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TMI Blog1981 (8) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... f other reserves as contemplated under clause(iii) of rule I of the Second Schedule to the Companies (Profits) Surtax Act, 1964? (3) Whether, on the facts and in the circumstances of the case, the amount of Rs. 4,33,825 standing to the credit of the gratuity reserve as on 1st July, 1962, is a reserve as contemplated in rule I of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ? " In this case we are concerned with the assessment year 1964-65, the previous accounting year in respect whereof was the calendar year ending 30th June, 1963. The material date for the purpose of capital computation under the Companies (Profits) Surtax Act, 1964, would be 1st July, 1962. The first question relates to the appropriation of a sum of Rs. 4,00,000 from the undistributed profits of the accounting year ended 30th June, 1962, and being placed to the credit of the general reserve in terms of the board's resolution dated 22nd November,1962. The question was whether the said amount could be included in the computation of the capital of the assessee-company as on 1st July, 1962, for the purpose of surtax for the assessment year 1964-65. Admittedly, the said amount of Rs. 4,00,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e excess reserve as being Rs. 15,283 instead of Rs. 5,988, by miscalculating the reserve of 75% at Rs. 87,867 instead of the correct amount of Rs. 97,162. However, the ITO held the said excess as not a reserve and, therefore, excluded it from the computation of capital. The AAC sustained the said order of the ITO. The Tribunal, however, took the view, following its earlier decision, that such excess of Rs. 5,988 fell in the category of "other reserves" in terms of r.1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. Before us, the learned counsel for the parties have agreed that the said question is squarely covered by a decision of this court in the case of CIT v. Otis Elevator Co. (India) Ltd. [1977] 107 ITR 241 (Bom). In that case it was held that the item of excess development rebate was covered by a circular dated 11th January, 1971, issued by the CBDT under which such excess development rebate reserve could be treated as " the other reserves " and included in the capital of the company. In that view of the matter, it was also not necessary to consider this question in any elaborate manner. The said question will, therefore, have to be answered in the affi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken by the assessee-company, the said amount would be considered to have been set apart on an ad hoc basis and, therefore, would not be considered as " provision " but would be considered only as a " reserve ". It -cannot be disputed that in order to find out whether a certain amount set apart was " reserve " or was. " provision ", for computing the capital of a company under the Second Schedule to the Super Profits Tax Act, 1963, the true nature of the amount should be taken into account and not the mere nomenclature used for it by the assessee. In this case, therefore, the fact that the said amount has been shown in the balancesheet as a " provision for service gratuity " or that Note 3 at the foot of the page refers to the same as " provision " was not conclusive to hold that the amount was " provision " and not " reserve ". The nature of the terms " provision " and " reserve " came to be considered by this court in its aforesaid decision in the case of CIT v. Forbes Forbes Campbell Co. Ltd. [1977] 107 ITR 38. In that case Tulzapurkar J., who delivered the judgment of this court, relying on the observations of the Supreme Court in the case of Metal Box Company [1969] 73 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and provided for in the balance-sheet could not be considered to be a reserve. Further, the provision for gratuity where the obligation to discharge the liability was contingent on a very remote ground and was in the nature of accrued liability would be allowable as deduction under s. 37 of the I.T. Act, 1961, in computing the income of an assessee. There was no evidence to show that the provision for gratuity was claimed as an allowable deduction in computing the income of the assessee. The fact that it was created as a reserve did not indicate whether it was allowed as a deduction or not. If an amount which was deductible was not allowed as a deduction and was available with the assessee it is not a free reserve as gratuity has to be paid out of those funds and it could not be used to meet any other liability of the business. Therefore, the provision for gratuity is not a reserve and cannot be included in the computation of the capital under Sch. II of the Act. " The above-quoted view of the Calcutta High Court appears to us to be in conflict with the view taken by our court in the decisions mentioned above. In the view that we are taking in this case, relying on the two earl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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