9911796707
TMI Blog1985 (9) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... ar years ended on December 31, 1965, and December 31, 1966, respectively. In the balance-sheet of the company for the said two previous years, there was an item of gratuity reserve of Rs. 17 lakhs and an item of debenture redemption reserve of Rs. 79 lakhs. We are not quite sure about the correctness of the figure, particularly regarding the debenture redemption reserve, but we are not concerned with whether the said figures are correct. From the balance-sheet, copies whereof have been tendered in the court and by consent taken on record as a supplemental statement of the case, we find that the company had issued secured 6 1/2 per cent. secured mortgage debentures of the value of Rs. 5,90,000 which were redeemable in the period 1965-70 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company. It is from this decision of the Tribunal that the following question has been referred to us : " Whether, on the facts and in the circumstances of the case, the sums of Rs. 17,00,000 and Rs. 79,00,000 representing 'gratuity reserve' and 'debenture redemption reserve', respectively, were includible in computing the capital of the assessee company under rule I of the Second Schedule to the Companies (Profits) Surtax Act, 1964?" Coming first to the question of gratuity reserve, little scope for argument is left, in view of the leading decision of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559. We have analysed the principles laid down in this decision in some detail in our decision in the case of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o retained or appropriated depending on several factors, including the intention with which and the purpose for which such retention or appropriation has been made. At page 570 of the aforesaid report, the Supreme Court has set out the definition of the term " provision " given in clause 7 of Part III of Schedule VI to the Companies Act, 1956. A perusal of that definition shows that the expression " reserve " means any amount retained or returned by way of providing for depreciation, renewals or diminution in the value of assets or retained by way of providing for any known liability of which the amount cannot be determined with specific accuracy subject to the provisions of sub-clause (2) of clause 7. As far as gratuity reserve is concerne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ientific basis but merely ad hoc; and, following the course adopted by the Supreme Court in the aforesaid case of Vazir Sultan Tobacco Co. Ltd. [1981] 132 ITR 559, since there is no sufficient material on record to show whether the appropriation made by the assessee towards gratuity reserve was based on any actuarial valuation or was in the nature of an appropriation of an ad hoc amount, we direct that when the matter goes back to the Tribunal, it will decide this question in the light of the principles which we have laid down in this context. We may point out that in respect of the gratuity reserve, the only argument of Mr. Munim, learned counsel for the assessee, was that since in the balance-sheets of the company for the relevant previ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appear to have been redeemed during the relevant previous years. There is no dispute regarding any of these facts. In these circumstances, it clearly appears to us that the debenture redemption reserve must be regarded as a provision made by the assessee company to enable it to redeem the said debentures when they became due for redemption. Since the aggregate amount of such debentures is much larger than the amount of the debenture redemption reserve, we fail to see how it can be said that there was any excess as such in this appropriation which could be taken as reserve. It is true that all the debentures had not become redeemable during the relevant previous years, but that does not make any difference because an amount set aside to mee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference shares. In our view, this decision is clearly distinguishable on facts from the case before us. In that case, what the Calcutta High Court had to deal with was a case where an amount was set apart for redeeming preference shares which the company was under no obligation to redeem; whereas, in the case before, us the assessee company was bound, to redeem the debentures referred to by us. This decision is, therefore, of no assistance to Mr. Munim in support of his contention. In the result, the question referred to us is answered as follows On the facts and in the circumstances of the case, it is directed that when the matter goes back to the Tribunal, the Tribunal will have to determine whether the appropriation of Rs. 17 lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X
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