Law:

Section:

JUDGMENT Tulzapurkar, J.-In this reference at the instance of the Commissioner of Income-tax, Bombay City-II, Bombay, the following two questions have been referred to us for our opinion: "(1)Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sums of Rs. 98,730 for the assessment year 1964-65, Rs. 1,10,000 for the assessment year 1965-66 and Rs. 81,000 for the assessment year 1966-67, representing provision for gratuity were includible in computing the capital of the assessee-company under rule 1 of Schedule II of the Companies (Profits) Surtax Act, 1964, for the purpose of surtax? (2)Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sums of Rs. 3,20,000 for the assessment year 1964-65, Rs. 3,48,943 for the assessment year 1965-66, and Rs. 4,62,609 for the assessment year 1966-67, representing dividend reserves were includible in the computation of the capital of the assessee-com-pany under rule 1 of Schedule II of the Companies (Profits) Surtax Act, 1964, for the purpose of surtax?" The first question relates to the assessment years 1964-65, 1965-66 and 1966-67, the previous accounting years in respect whereof were calendar years ended December 31, 1963, December 31, 1964, and December 31, 1965, respectively; consequently the material date, being the first day of the previous accounting period for the purpose of capital computation under the Companies (Profits) Surtax Act, 1964, would be January 1, 1963, January 1, 1964, and January 1, 1965, respectively. For the relevant assessment years 1964-65, 1965-66 and 1966-67 there were three amounts standing to the credit of gratuity reserve in the company's books, the amounts being Rs. 98,730, Rs. 1,10,000 and Rs. 81,000, respectively. In surtax assessment the assessee-company included in the computation of its capital for these three assessment years the said three amounts. Admittedly, these amounts had not been allowed as a deduction under the Income-tax Act, 1961. The Income-tax Officer while computing the capital of the assessee-company under the Companies (Profits) Surtax Act, 1964, did not include…

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