Rege, J.:— In this reference by the Commissioner of Income-tax, Bombay City-II, Bombay, under s. 256(1) of the I.T Act, 1961, the following three questions have been referred to us for our opinion:
“(1) Whether, on the facts and in the circumstances of the case, the sum of Rs. 4,00,000 appropriated from undistributed profits of the accounting year ended 30th June, 1962, and placed to the credit of the general reserve in terms of the board's resolution dated 22nd November, 1962, is includible in the computation of capital of the assessee-company as on 1st July, 1962, for the purpose of surtax for the assessment year 1964-65?
(2) Whether, on the facts and in the circumstances of the case, the excess of Rs. 5,988 of the reserve actually created over the reserve required to be created in terms of section 10(2)(vib) of the Indian Income-tax Act, 1922 (section 34(3)(a) of the Income-tax Act, 1961), falls in the category of ‘other reserves’ as contemplated under clause (iii) of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964?
(3) Whether, on the facts and in the circumstances of the case, the amount of Rs. 4,33,825 standing to the credit of the gratuity reserve as on 1st July, 1962, is a reserve as contemplated in rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964?”
2. In this case we are concerned with the assessment year 1964-65, the previous accounting year in respect whereof was the calendar year ending 30th June, 1963. The material date for the purpose of capital computation under the Companies (Profits) Surtax Act, 1964, would be 1st July, 1962. The first question relates to the appropriation of a sum of Rs. 4,00,000 from the undistributed profits of the accounting year ended 30th June, 1962, and being placed to the credit of the general reserve in terms of the board's resolution dated 22nd November, 1962. The question was whether the said amount could be included in the computation of the capital of the assessee-company as on 1st July, 1962, for the purpose of surtax for the assessment year 1964-65.
3. Admittedly, the said amount of Rs. 4,00,000 was included in the balance-sheet of the assessee-company as at 30th June, 1963, in the opening balance as on 1st July, 1962, of the general reserve of Rs. 17,00,000. The ITO under his surtax assessment order dated 7th February, 1968, excluded the said sum of Rs. 4,00,000 from the computation of capital as on 1st July, 1962, on the ground that the necessary appropriation to the reserve was made after 1st July, 1962, that is, by a resolution passed at the annual general meeting held on 27th December, 1962. The AAC by his order dated 7th September, 1968, sustained the said view. The Income-tax Appellate Tribunal, however, by its order dated 26th September, 1970, following the view expressed by this court in the case of CIT v. Aryodaya Ginning and Manufacturing Co. Ltd., [1957] 31 ITR 145, held that for the purpose of surtax the said amount of general reserve of Rs. 4,00,000 along with the earlier general reserve of Rs. 13,00,000 was to be included in the capital as on 1st July, 1962.
4. The learned counsel for the parties before us are agreed that the said question is squarely covered by the aforesaid decision of this High Court in the case of Aryodaya Ginning and Manufacturing Co. Ltd., [1957] 31 ITR 145, as well as by a subsequent decision of the Supreme Court in the case of CIT v. Mysore Electrical Industries Ltd., [1971] 80 ITR 566. Both the said decisions held that appropriation by the directors or at the general meeting of the company of the amount to the reserve (in this case on 27th December, 1963), later than the beginning of the accounting year (in this case 1st July, 1962), had to be treated as effective, as from the beginning of the accounting year. In that view of the matter, it is not necessary to deal elaborately with the consideration of the said question. The said question No. 1, therefore, will have to be answered in the affirmative and in favour of the assessee.
5. The second question is whether an excess of Rs. 5,988 in the reserve actually created, over the reserve required to be created in terms of s. 10(2)(vib) of the Indian I.T Act, 1922, (s. 34(3)(a) of the I.T Act, 1961), falls within the category of “other reserves” as contemplated under cl. (iii) of r. 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.
