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TMI Blog1990 (11) TMI 77X X X X Extracts X X X X X X X X Extracts X X X X ..... g that the amount standing to the credit of the gratuity reserve account to the tune of Rs. 3,51, 000 should not be treated as a provision, but should be treated as a 'reserve' and should, therefore, be taken into account while computing the capital of the assessee-company for surtax purposes ?" For the year ending March 31, 1971, out of the profits for the year, the assessee transferred Rs. 2.51 lakhs to the gratuity reserve account. Likewise, from out of the profits for the year ending March 31, 1972, another sum of Rs. 1 lakh was transferred out of profits. The assessee did not have an approved gratuity scheme and the amounts referred to earlier were ad hoc transfers to the reserve fund. For the assessment year 1973-74, in making the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier, there had been some difficulty experienced in ascertaining whether sums so set apart really constituted provision or reserve, particularly from the point of view of computation of capital for purposes of surtax assessment, that has since been set at rest by the decision of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559. In that case, the Supreme Court considered whether, among others, amounts retained or appropriated or set apart by the assessee-company by way of making provision for retirement gratuity in a sum of Rs. 9,08,106 could be considered as other reserve within the meaning of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, or rule 1 of the Second Schedule to the Companies (P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made, it is a definite liability if it is done on scientific principles, in which case the provision will be a charge against the profits of the year in which the provision is made, and it would be a "provision" and not a "reserve". (3) To provide for gratuity liability, an employer may adopt any one of the following three courses : (i) He may set apart an ad hoc sum as a "provision" for gratuity ; (ii) he may avail of the services of an actuary and arrive at an actuarial valuation of the estimated liability, i.e., a fairly accurate appraisal of the present cost of future commitment for gratuity and make provision for such a liability for such an amount. (iii) The employer may obtain actuarial determination of the liability, but while mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of the Companies Act, but at the same time, the Supreme Court cautioned that it would be necessary to go into the nature and character of the appropriation, the intention and purpose and other surrounding circumstances to decide whether it is a "reserve" in the sense that it is retained as part of the company's capital. Applying the tests laid down by the Supreme Court referred to above, what is found is that there had been ad hoc transfers by the assessee to the gratuity reserve fund, and, in such a case, the Supreme Court has clearly pointed out at page 574, that if an ad hoc sum is appropriated without resorting to any scientific basis, such appropriation would also be provision intended to meet a known liability. From the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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