1985 (9) TMI 69 - HC - Income Tax

Issues Involved:
1. Inclusion of various reserves in the computation of capital under Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, for the assessment years 1964-65 and 1965-66.

Detailed Analysis:

1. Retirement Gratuity Reserve:
The Supreme Court's decision in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 (SC) is pivotal. It distinguishes between a "provision" and a "reserve." A provision is a charge against profits, while a reserve is an appropriation of profits. The Supreme Court held that an appropriation to a gratuity reserve is typically a provision for a contingent liability. If the amount set aside exceeds the estimated liability calculated on a scientific basis, only the excess can be considered a reserve. The Tribunal must calculate the estimated liability and include only the excess in the computation of capital.

2. Contingency Reserve:
For both assessment years, amounts were set aside to meet possible demands for excise duty and sales tax. Since no actual liability accrued, these amounts are to be included in the computation of the capital of the company.

3. Super Profits Tax Reserve and Surtax Reserve:
For the assessment year 1964-65, the amount of Rs. 16,93,354 was set aside for super profits tax, and for 1965-66, Rs. 20,83,115 was set aside for surtax. The Tribunal must determine if these amounts represent an excess over the actual tax liability. Only the excess amount, if any, should be included in the capital computation.

4. Reserve for Doubtful Debts:
The reserves for doubtful debts were created to cover all debts over six months old without estimating which debts would become bad. Since there were hardly any doubtful debts, these amounts must be included in the capital computation.

5. Dividend Tax Reserve:
For the assessment year 1965-66, Rs. 7,50,000 was set aside for dividend tax. The actual liability was Rs. 7,41,924. The Tribunal must include the excess amount of Rs. 8,076 in the capital computation. If a higher court reverses the finding that the assessee is a company in which the public is substantially interested, the entire amount of Rs. 7,50,000 will have to be included.

Conclusion:
The Tribunal is directed to compute the capital of the assessee in accordance with the judgment. The specific answers to the questions referred are:

1. Items (i) and (ii) for both assessment years:
- These amounts are to be included in the capital computation.

2. Item (iii) for both assessment years:
- The Tribunal must determine the excess over the tax liabilities and include only the excess amount in the capital computation.

3. Items (iv) and (v) for respective assessment years (retirement gratuity reserve):
- The Tribunal must determine the estimated liability and include only the excess amount in the capital computation.

4. Dividend Tax Reserve (item (iv) for 1965-66):
- Rs. 8,076 is to be added to the capital computation. If the higher court reverses the finding, the entire Rs. 7,50,000 will be included.

The Tribunal must proceed with the computation without awaiting further decisions on the public interest status of the assessee. There will be no order as to costs.

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