9911796707
TMI Blog1983 (9) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... computation of capital for the purpose of surtax ?" In T. C.. No. 375 of 1978, the Income-tax Appellate Tribunal has referred to this court the following question again at the instance of the Revenue : "Whether, on the facts and in the circumstances of the case, the amounts credited in the assets replacement reserve and debenture redemption fund of Rs. 42,000 and Rs. 21,071, respectively, should be taken into account for the purpose of computing the capital for the purpose, of surtax ?" The assessee-company, in the course of the assessment for the assessment years 1971-72 and 1972-73, claimed before the Income-tax Officer that the following three reserves should be included in the computation of capital for the purpose of surtax : 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re this court is whether any or all of the items, viz., asset replacement reserve, debenture reserve and staff retirement gratuity reserve could be included in the computation of capital for the purpose of surtax for the assessment years in question. So far as the asset replacement reserve is concerned, the contention of the Revenue is that it is only a provision and not a reserve, that the provision has arisen only as a result of the revaluation of the assets and, therefore, should be taken as a revaluation on depreciation reserve and as such it should be taken as a provision. The Revenue puts forward an alternative contention that, even if it is taken as a reserve, in view of Explanation 1 to rule 2 of the Second Schedule to the Compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, apparent that this is only a specific provision and cannot be termed as free reserve. This will also not qualify for capital computation." The contention of the assessee, on the other hand, is that Explanation I to rule 2 of the Second Schedule will not, in terms, apply as the reserve has been created to cover depreciation on the enhanced value of the assets and, therefore, the reserve cannot be said to have been created on revaluation of the assets as contemplated by the said Explanation. However, we are of the view that the said Explanation will apply to the amounts set apart as asset replacement reserve, for the necessity to create a reserve arose only as a result of the revaluation of the fixed assets. Therefore, it is unnecessar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a sum falls within the definition of "provision", it can never be a reserve, but it does not follow that if the retention or appropriation is not a provision, it is automatically reserve, that the question will have to be decided having regard to the true nature and character of the sum so retained or appropriated, depending on several factors including the intention with which and the purpose for which the said retention or appropriation has been made, because the sub stance of the matter is to be regarded and that, in this context, the primary dictionary meaning of the word "reserve" may have to be availed of and if any retention or appropriation of a sum is not a provision, i.e., it is not designed to meet depreciation, renewals or dim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision of the Supreme Court, the decision in CIT V. British India Corporation (P.) Ltd. [1973] 92 ITR 38 (All) has to give way. As a matter of fact, even before the said decision of the Supreme Court, the Calcutta High Court in Upper Ganges Sugar Mills Ltd. v. CIT [1981] 129 ITR 438, has taken the view that the reserve brought into existence by creating or increasing (by revaluation or otherwise) any book assets is not capital for computing the capital of a company as it is only provision. Of course , the decision of the court rested on Explanation 1 to rule 2 of the Second Schedule to the Act. We have, therefore, to hold that so far as the assets replacement reserve is concerned, it cannot be included in the computation of capital for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s issued. We have therefore, to hold that the debenture redemption fund is not includible in the capital of the company for purposes of surtax. So far as the staff retirement gratuity reserve is concerned, it has to be noted that the Supreme Court has held in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559, that the gratuity liability calculated each year as per the scientific or actuarial method can be taken to be a present liability and, therefore, it could be taken to be a debt due by the company and hence it is included as part of the capital. However, at page 574, it has observed that if the retirement gratuity reserve exceeds the amount determined on the basis of the actuarial valuation, it should be taken to be an excess pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
