1985 (9) TMI 70 - HC - Income Tax

Summary

Issues involved:
The judgment involves the interpretation of provisions of the Companies (Profits) Surtax Act, 1964 regarding the treatment of gratuity reserve and debenture redemption reserve in the computation of a company's capital base.

Gratuity Reserve:
The Supreme Court's decision in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 provides guidance on distinguishing between reserves and provisions. A gratuity reserve is considered a provision for a contingent liability, especially if not based on actuarial valuation. The true nature of the appropriation determines whether it is a reserve or provision, regardless of how it is labeled in the balance sheet. The Tribunal is directed to assess whether the gratuity reserve was based on actuarial valuation or an ad hoc amount.

Debenture Redemption Reserve:
The debenture redemption reserve is analyzed in light of the company's obligation to redeem debentures. The increase in the reserve amount from one year to the next is noted. The reserve is deemed a provision as it is set aside to meet future liabilities, even if not all debentures were redeemable during the relevant years. The Calcutta High Court's decision in CIT v. Placid Limited [1985] 44 CTR 123 is distinguished as it involved redeeming preference shares, unlike the present case where the company was obligated to redeem debentures.

Conclusion:
The Tribunal is instructed to determine if the gratuity reserve exceeds the liability on account of gratuity calculated actuarially, with only the excess being deemed a reserve for computing the company's capital. The debenture redemption reserve is not includible in the capital computation. The assessee is directed to bear the costs of the reference.