Law:

Section:

Second schedule to the Companies (Profits) Surtax Act, 1964 - Capital - Computation of - Assessment year 1973-74- Whether amount transferred by assessee company to an unapproved gratuity fund on an ad hoc basis should be regarded as a provision and not as a reserve, and therefore said amount could not be taken into account while computing capital of assessee - Held, yes FACTS During the relevant previous year, the assessee company transferred certain amounts to the gratuity reserve account though the assessee did not have an approved gratuity scheme. For the assessment year 1973-74, in making the surtax assessment on the assessee, the ITO omitted to take into account the gratuity reserve for capital computation on the ground that it was in the nature of a mere provision, though camouflaged as a reserve. However, on second appeal the Tribunal held that the amount standing to the credit of the gratuity reserve account should not be treated as a provision, but should be treated as a 'reserve' and should, therefore, be taken into account while computing the capital of the assessee for surtax purposes. On reference : HELD Applying the tests laid down by the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 what was found in the instant case was that there had been ad hoc transfers by the assessee to the gratuity reserve fund, and, in such a case, the Supreme Court had clearly pointed out that if an ad hoc sum is appropriated without resorting to any scientific basis, such appropriation would also be a provision intended to meet a known liability. From the facts available in the statement of the case, and in the light of the principles laid down by the Supreme Court in the decision referred to earlier, the Tribunal was in error in concluding that the amounts transferred by the assessee should be regarded as part of the general reserve or at least in the nature of a particular reserve for purposes of capital computation for surtax assessment. Note : The case has been decided in favour of the revenue. CASE REFERRED TO Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 (SC). C.V. Rajan for the Applicant. S.A. Balasubramaniam for…

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