Law:

Section:

Rule 1 of the second schedule to the com-panies (profits) surtax act, 1964-Capital-Computation of-Assessee-company claimed additional depreciation reserve, provision for taxation and gratuity and amount of proposed dividend as reserves includible in its capital base for purpose of standard deduction - Whether additional depreciation reserve was reserve includible in computation of capital base - Held, yes-Whether provisions for taxation and gratuity and amount of proposed dividend were to bb excluded while computing capital base-Held, yes Facts During the assessment year 1963-64, the assessee-company claimed that the following four items should be included in the computation of capital base as reserves as these formed "other reserves" within the meaning of rule 1 of the Second Schedule : (a) additional depreciation reserve, (ft) provision for tax, (c) provision for gratuity, and (d) proposed dividend. The ITO, however, held that these four items were in the nature of provisions which were set apart to meet the known liability and so he did not treat these as reserves and excluded them from the computation of the capital base. On appeal, the AAC and the Tribunal confirmed the ITO's order. On reference : Held 1. As regards the first item, i.e., additional depreciation reserve, it was clear that this was over and above the depreciation that was allowable or allowed under the Income-tax Act. From a common sense point of view, this was an additional depreciation reserve over and above the normal depreciation, which was kept ready for use in future for business purposes. Therefore, it should be treated as a reserve and should have been included in the capital base for the determination of statutory deduction. 2. As regards the second item, i.e., provision for taxation, since there was no finding that it was an excess provision it should be treated as a liability and not as a reserve. Therefore, it had to be excluded from computing the capital base for determination of the standard deduction. 3. As regards the third item, i.e ., provision for gratuity, the Tribunal had found that there was a scheme for gratuity which was regularly followed by the assessee-company.…

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