1. In this reference three question of law stand referred to us by the Income-tax Appellate Tribunal, two at the instance of the Commissioner and one at the instance of the assessee.
2. The three question pertain to three amounts which were claimed by the assessee as constituting reserves for the purpose of computing the capital under the Super Profits Tax Act, 1963. These three items pertain to the assessment year 1963-64 and were :
(1) Provision for taxation Rs. 27,57,781
(2) Proposed dividend Rs. 17,54,688
(3) Provision for gratuity Rs. 9,65,203
Question No. 1 pertains to the amount set aside as a provision for gratuity. Question No. 2 pertains to the amount set aside for proposed dividend. Question No. 3 (as we shall designate it) referred to us at the instance of the assessee pertains to the amount set aside by the assessee-company as provision for taxation.
These three questions are as under :
'1. Whether, on the facts and in the circumstances of the case, the provision for gratuity of Rs. 9,65,203 constituted a reserve for the proposes of the Super Profits Tax Act, 1963 ?
2. Whether, on the facts and in the circumstances of the case, the provision of proposed dividend of Rs. 17,54,688 constituted a reserve for the purpose of the super Profit Tax Act, 1963 ?
3. Whether, on the facts and in the circumstances of the case, the sum of Rs.. 27,57,781 set aside by the company as provision for taxation constitutes a reserve for the purpose of the Super Profit Tax Act, 1963 ?
3. As far as the third question is concerned, it has been pointed out that the reference was not competent because of the failure of the assessee to adopt necessary procedural modalities for invoking a reference. What was done by the assessee was not filing of a separate reference application but to, make a claim of reference in its written reply submitted in answer to the reference application made by the Commissioner. This process in contrary to what the Supreme Court has laid down in CIT v. Damodaran : 121ITR572(SC) . Question No. 3 was totally an independent question and did not pertain to an aspects of law which had been negatived by the Tribunal while dealing with the two questions referred at the instance of the Commissioner. Once we reach that conclusion, we are obliged to hold that the Appellate Tribunal was not competent to refer question No. 3 merely on the basis of an application made in the reply and the reference to that extent must be considered void. In the circumstances, we cannot examine or express any opinion on the said question on its merits.
4. As far as the other two questions which are properly referred to us are concerned, it has been fairly stated by Mr. Dastur appearing on behalf of the assessee that question No. 2 is concluded in favour of the Commissioner and against the assessee by the Supreme Court its decision given in Vazir Sultan Tobacco Co. Ltd. v. CIT : 132ITR559(SC) . It was not the case of the assessee that a higher amount was provided for than the one actually distributed subsequently as dividend and if that be so, the matter would seem to squarely concluded against the assessee by the decision of the Supreme Court referred to above. As far as the said question in discussion, it is unnecessary to elaborate the material further Question No. 2 is accordingly answered in the negative and against the assessee.
5. Question No. 1 which pertains to an amount of Rs. 9,56,203 set aside by the assessee as provision for gratuity causes some difficulty as was referred to by the Supreme Court in the said decision in vazir s Sultan Tabacco's case : 132ITR559(SC) . It has been stated by the Supreme court in the above case [p.574] :
'Ordinary an appropriation to gratuity reserve will have to be regard as a provision made for a contingent liability for under a scheme framed by a company, the liability to pay gratuity to its employees on 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 employment and the number of years of service put in by him and the but the company can work out on an actuarial valuation its estimated liability i.e., discounted present value of the 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(1)(a) of Part III of the Sixth Schedule to the Companies Act includes any expenditure contracted for and arising under a content 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 part III of the Sixth Schedule to the Companies Act, 1956.'
6. Our attention was also drawn in this connection to a decision given by a Division Bench of the Bombay High Court in CIT v. Gokak Mills Ltd. : 142ITR525(Bom) . In Gokak Mills' case, the Division Bench followed the guidelines laid down by the Supreme Court in Vazir Sultan Tobacco's case : 132ITR559(SC) , and gave necessary directions to the Tribunal Mr. Dastur tried to bring to our attention the fact as contended by him that there was material already on record to show that this provision was far in exceeds of the estimated liability of the assessee-company for gratuity to its employees. According to him this would be borne out by note No. 1 at the foot of the balance-sheet of the company as on December 31, 1962 (which was available before us), as presumably in the previous balance-sheet also. Thus, according ton him, as against the estimated liability of Rs. 4,82,602 (as at December 31, 1961), the company had provided for Rs. 9,65,203 and at least this difference, which presumably would have been much more if the estimate had been a scientific estimate and not an ad hoc one, must be clearly regarded as a reserve.
7. In our view, we should refrain from expressing any definite opinion on this contention and leave the matter to the Tribunal to decide in accordance with the guidelines propounded by the Supreme Court in Vazir Sultan Tobacco's case : 132ITR559(SC) . In that cases, the Supreme Court observed that if sufficient material throwing light on the aspects of the question was not available, it was in the interest of justice necessary to remand the case through the Tribunal to the taxing authority to decide the issue whether the amount set apart and transferred to the gratuity reserve by the assessee-company was either a provision or a reserve and if the latter to what extent. The relevant paragraph of the Supreme Court decision is to be found at p. 578 of the report.
8. Thus, as far as question No. 1 is concerned, it must be answered in the negative as far as the entire amount of Rs. 9,65,203 in concerned. However, a part of it would seen to be a provision and a part of the amount to a reserve as indicated by the Supreme Court. The lower taxing authority will decide the issue in the light of the principles enunciated in Vazir Sultan Tabacco's case : 132ITR559(SC) , after giving an opportunity to the assessee-company to place additional relevant materials before it, if necessary.
9. In our views, this order disposes of all the three question referred to us. In the circumstances of the case, parties are directed to bear their own costs.