TMI Blog1978 (2) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 to that Act. It is not necessary for us to go into the adjustments provided in the First Schedule for the present purpose. Under s. 2(8) of the said Act there was statutory deduction for an amount equal to 10 per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule to that Act or Rs. 2,00,000, whichever was greater. In the Second Schedule the computation of capital was shown as follows : (a) Paid up share capital, (b) Development rebate reserve, and (c) Other reserves in so far as the amounts credited to such other reserves had not bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g gratuity', was a reserve so as to be eligible for inclusion in the capital computation under the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?" (There is a typographical error in the question at page 4 of the paperbook. The figure should be as we have mentioned above and not Rs. 30,60,869). The question as to in what sense "reserve" in r. 1 of the Second Schedule of the Super Profits Tax Act, 1963, should be construed, has recently been discussed by us in the case of CIT SPT v. Burn Co. Ltd. I.T. Reference No. 371 of 1970 [since reported in [1978] 114 ITR 565 (Cal)]. We further held in any event that the items with which we were concerned in that case were not ascertained with any substantial accuracy and these had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tuity'. This amount appears as on 1st April, 1962. The amount continues in the balance-sheet as on 31st December, 1962, and 31st December, 1964, with some slight modification covering some actual payments made thereout. It was explained before us that this amount was only a reserve for covering the future liability regarding the gratuity. It was pointed out that at the end of a person's service gratuity was payable under certain conditions and that on the basis of the assumption that the conditions would be satisfied, the assessee in order not to be faced with a large liability on a future date went on making provisions. The submission is that the amount was intended only as a reserve and was not to cover any imminent or known liability. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he scope of any of the enumerated items. It is not also excluded from the category of reserves. In these circumstances, we are satisfied that the change in the law does not affect the character of this amount which we have treated earlier in this order as a reserve. For the same reasons, we direct its inclusion as a reserve for this year also." Therefore, we have to consider this question whether in view of the Explanation added to the Companies (Profits) Surtax Act, 1964, the provision for labour retiring gratuity for Rs. 20,60,869 could be considered to be a part of its reserve in terms of r. 1 of the Second Schedule to the said Act. It is apparent that the Explanation specifically excluded certain items from the computation of reserve. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining to be executed on capital account and not provided for. (5) Other money for which the company is contingently liable." In this case it is not urged that the item in question can be considered to be in the nature of either item (5) or (6) or (7) under the heading "Reserves and Surplus". There is no dispute that the item is none of these. The only question, therefore, is whether the item with which we are concerned comes under the heading "Current liabilities and provisions". Undoubtedly there is scope for argument that this item might be covered by item (10) under the heading "Provision for contingencies" or item (13) being "other provisions". The form of the balance-sheet under the heading "Current liabilities and provisions" ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lanation introduced in the Act of 1964, that the item of this nature should be considered to be reserve (sic). In any event, an item which cannot be ascertained with any substantial accuracy, either by following any normal method of accountancy-- actuarial or otherwise---cannot be considered to be a contingent liability which merits exclusion from being considered as "reserve" in the context of r. 1 of the Second Schedule to the Act. This aspect is important even if one considers the question of "reserve" in contradistinction to. "provision" in the accountancy principle. On the point that such a kind of estimate of an obligation cannot be considered to be a contingent liability meriting exclusion from reserve, reliance may be placed on th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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