1981 (9) TMI 105 - SC - Income Tax

Whether amounts retained or appropriated or set apart by the concerned assessee-company by way of making provision, (a) for taxation, (b) for retirement gratuity, and (c) for proposed dividends from out of profits and other surpluses could be considered as " other reserves " within the meaning of r. 1 of the Second Schedule to the super Profits Tax Act, 1963 for inclusion in the capital computation of the company for the purpose of levying super profits tax ?

Held that:- the appropriation of the amounts set apart by the assessee-companies before us for taxation would constitute a provision made by them to meet a known and existing liability and as such the concerned amounts would not be includible in the capital computation.

All the items, namely, 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 reserve but a provision

In the context of the question whether while incurring any expenditure or making any disbursement a commercial concern will resort to current income or past savings, the normal rule, in the absence of express indication to the contrary, would be to resort to the current income rather than past savings.

In our view, therefore, the Tribunal was right in excluding the sum of ₹ 3,10,450 from the general reserves while computing the capital of the assessee-company for the assessment year 1974-75 in the absence of express indication to the contrary. Civil Appeal is partly allowed and the issue whether the appropriation for retirement gratuity is a reserve or not is remanded to the taxing authority and the rest of the appeal is dismissed.