1981 (8) TMI 20 - HC - Income Tax

Issues Involved:

1. Inclusion of Rs. 4,00,000 in the computation of capital for surtax purposes.
2. Classification of excess reserve of Rs. 5,988 as "other reserves."
3. Classification of Rs. 4,33,825 in gratuity reserve as "reserve" or "provision."

Issue-wise Detailed Analysis:

Issue 1: Inclusion of Rs. 4,00,000 in the Computation of Capital for Surtax Purposes

The first question addressed whether the sum of Rs. 4,00,000 appropriated from the undistributed profits of the accounting year ending on 30th June 1962, and credited to the general reserve by a board resolution dated 22nd November 1962, should be included in the computation of the capital of the assessee-company as of 1st July 1962, for surtax purposes for the assessment year 1964-65. The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) excluded this amount from the computation, arguing that the appropriation was made after 1st July 1962. However, the Income-tax Appellate Tribunal included it, following the precedent set by CIT v. Aryodaya Ginning and Manufacturing Co. Ltd. [1957] 31 ITR 145, which was supported by the Supreme Court decision in CIT v. Mysore Electrical Industries Ltd. [1971] 80 ITR 566. The court agreed with the Tribunal's view, stating that appropriations made later should be treated as effective from the beginning of the accounting year. Therefore, the question was answered in the affirmative and in favor of the assessee.

Issue 2: Classification of Excess Reserve of Rs. 5,988 as "Other Reserves"

The second question was whether the excess reserve of Rs. 5,988, created over the required reserve under s. 10(2)(vib) of the Indian I.T. Act, 1922 (s. 34(3)(a) of the I.T. Act, 1961), should be classified as "other reserves" under clause (iii) of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The ITO initially miscalculated the reserve and excluded the excess from the capital computation. The Tribunal, however, included it as "other reserves," following its earlier decisions. The court concurred, referencing CIT v. Otis Elevator Co. (India) Ltd. [1977] 107 ITR 241 (Bom), which held that such excess reserves could be included in the capital computation as per a CBDT circular dated 11th January 1971. Hence, this question was also answered in the affirmative and in favor of the assessee.

Issue 3: Classification of Rs. 4,33,825 in Gratuity Reserve as "Reserve" or "Provision"

The third question involved whether Rs. 4,33,825 in the gratuity reserve as of 1st July 1962, should be considered a "reserve" or a "provision" under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The ITO and AAC classified it as a "provision," but the Tribunal viewed it as a "reserve." The court examined the balance-sheet and noted that the amount was listed as a "provision for service gratuity," but emphasized that the true nature of the amount, not its nomenclature, was critical. Citing CIT v. Forbes Forbes Campbell & Co. Ltd. [1977] 107 ITR 38 and Parke Davis (India) Ltd. v. CIT [1981] 130 ITR 813, the court held that in the absence of actuarial valuation, the amount should be considered a "reserve" set aside on an ad hoc basis for contingent liability. The court disagreed with the Calcutta High Court's contrary view in CIT v. Jugantar P. Ltd. [1981] 128 ITR 619. Consequently, this question was answered in the affirmative and in favor of the assessee.

Conclusion:

All three questions were answered in the affirmative and in favor of the assessee. The court emphasized the importance of the true nature of financial appropriations over their mere nomenclature in balance-sheets.

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