1985 (12) TMI 100 - AT - Income Tax

Issues Involved:
1. Provision for gratuity as part of capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964.
2. Deduction of amounts appropriated to the statutory reserve fund under section 17 of the Banking Companies Act, 1949.
3. Treatment of interest on sticky advances in computing chargeable profits.

Issue-wise Detailed Analysis:

1. Provision for Gratuity as Part of Capital:
The primary issue was whether the provision for gratuity, as on the opening day of the accounting years, should be considered part of the capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964. The assessee argued that the provision for gratuity was made on an ad hoc basis without any actuarial valuation and should be treated as part of the capital. The Tribunal referred to several precedents, including the Supreme Court decision in *Vazir Sultan Tobacco Co. Ltd. v. CIT* [1981] 132 ITR 559, which held that any excess provision over the amount reasonably necessary for the liability should be treated as a reserve. The Tribunal directed the Income Tax Officer (ITO) to obtain an actuarial valuation of the estimated liability and consider any excess over this valuation as a reserve.

2. Deduction of Amounts Appropriated to the Statutory Reserve Fund:
The assessee contended that amounts appropriated to the statutory reserve fund under section 17 of the Banking Companies Act, 1949, should be allowed as deductions in computing chargeable profits. The Tribunal analyzed the statutory requirement under section 17(1) of the Banking Regulation Act, which mandates transferring 20% of the profits to the reserve fund. The Tribunal held that even if the actual transfer was made after the end of the accounting year, the statutory obligation to transfer the amount existed as soon as the profits were earned. Citing the Supreme Court decision in *Kedarnath Jute Mfg. Co. Ltd. v. CIT* [1971] 82 ITR 363, the Tribunal concluded that the amounts should be deemed to have been transferred during the relevant previous years and allowed the deductions.

3. Treatment of Interest on Sticky Advances:
The assessee argued that interest on sticky advances should not be included in chargeable profits as no actual income arose from such advances. The Tribunal noted that the Commissioner (Appeals) had previously excluded interest on sticky advances from gross receipts for computing business income in earlier years, and this position was upheld by the Tribunal in the assessee's own case. The Tribunal directed that necessary amendments be made in accordance with section 14 of the Companies (Profits) Surtax Act, which allows for recomputation of chargeable profits based on rectificatory orders under section 154 of the Income-tax Act.

Conclusion:
The Tribunal allowed the appeals in part, directing the ITO to:
1. Obtain an actuarial valuation of the gratuity liability and treat any excess provision as a reserve.
2. Deem the amounts appropriated to the statutory reserve fund as transferred during the relevant previous years and allow the deductions.
3. Exclude interest on sticky advances from chargeable profits in accordance with prior rulings and necessary amendments.

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