6. In this case it cannot be disputed that the ITO in his assessment order had committed a mistake in calculating the excess reserve as being Rs. 15,283 instead of Rs. 5,988, by miscalculating the reserve of 75% at Rs. 87,867 instead of the correct amount of Rs. 97,162. However, the ITO held the said excess as not a reserve and, therefore, excluded it from the computation of capital. The AAC sustained the said order of the ITO. The Tribunal/however, took the view, following its earlier decision, that such excess of Rs. 5,988 fell in the category of “other reserves” in terms of r. 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.
7. Before us, the learned counsel for the parties have agreed that the said question is squarely covered by a decision of this court in the case of CIT v. Otis Elevator Co. (India) Ltd., [1977] 107 ITR 241 (Bom). In that case it was held that the item of excess development rebate was covered by a circular dated 11th January, 1971, issued by the CBDT under which such excess development rebate reserve could be treated as “the other reserves” and included in the capital of the company. In that view of the matter, it was also not necessary to consider this question in any elaborate manner. The said question will, therefore, have to be answered in the affirmative and in favour of the assessee.
8. The third question which was argued before us was whether Rs. 4,33,825 standing to the credit of the gratuity reserve as on 1st July, 1962, was a “reserve” as contemplated under r. 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The ITO excluded the said amount from computation of capital on the ground that the same represented “provision” and not “reserve”. The AAC upheld the said order of the ITO. The Tribunal, however, following its earlier decision, held that the said amount is a “reserve” and not a “provision”. It observed:
“Nothing turns on the exhibition of the amount in the balance-sheet as provision for gratuity or as a reserve for gratuity. What we have to see is the true nature of the amount in order to find out whether it is a provision or a reserve.”
9. In the balance-sheet of the assessee-company as on 30th June, 1962, the said amount of service gratuity is shown under a heading “Provision for service gratuity”. Under the said head the total amount of gratuity of Rs. 4,33,824.81 is made up of Rs. 3,31,092.60 being as per last balance-sheet, Rs. 1,22,379 being addition during the year, less Rs. 19,647.15 being the payment during the year. In the balance-sheet in respect of the said item a note is inserted at the foot of the page, being Note 3, in the following terms:
“Provision has been made for gratuities to members of the staff with a service of 15 years and over……
The learned counsel for the Revenue has contended, relying on the aforesaid facts, that since the balance-sheet itself refers to the said amount as “provision for service gratuity” and since the very nature of the amount shows that it had been arrived at after some detailed calculation, the said amount could only be treated as a provision for a known or existing liability. On the other hand, the learned counsel for the assessee has contended that mere use of the word “provision” in connection with the said amount was not conclusive of the matter. He has further contended, relying on two decisions of this court, namely, (1) in the case of CIT v. Forbes Forbes Campbell & Co. Ltd., [1977] 107 ITR 38, and (2) Parke Davis (India) Ltd. v. CIT, [1981] 130 ITR 813, that in the absence of any material on record to show that the said amount was arrived at as a result of any specific or actuarial valuation undertaken by the assessee-company, the said amount would be considered to have been set apart on an ad hoc basis and, therefore, would not be considered as “provision” but would be considered only as a “reserve”.
10. It cannot be disputed that in order to find out whether a certain amount set apart was “reserve” or was “provision”, for computing the capital of a company under the Second Schedule to the Super Profits Tax Act, 1963, the true nature of the amount should be taken into account and not the mere nomenclature used for it by the assessee. In this case, therefore, the fact that the said amount has been shown in the balance-sheet as a “provision for service gratuity” or that Note 3 at the foot of the page refers to the same as “provision” was not conclusive to hold that the amount was “provision” and not “reserve”:
The nature of the terms “provision” and “reserve” came to be con sidered by this court in its aforesaid decision in the case of CIT v. Forbes Forbes Campbell & Co. Ltd., [1977] 107 ITR 38. In that case Tulzapurkar J., who delivered the judgment of this court, relying on the observations of the Supreme Court in the case of Metal Box Company, [1969] 73 ITR 53, held (p. 42 of 107 ITR):
“From the aforesaid observations the principle which is deducible is, though ordinarily appropriations to gratuity reserve are to be regarded as contingent liabilities, if on actuarial basis the estimated present liability could be ascertained properly, then, such ascertained estimated present liability could be allowed as a deduction while computing the profits of a business. On the other hand, if appropriations have beenmade to gratuity reserve without undertaking any actuarial liability or discounting the present value, then, obviously the appropriations cannot be regarded as a provision made by way of providing for any known or existing liability.”
