TMI Blog1978 (2) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... 31st March, 1963. Under the aforesaid Act, tax should be levied on the chargeable profits of the previous year in accordance with the rates set out in the Third Schedule to that Act. " Chargeable profits " mean the total income of the assessee computed under the I.T. Act, 1961, for any previous year and adjusted in accordance with the provisions of the First Schedule. The super profits tax is levied only on the balance remaining after adjustment of the balance-sheet deduction against the chargeable profits. The assessee is a company carrying on the business of building railway wagons. In the assessment year 1963-64, a sum of Rs. 19,57,258 appeared as provision for labour retiring gratuity as on 1st April, 1962, the relevant date, and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foresaid facts, the following question of law is referred for opinion : " Whether, on the facts and in the circumstances of the case, the sum of Rs. 19,57,268 shown by the assessee in its accounts as ' provision for labour retiring gratuity ' was a reserve so as to be eligible for inclusion in the capital computation under the Second Schedule to the Super Profits Tax Act, 1963 ? " The expression "reserve" has not been defined in the S.P.T. Act, 1963. But it is the admitted case of both the parties that there, is a clear-cut distinction between a " provision " and a " reserve ". If any amount is retained by way of providing for " any known liability of which the amount cannot be determined with substantial accuracy ", the same will have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... surpluses to provide for any known liability of which the amount cannot be determined with substantial accuracy is a provision : (See William Pickles Accountancy, second edition, p. 192 ; Part III, clause 7, Schedule VI to the Companies Act, 1956, which defines provision and reserve). Mr. Pal argues that in this case certain amount was set apart out of the profits and surpluses for payment of gratuity, a known liability, the amount of which, of course, could not be determined with substantial accuracy. He also relies upon the interpretation of the words " reserves " and " provisions " as had been defined by rule 7 in Part III of Schedule VI of the Companies Act, 1956, as hereunder : " Rule 7(1)(a).-The expression ' provision ' shall, su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the balance-sheet is a reserve but an amount set aside out of profits and other surpluses to provide for any known liability of which the amount cannot be determined with substantial accuracy is a provision. On this principle, it is argued that the sum of Rs. 19,57,258 set apart for labour retiring gratuity could not be included in the capital computation. The amount set apart for specific contingency already foreseen though not quantified could not be accepted as a reserve. Dr. Pal, appearing for the assessee, on the other hand, contends that the question of payment of gratuity arises if and when the employment of the employee is determined by death, incapacity, retirement or resignation. So, according to him, this is a contingent liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the Payment of Bonus Act, 1965, not the payment of gratuity on determination of relationship of employer and employee. In that case the company's accounting year was from 1st April to 31st March of the following year and its books of account were maintained on the mercantile system of accounting. The company computed the amount of bonus payable to its employees under the Payment of Bonus Ordinance which was promulgated on 29th May, 1965, and furnished on 5th July, 1965, copies of its computation to the three respondents-unions representing its employees. The available surplus and allocable surplus, according to this computation, were Rs. 49.96 lakhs and Rs. 29.28 lakhs, respectively. On this basis, the company declared the bonus at 13.28 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 FJR 399 ; AIR 1971 SC 1821, the learned judges in this case were not prepared to accept the view taken by the Andhra Pradesh High Court, i.e., Vazir Sultan Tobacco Co. Ltd. v. CIT [1974] 96 ITR 248. It was held that there was no approved gratuity scheme framed as such by the assessee-company until appropriation to the gratuity reserve was made and while appropriating the amounts to gratuity reserve ad hoc amounts were appropriated or transferred to that reserve without undertaking any actuarial valuation. No attempt was made to estimate the present liability that would arise as a result of either retirement, death or superannuation or anything which may require the company to undertake a recourse to gratuity reserve and as such the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X
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