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Second Schedule to the Companies (Profits) Surtax Act, 1964 - Capital - Computation of - Assessment year 1965-66 - Whether gratuity reserve, taxation reserve and dividend reserve only in excess of actual liability of assessee are includible in capital computation - Held, yes FACTS The Tribunal held that (i ) retirement gratuity reserve, (ii) dividend reserve, and (iii) taxation reserve in excess of tax liability constituted reserves includible in capital computation. On reference: HELD In view of the decision of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 neither retirement gratuity reserve nor taxation reserve have to be treated as reserve as such but only that part of these reserves which is in excess of the liability of the assessee in the case of gratuity reserve computed on the basis of actuarial valuation and in the case of taxation reserve actual liability will have to be treated as reserve. Further, the dividend reserve to the extent it was in excess of the amount of the dividend proposed and actually declared was alone to be treated as reserve. CASE REVIEW Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 (SC) followed and relied upon. CASES REFERRED TO Vazir Sultan Tobacco Co. Ltd v. CIT [1981] 132 ITR 559 (SC) and CIT v. Burmah Sheel Refineries Ltd [1990] t86 ITR 138 (Bom.). Dr. V. Balasubramanian, J.P. Deodhar, P.S. Jetly and K.C. Sidhwa for the Applicant J.D. Mlstry for the Respondent. JUDGMENT Sugla, I. - In this departmental reference relating to the assessee's surtax assessment for the assessment year 1965-66 the Tribunal has referred to this Court the following three questions of law for opinion under section 256(1) of the Income-tax Act, 1961 as applied to surtax by section 18 of the Companies (Profits) Surtax Act, 1964: " 1. Whether, on the facts and in the circumstances of the case, the retirement gratuity reserve of Rs. 16,17,966 constitutes a reserve includible in the computation of capital in terms of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 for the assessment year 1965-66? 2. Whether, on the facts and in the circumstances of the case, the dividend reserve of Rs.…

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