusion of amounts in the capital base. In conclusion, the High Court declined to answer the question referred and remanded the matter to the taxing authority through the Tribunal to determine the inclusion of the amounts credited to the gratuity account based on actuarial valuation or ad hoc appropriation, following the principles established by the Supreme Court. The taxing authority was also instructed to consider any amounts entitled to be credited as reserves for previous assessment years in this determination.
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