(Underlining* supplied.)
11. This court in the case of Parke Davis (India) Ltd., [1981] 130 ITR 813, following the said earlier decision, on the facts of that case, held that the concerned amount not being in respect of any present or future liability and that while creating that reserve and appropriating the amount set apart towards reserve for staff gratuity, no attempt being made by the assessee to estimate any present liability on an actuarial basis, the reserve created was really on the footing that some claim for gratuity might arise in future and, therefore, the amount was in the nature of a reserve.
12. In this case, although the amounts mentioned under the said head, which have been worked out up to naya paise, do show that they have been arrived at after a certain degree of calculation, still there was no material on record tending to show that the said appropriations have been made on the basis of any scientific or actuarial valuation so as to regard the same as providing for any known or existing liability. The mere fact that the said amount has been referred to in the balance-sheet as “provision” was not conclusive. Under the circumstances, in consonance with the view taken by this court in its aforesaid two decisions, we hold that the said appropriation to gratuity reserve should be considered as “reserve” as being set apart on ad hoc basis for contingent liability and not “provision”.
13. The learned counsel for the Revenue relied upon a decision of the Calcutta High Court in the case of CIT v. Jugantar P. Ltd., [1981] 128 ITR 619 (Cal), which has taken the following view (headnote):
“That the provision for gratuity quantified with a certain amount of certainty and provided for in the balance-sheet could not be considered to be a reserve. Further, the provision for gratuity where the obligation to discharge the liability was contingent on a very remote ground and was in the nature of accrued liability would be allowable as deduction under s. 37 of the I.T Act, 196], in computing the income of an assessee. There was no evidence to show that the provision for gratuity was claimed as an allowable deduction in computing the income of the assessee. The fact that it was created as a reserve did not indicate whether it was allowed as a deduction or not. If an amount which was deductible was not allowed as a deduction and was available with the assessee it is not a free reserve as gratuity has to be paid out of those funds and it could not be used to meet any other liability of the business. Therefore, the provision for gratuity is not a reserve and cannot be included in the computation of the capital under Sch. II of the Act.”
14. The above-quoted view of the Calcutta High Court appears to us to be in conflict with the view taken by our court in the decisions mentioned above. In the view that we are taking in this case, relying on the two earlier decisions of this court, we are not able to agree with the view expressed by the Calcutta High Court in its said decision.
15. In that view of the matter, the third question will also have to be answered in the affirmative and in favour of the assessee, that is, the said amount of Rs. 4,33,825 standing to the credit of the gratuity reserve as on 1st July, 1962, was a reserve as contemplated under r. 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. Accordingly, for the reasons set out above, we answer the questions as under:
Question No. 1:
In the affirmative and in favour of the assessee.
Question No. 2:
In the affirmative and in favour of the assessee.
Question No. 3:
In the affirmative and in favour of the assessee.
S.K Desai, J.:— I have nothing to add to the discussion of the legal position. However, I find that the name of the respondents (assessee-company), which stands altered by reason of necessary resolutions being passed by the shareholders, has yet remained to be amended in the title of the reference, although Mr. Joshi was informed on 25th August, 1981, about the need for altering the name to Garware Paints Ltd.
16. This is the usual remissness of the Commissioner (or his attorneys?) in carrying out minor requirements, and it would appear that those in charge of the references to the High Court are either careless or negligent. Perhaps, the work load is a little too much for them. Mr. S.V Naik, appearing on behalf of the Commissioner, has assured me that the needful would be done and the title of the reference would be amended on or before 31st August, 1981. I am accepting the undertaking but making it clear that if hereafter affidavits of service are not ready, or the directions of the court are not carried out by the Commissioner or the assessee, as the case may be, they may be regarded as parties in default and non-suited on that ground. These words are added to the main judgment as and by way of caution and with the hope that the Commissioner would be a more responsible litigant hereafter.