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TMI Blog1987 (10) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... s ?" The question arises under the Companies (Profits) Surtax Act, 1964. The assessment years concerned are 1966-67 and 1967-68. The assessee is a public limited company engaged in the manufacture of cigarettes and other tobacco products. Under the Companies (Profits) Surtax Act, the relevant date with reference to which the capital of a company has to be determined is the first day of the previous year relevant to the assessment year-which means that, for the assessment year 1966-67, it is October 1, 1964, and, for the assessment year 1967-68, it is October 1, 1965. On October 1, 1964, an amount of Rs. 15,75,000 was shown as "reserve" under the heading "Reserve for leave/retirement gratuities". On October 1, 1965, it became Rs. 16,75,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of the Supreme Court in the case of this very assessee relating to the assessment year 1963-64 reported in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 (SC), was not available. The decision of the Tribunal in this case was in June, 1980, whereas the decision of the Supreme Court was rendered in September, 1981. It is brought to our notice by Sri M. Suryanarayana Murthy, learned standing counsel for the Revenue, that an identical question was urged before and considered by the Supreme Court and a certain direction was given therein. He says that the same direction should follow in respect of the two assessment years concerned herein. The capital base of a company for the purpose of the Surtax Act has to be determined in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore us, it would be evident from a perusal of the decision of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559, that the Supreme Court remanded the matter through the Tribunal to the taxing authority to decide the issue whether the amount concerned for the said assessment year, viz., a sum of Rs. 9,08,106, set apart and transferred to gratuity reserve by the assessee-company was either a provision or a reserve and, if it is latter, to what extent ? The taxing authority was directed to decide the issue in the light of the principles enunciated by the Supreme Court in the said decision. The principle enunciated by the Supreme Court is that gratuity is a known liability ; therefore, a provision therefor will have t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty not all at once but spread over a number of years. It is clear that if by adopting such scientific method any appropriation is made, such appropriation will constitute provision representing fairly accurately a known and existing liability for the year in question ; if, however, an ad hoc sum is appropriated without resorting to any scientific basis, such appropriation would also be a provision intended to meet a known liability, though a contingent one, for, the expression 'liability' occurring in clause 7(1)(a) of Part III of the Sixth Schedule to the Companies Act includes any expenditure contracted for and arising under a contingent liability ; but if the sum so appropriated is shown to be in excess of the sum required to meet the es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the accounting year relevant to the assessment year 1967-68 was claimed as a deduction in the income-tax proceedings relating to that assessment year, but was disallowed. If so, the said amount cannot be treated at the same time as a provision. He says that it is not open to the Income-tax Department to take two inconsistent stands under the Income-tax Act and the Surtax Act. We find that a similar argument was addressed before the Supreme Court in the aforesaid decision relating to the assessment year 1963-64 ; but the Supreme Court preferred to express no opinion on the said contention. It would suffice on our part to observe that the relevancy of the said question should be examined in the light of the rules contained in the Second ..... X X X X Extracts X X X X X X X X Extracts X X X X
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