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TMI Blog1994 (12) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... the Second Schedule to the Surtax Act, holding that this was not a " reserve ". The officer relied on the decision of this court, without mentioning it in the order. The assessee preferred an appeal to the Appellate Assistant Commissioner. He contended that the opening balance as regards provision for gratuity amounting to Rs. 3,03,798 ought to have been considered for the purpose of computing the standard deduction. The appellate authority accepted this contention, relying on the decision in the case of CIT v. Indian Steel Rolling Mills Ltd. [ 19731 92 ITR 78 (Mad) as well as the decision of this court in CIT v. Periakaramalai Tea and Produce Co. Ltd. [1973] 92 ITR 65. The two decisions specify the meaning of " statutory deduction " to an amount equal to ten per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of two hundred thousand rupees, whichever is greater. The court has observed that the amount standing to the credit under the heading " Retirement gratuity reserve " is to be treated as " reserve " and normally has to be taken into account for the purpose of calculating the capital. The court took up fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f computing the standard deduction. At the same time, the amount is shown in the balance-sheet as a " reserve " for the purpose of gratuity. The amount which is shown as a " reserve " or sometimes even shown as a " gratuity reserve ", no doubt, according to the methods of accountancy would go towards the capital and, therefore, would not be available for deduction as is sought to be claimed. It was urged on behalf of the assessee that what is required to be considered is the nature of the amount, as to whether it has been set apart for being spent towards the payment of gratuity which would, then, amount to an item of expenditure liable for deduction. On the other hand, it was sought to be contended on behalf of the Department by learned counsel that it would be clear from the principles of accountancy that any amount shown as " reserve " would get added to capital and in that event, it could not be considered as an item of expenditure and, therefore, consequently, it will have to be stated that such an amount would not be available for a claim of deduction in any event. Thus, on the basis of the submissions, the question that would be required to be considered would be as to w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by having regard to the true nature and character of the sums so appropriated depending on the surrounding circumstances particularly the intention with which and the purpose for which such appropriations had been made. In the process of reasoning the Supreme Court gave importance to the substance of the matter observing that one must have regard to the intention with which and the purpose for which the appropriation has been made, such intention and purpose being gathered from the surrounding circumstances. In fact by way of guidelines, it is observed as follows ( headnote of 132 ITR 559 ) : " The following aspects provide some guidelines : (a) a mass of undistributed profits cannot automatically become a reserve and somebody possessing the requisite authority must clearly indicate that a portion thereof has been earmarked or separated from the general mass of profits with a view to constituting it either a general reserve or a specific reserve ; (b) the surrounding circumstances should make it apparent that the amount so earmarked or set apart is in fact a reserve to be utilised in future for a specific purpose and on a specific occasion ; and (c) a clear conduct on the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for which appropriation has been made, such intention and purpose being gathered from the surrounding circumstances. It is in the context of these aspects that the decision of this court in CIT v. Periakaramalai Tea and Produce Co. Ltd. [1973] 92 ITR 65 (Ker) and CIT v. Indian Steel Rolling Mills Ltd. [1973] 92 ITR 78 (Mad) would require consideration. In Periakaramalai's case [1973] 92 ITR 65, in the matter of the Companies (Profits) Surtax Act, 1964, this court was dealing with an undisputed factual matrix. The assessment years were 1964-65, 1965-66 and 1966-67 and the question was as to whether as held by the Tribunal it would be correct in law to hold that the amount standing to the credit of the " retirement gratuity reserve " is to be treated as a reserve and has to be taken into account for the purposes of calculating the capital, this court considered whether the sums created by the assessee as " reserve for retirement gratuity " were really to be treated as " reserves " in computing the statutory deduction permissible under the Act. The dispute necessitated the consideration of two questions. The first as to what exact is meant by " reserve ", and the other whether r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d CIT v. Periakaramalai Tea and Produce Co. Ltd [1973] 92 ITR 65 (Ker) independently and we do not find that this court does not represent the correct position in law in the said decision. While considering the common question of law certain general principles are specified in Vazir Sultan's case [1981] 132 ITR 559 which are to be applied to the factual matrix. Before the Gujarat High Court the amounts in question were found to be doubtful debts which necessitated the order of remand. However, this is not the position before us. As we have already specified, the opening balance in the provision for gratuity account of Rs. 3,03,798 is seen for the purpose of computing standard deduction. The Appellate Assistant Commissioner would have to be stated as having correctly relied upon the decision in CIT v. Indian Steel Rolling Mills Ltd. [1973] 92 ITR 78. The said decision is the decision of the Madras High Court. The decision of this court in CIT v. Periakaramalai Tea and Produce Co. Ltd. [1973] 92 ITR 65 leads to the same conclusion on the basis of the clear factual matrix. It is not necessary to consider the question of remand because on the facts there is no doubt of any kind. For ..... X X X X Extracts X X X X X X X X Extracts X X X X
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