TaxTMI 
TaxTMI 
1972 (8) TMI 29
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.... 1964 ? " The assessee is a public limited, company owning certain estates and deriving income from tea, coffee and cardamom. Its issued and subscribed capital during the relevant periods was Rs. 57,94,880. In the balance-sheet of the company as on March 31, 1963, the following sums were shown under the heading " reserves and surplus " : Rs. General reserve 19,00,000 Reserve for retirement gratuity 11,50,000 Development reserve 1,68,711 Profit and loss account balance 58,308 For determining the capital for the purpose of standard deduction under the Companies (Profits) Surtax Act (hereinafter referred to as " the Act " ), for the assessment year 1964-65, the assessee claimed that the sum of Rs. 11,50,000 shown as " reserve for retirement gratuity " must also be taken into account. For the year 1965-66, the sum standing to the credit of the reserve for retirement gratuity was Rs. 11,60,727 and for the year 1966-67, the amount was Rs. 13,98,000. The dispute before the Income-tax Officer was whether these sums which were treated by the assessee as reserve for retirement gratuity were really to be treated as reserves in computing the statutory deduction permissible under the Ac....
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....t, on the facts and in the circumstances, the retirement gratuity reserve cannot be treated as a reserve and, therefore, cannot be taken to be part of the capital. Before us, it is urged by counsel for the department that the amount in dispute is not a reserve at all and even if it be a reserve in any sense of the term, since it is in the nature of one or other of the items falling under the heading " current liabilities and provisions " in the column relating to liabilities in the form of balance-sheet given in Part I of Schedule VI to the Companies Act, 1956 (hereinafter referred to as " the Companies Act "), it has to be excluded from the computation of capital. We will now refer to the relevant provisions of the Act to which we may have to advert to in due course. Section 4 of the Act is the charging section. That reads : " 4. Subject to the provisions contained in this Act, there shall be charged on every company for every assessment year commencing on and from the first day of April, 1964, a tax (in this Act referred to as the surtax), in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduc....
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....aid) or any person in a country outside India : Provided that such moneys are borrowed for the creation of a capital asset in India and the agreement under which such moneys are borrowed provides for the repayment thereof during a period of not less than seven years. Explanation.- For the removal of doubts it is hereby declared that any amount standing to the credit of any account in the books of a company as on the 1st day of the previous year relevant to the assessment year which is of the nature of item (5) or item (6) or item (7) under the heading 'Reserves and surplus' or of any item under the heading 'Current liabilities and provisions' in the column relating to 'Liabilities' in the 'Form of balance-sheet' given in Part I of Schedule VI to the Companies Act, 1956, shall not be regarded as a reserve for the purposes of computation of the capital of a company under the provisions of this Schedule. " The parties have no case that reserve for gratuity falls within any of the items mentioned in this rule other than item (iii), namely, " other reserve ". Whether it is a reserve at all to bring it within this clause and even if it is a reserve whether it is excluded by reason of ....
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....ction 4 of the Business Profits Tax Act permitted the levy of tax on the amount of the taxable profits equal to sixteen and two-thirds per cent. of such taxable profits. " Taxable profits " was defined as the amount by which the profits during a chargeable accounting period exceeded the abatement in respect of that period. " Abatement " was defined in section 2(1) of that Act thus : " 'Abatement' means, in respect of any chargeable accounting period ending on or before the 31st day of March, 1947, a sum which bears to a sum equal to--- (a) in the case of a company, not being a company deemed for the purposes of section 9 to be a firm, six per cent. of the capital of the company on the first day of the said period computed in accordance with Schedule II, or one lakh of rupees, whichever is greater. " In the case before the Supreme Court in Commissioner of Income-tax v. Century Spg. and Mfg. Co. Ltd. , the question that arose was whether an amount of Rs. 5,08,637 was a part of the " reserves " of the assessee- company as on 1st April, 1946, within the meaning of rule 2(1) of the rules in Schedule II to the Business Profits Tax Act. That was the undistributed profits of the company....
