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TMI Blog1981 (11) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... " for gratuity on the liabilities side of their balance-sheet as on December 31, 1961, must be reckoned as part of their capital for purposes of capital computation under the Second Schedule to the Act. The ITO rejected the assessee's claim. His reasons for doing so, along with similar reasons for disallowing the assessee's claim under another bead, were as under: " The reserve for gratuity of Rs. 7,75,000 and the reserve for bad and doubtful debts of Rs. 48,872 cannot, in my opinion, be termed as reserves. In fact, the assessee itself has shown the reserve for gratuity as a provision for gratuity and has included it under the head ' Current liabilities and provisions'. The provision for bad and doubtful debts has been deducted from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by created out of profits of a business to meet contingencies which are unknown and which cannot be foretold on the basis of knowledge of current facts. A reserve is created by way of appropriation of profits. It is not a charge against profits. Since it is an appropriation, it, does not go out of the business, but is retained in the business as part of its capital. (b) A provision, on the other hand, is a charge against profits. It is created to meet liabilities, which are known and foreseeable, but whose exact timing, and hence whose quantification, alone, are uncertain, at the moment. proposition 2 : Gratuity for employees is a definite liability of the business, although when exactly it would have to be paid actually is dependent up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only, it is an ad hoc provision. In case (ii) also, the liability is foreseen and, what is more, it is currently ascertained on an actuarial calculation as to the exact amount to be set aside. Hence, this is a fortiori case; the amount set aside is clearly a current liability and a provision. Cases (i) and (ii) must thus be regarded as " provisions " and not as " reserves " Case (iii) is of an amount capable of break-up or dissection. It comprises the amount of liability determined on an actuarial valuation plus an amount over and above the actuarial figure. To the extent it represents the amount arrived at by actuarial valuation, it is a provision and has to be dealt with as charge against current profits. Bat to the extent the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's capital. Having made these points, the Supreme Court remanded the case before them to the Tribunal to find out whether what was provided for by the assessee in its balance-sheet was really an ad hoc provision for gratuity, or whether it was an actuarial provision, or whether the actual amount set apart in the balance-sheet was in excess of the actuarial provision and if so, to what extent. The Supreme Court directed the Tribunal to decide about the nature of the provision or part thereof, as the case may be, on a consideration of all these relevant factors. In the course of the argument before us in the present case, three decisions of our High Court were cited. All of them happened to be rendered before the Supreme Court rendered th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion made in this case was an out and out ad hoc amount, or a precise amount recommended by actuarial valuation, or an amount which spills over and above the figure based on actuarial valuation. The Supreme Court's decision shows that the character of the appropriation for gratuity liability will really depend on whether the amount in question is purely ad hoc, or whether it is a lump sum over and above the actual actuarial figure of liability. As we earlier pointed out, an amount of Rs. 7,75,000 has been set apart in the balance-sheet of the assessee in this case, but it is not known whether this lump sum appropriation is of the one kind or the other. In this state of our knowledge, we are not in a position to answer the question of law ref ..... X X X X Extracts X X X X X X X X Extracts X X X X
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