Law:

Section:

Second Schedule to Super Profits Tax Act, 1963 - Capital - Computation of - Assessment year 1962-63 - Whether meaning of word 'reserve' in rule 1 of Schedule II has to be understood as a specified amount set apart for a specific purpose by company before distribution of dividends which is available for future use of company - Held, yes - Whether therefore, amount set apart by assessee-company for payment of gratuity, a contingent and future liability which has been used for purpose of business of company, could be treated as reserve - Held, yes - Whether, similarly, excess provision for taxation which was available for use of assessee-company in its business could also be treated as a 'reserve' - Held, yes FACTS In working out the capital base for the purpose of ascertaining amount of standard deduction under the Act, the assessee included the following sums apart from the capital : Development rebate reserve General Reserves Repairs and renewal reserve Balance in the profit and loss account Provision for taxation Proposed dividend Reserve for gratuity The Super Profits Tax Officer considered the development rebate reserve and the general reserve as capital and rejected the claim in respect of the other items for the reason that they were merely provisions for specific liabilities and would not constitute reserves under rule 1 of the Second Schedule. The AAC held that the sum representing the reserve for repairs and renewals should be regarded as reserve and included it in the computation of capital. He, however, agreed with the Super Profits Tax Officer in respect of the other items. The Tribunal held that the assessee was entitled to treat the sum representing the provision for gratuity as a reserve. It also held that the excess provision for taxation would also be a reserve. On reference : HELD As regards the amount set apart for payment of gratuity to employees, it is seen that the payment of gratuity is governed by a scheme which provided that every permanent employee of the assessee-company would be eligible for a retiring gratuity which would be equal to half a months' salary or wages for every completed year of continuous service put in since 1-1-1941,…

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