1. This is a reference under s. 18 of the Companies Profits) Surtax Act, 1964 (referred to hereinafter as 'The Companies Surtax Act'), read with as. 256 (1) of the I.T. Act, 1961. The question referred to us in this reference is as follows :
'Whether, on the facts and in the circumstances of the case, the Staff Gratuity Reserve of Rs. 1,57,967 as on 1st January, 1963, constitutes a reserve as a contemplated in rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?'
2. The relevant facts can be very shortly stated. The assessment year with which we are concerned is the assessment year 1964-65. The reference relates to the computation of the capital of the assessee-company for surtax purposes in terms of r. 1 of the Second Schedule to the Companies (Profit) Surtax Act. The capital required to be computed is as on 1st January, 1963, being the 1st day of the relevant previous years namely, 1st January, 1963 to 31st December, 1963. Out of the profits of the assessee for the year ended 31st December, 1962, the directors had appropriated on 10th May, 1963, a sum of Rs. 1,57,957 by way of transfer to the staff gratuity reserve. The assessee contended that this amount should be included in the capital of the company for the purposes of the Companies (Profits) Surtax Act. This contention of the assessee was not accepted by the ITO. On an appeal by the assessee to the AAC, the AAC held that this amount was in the nature of a provision and not a reserve and he dismissed the appeal. The assessee thereafter preferred an appeal to the Income-tax Appellate Tribunal. The Tribunal took the view that the aforesaid amount, representing the staff Gratuity Reserve could not be said to have been retained by way of providing for a known liability but it was a provision merely for a contingent liability and hence it was liable to be included in the capital of the assessee-company for the purposes of the Companies (Profits) Surtax Act. The aforesaid question referred arises from this decision of the Tribunal.
3. Our attention is drawn by the counsel on both the sides to the decision of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT : 132ITR559(SC) . That case also related to the computation of the capital of the assessee - company for the same purpose as in the case before us. It was held by the Supreme Court that ordinarily an appropriation to gratuity reserve will have to be regarded as a provision made for a contingent liability, for under a scheme framed by a company, the liability to pay gratuity to its employee on the determination of employment arises only when the employment of the employee is determined by death, incapacity, retirement or resignation-an event (cessation of employment) certain to happen in the service career of every employee; moreover, the amount of gratuity payable is usually dependent on the employee's wages at the time of determination of his employment and the number of years of service put in by him and the liability accrues and enhances with the completion of every year of service; but the company can work out on an actuarial valuation its estimated liability (that is, discounted present value of the liability under the scheme on a scientific basis) and make a provision for such liability not all at once but spread over a number of years. It is clear that if by adopting such scientific method any appropriation is made such appropriation will constitute a provision representing fairly accurately a known and existing liability for the year in question; if, however, 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, though a contingent one, for the expression 'liability' occurring in cl. 7(a) of : Pt. III of the Sixth Schedule to the Companies Act, 1956, includes any expenditure contracted for and arising under a contingent liability; but if the sum so appropriated is shown to be in excess of the sum required to meet the estimated liability (discounted present value on a scientific basis) it is only the excess that will have to be regarded as a reserve under cl. 7(2) of Pt. III of the Sixth Schedule to the Companies Act. It is not disputed before us that in view of this decision the amount of Rs. 1,57,967 cannot be included in the capital of the assessee-company for the aforesaid purposes, as this amount has been set aside merely on an ad hoc basis to meet a contingent liability, namely, the liability which the assessee-company is bound to incur some day or the other to pay gratuity. However, our attention was drawn by Mr. Mehta learned counsel for the respondent-assessee, to a passage in the judgment of the Supreme Court (P. 578), where the Supreme Court has observed that since in the case before it sufficient material throwing light on the aforesaid aspects of the question had not been made available in the interests of justice, the Supreme Court remanded the matter to taxing authority through the Tribunal to decide whether the concerned amount set apart and transferred to gratuity reserve by the assess-company was either a provision or a reserve and if the latter, to what extent. It was further observed that this question would be decided by the taxing authority after giving an opportunity to the assess-company to place additional relevant material before it. On the basis of the observation to the aforesaid effect made by the Supreme Court, it was submitted by Mr. Mehta that in the present case also we 34 should remand the matter with directions similar to those given by the Supreme Court. We are afraid, in view of the limited jurisdiction that we have got in a reference it is not possible to accede to the request of Mr. Mehta. We do, however, think that when the matter goes back to the Tribunal, in view of our decision on the question referred it should be open to the assessee to take up the contention that such part of the said amount of Rs. 1,57,967, as exceeded the liability for gratuity calculated on an actuarial basis as on 1st January. 1963, should be included in the capital of the assessee-company for the purposes of the Companies (Profit) Surtax Act. We have no doubt that the Tribunal and the taxing authorities will follow the procedure directed by the Supreme Court in the aforesaid case, which we have set out earlier.
4. In the result, the question referred is answered in the negative and against the assessee. The matter will now go the Tribunal, which will dispose of the case in accordance with what we have observed above. Looking to all the facts and circumstances of the case, there will be no order as to costs.