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....earlier decision and said thus : " As to what the word 'reserves' as used in the Business Profits Tax Act connotes, was considered by this court in Commissioner of Income-tax v. Century Spinning and Manufacturing Co. Ltd. It was held that the true nature and character of a sum disputed as reserve was to be determined with reference to the substance of the matter. The amount in dispute in that case was the profits after the deduction of depreciation and tax which amount was carried to the balance-sheet and was later recommended by the directors to be appropriated mainly to dividends and balance to be carried forward to the next year's account. Thus, on the crucial date, i.e., April 1, 1946, from which the chargeable accounting period began the sum in dispute had not been declared as reserve ; on the other hand the directors had earmarked it for distribution as dividend and it remained as a mass of undistributed profits available for distribution. At page 504, Ghulam Hassan J. said : ' The reserve may be a general reserve or a specific reserve, but there must be a clear indication to show whether it was a reserve either of the one or the other kind. The fact that it constituted a m....
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....y, the court said thus : " The right to obtain gratuity under the awards arises only when there is determination of employment and not before. The liability does not exist in praesenti : it is contingent upon the determination of employment. " Referring to the earlier decision of the court in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax the Supreme Court said : " ' ..... the following definition is unanimously accepted : " a debt is a sum of money which is now payable or will become payable in future by reason of a present obligation : debitum in praesenti, solvendum in futuro" '. " The Supreme Court further said that : " The said decisions also accept the legal position that a liability depending upon a contingency is not a debt in praesenti or in futuro till the contingency happened. But, if there is a debt, the fact that the amount is to be ascertained does not make it any the less a debt if the liability is certain and what remains is only the quantification of the amount. In short, a debt owed within the meaning of section 2(m) of the Wealth-tax Act can be defined as a liability to pay in praesenti or in futuro an ascertainable sum of money." I....
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.... shall not be made by the Income-tax Officer in certain cases. It is in connection with this that the question arose before the Bombay High Court and what had to be decided in the reference was the admissibility of the claim by the assessee that a sum of Rs. 1,00,200 which was a provision for retirement gratuity and another provision for bonus of a sum of Rs. 1,04,000 should be excluded in determining the applicant's actual accounting profits. That was for the purpose of deciding whether, having regard to the smallness of the profits, an order under section 23A ought to be made or not. Therefore, the question that had to be decided was whether these sums could be deducted in arriving at the net profit. The sum of Rs. 1,04,000 was a debt payable in the accounting year itself, namely as a provision for payment of bonus. Though not paid, it was found to be a liability of the assessee. With regard to the sum of Rs. 1,00,200, it was a provision for gratuity and it was contended by the assessee that the gratuity was due on account of an award. The provision for gratuity was treated as a provision which should be taken into account in determining the profit. It is not possible to ascert....
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....the provision made for gratuity could be regarded as a reserve. What it pointed out was that a reserve was a fund set apart to meet a future expenditure or a liability which would fall at a future time. Where a liability has actually fallen though the quantum of the liability has not yet been determined, a provision made to meet the present liability is not a provision by way of a reserve. " According to us, the principle has been correctly stated by the Bombay High Court. Possibly, in that case the liability for payment had already arisen by reason of the award. That again is not quite clear from the facts stated. Whatever that be, the principle stated is quite consistent with what we have said in this judgment. We proceed to consider the next aspect. We have to examine now whether the reserve is of the nature of any of the items in the current liabilities and provisions in the form of the balance-sheet, given in Part I of Schedule VI to the Companies Act. Schedule VI, Part I, gives the form of balance-sheet. Any trader would like to ascertain his true financial position as at the end of each trading period, and that he could, by the preparation of a profit and loss account. Whe....
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....urrent liability has arisen in the accounting year it cannot find a place either in the items of expenditure for the year or in provisions for meeting liabilities. There is no current liability. In regard to a liability which has not arisen (in the sense no debt has become due from the assessee by reason of retirement) any amount reserved does not have the character of amount reserved by way of provision to meet a liability. The argument of counsel for revenue is that even such a reserve is in the nature of liability mentioned in the heading " current liabilities and provisions ". It is easy to see that it is neither a current liability nor one in the nature of such liability. If " provision " has to be understood in relation to a balance-sheet for the current year as one for meeting the liabilities of the year, as we feel it should be, it is evident that the disputed reserve is not in the nature of a provision. Counsel for the revenue argues that the term "Contingencies" referred to in the form of balance-sheet has not to be related to the year in question but to any liability that may arise at any point of time. In a balance-sheet where the financial position for the year is re....