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TMI Blog1976 (7) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment year 1966-67, representing dividend reserves were includible in the computation of the capital of the assessee-company under rule 1 of Schedule II of the Companies (Profits) Surtax Act, 1964, for the purpose of surtax ? " The first question relates to the assessment years 1964-65, 1965-66 and 1966-67, the previous accounting years in respect whereof were calendar years ended December 31, 1963, December 31, 1964, and December 31, 1965, respectively ; consequently the material date, being the first day of the previous accounting period for the purpose of capital computation under the Companies (Profits) Surtax Act, 1964, would be January 1, 1963, January 1, 1964, and January 1, 1965, respectively. For the relevant assessment years 1964-65, 1965-66 and 1966-67 there were three amounts standing to the credit of gratuity reserve in the company's books, the amounts being Rs. 98,730, Rs. 1,10,000 and Rs. 81,000, respectively. In surtax assessment the assessee-company included in the computation of its capital for these three assessment years the said three amounts. Admittedly, these amounts had not been allowed as a deduction under the Income-tax Act, 1961. The Income-tax O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computing the income of the company for the purposes of the Indian Income-tax Act, 1922, or the Income-tax Act, 1961, the same would have to be deducted from such reserve and only the balance will be includible in the capital computation. Admittedly, in the instant case, none of the three amounts for the relevant years have been allowed as a deduction while computing the assessee-company's income for the purpose of the Income-tax Act, 1961. The only question which requires our consideration is whether these amounts which stand to the credit of gratuity reserve could be regarded as reserves falling within the concept of "reserve" under rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964. Certain undisputed facts with regard to these amounts standing to the credit of gratuity reserve may be stated. In the first place, it was not disputed before us that there was no approved gratuity scheme framed as such by the assessee-company until such appropriation to gratuity reserve had been made ; secondly, it was not disputed before us that while appropriating the amounts to gratuity reserve ad hoc amounts were appropriated or transferred to that reserve without un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee maintaining his accounts on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid. Just as receipts, though not actual receipts but accrued due are brought in for income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business." Again, at page 64 of the report, this is what the Supreme Court has observed : " The question that concerns us is whether, while working out the net profits, a trader can provide from his gross receipts his liability to pay a certain sum for every additional year of service which he receives from his employees. This, in our view, he can do, if such liability is properly ascertainable and it is possible to arrive at a proper discounted present value. Even if the liability is a contingent liability, provided its discounted present value is ascertainable, it can be taken into acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Second Schedule." In that case also the court was concerned with the question as to whether particular provision made for gratuity, furlough, salary, etc., was a reserve or a provision for the purpose of Schedule II to the Payment of Bonus Act, 1965. In para. 8 of its judgment the Supreme Court has categorically observed that all those items, viz., gratuity, furlough, salary, passage, service, commission, etc., were clearly in respect of liabilities which had already accrued in the years in which the provision was made and were not in respect of anticipated liabilities which might arise in future and, therefore, the court held that the said provision was not a reserve but a provision. Our attention was invited by Mr. Joshi for the revenue to a decision of the Andhra Pradesh High Court in the case of Vazir Sultan Tobacco Co. Ltd. v. Commissioner of Income-tax [1974] 96 ITR 248 (AP), where the question that was considered by the court was whether appropriation made for gratuity on retirement was a " provision " or " reserve " and the court had, at page 259 of the report, come to the conclusion that the amount set apart for gratuity was certainly liability known on the da ..... X X X X Extracts X X X X X X X X Extracts X X X X
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