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Parke Davis (India) Ltd. Vs. Commissioner of Income-tax, Bombay City-i - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 69 of 1970
Judge
Reported in(1979)13CTR(Bom)219; [1981]130ITR813(Bom); [1979]2TAXMAN70(Bom)
ActsSuper Profits Tax Act, 1963; Super Profits Tax Rules, 1963 - Rule 1; Income Tax Act, 1961 - Sections 34, 84 and 85
AppellantParke Davis (India) Ltd.; Commissioner of Income-tax, Bombay City-i
RespondentCommissioner of Income-tax, Bombay City-i; Parke Davis (India) Ltd.
Appellant AdvocateS.E. Dastur, Adv.
Respondent AdvocateR.J. Joshi, Adv.
Excerpt:
(i) direct taxation - terminal pay - super profits tax act, 1963, rule 1 of super profits tax rules, 1963 and sections 34, 84 and 85 of income tax act, 1961 - whether reserve for terminal pay includible in capital computation for tax purpose - such amount set apart for possible claim for retrenchment compensation which may or may not arise in future - not in respect of known liability - such amount to be treated as reserve - held, reserve for terminal pay includible in capital computation for tax purpose. (ii) bad and doubtful debts - whether reserve for bad and doubtful debts includible in capital computation for tax purpose - no existing liability or known liability - not ascertained as to which debt likely to become bad debt - practice of company to debit bad and doubtful debts to.....chandurkar, j.1. this reference in which four questions have been referred to us at the instance of the assessee and two questions at the instance of the revenue arises out of assessment proceedings for super profits tax of the assessee-company in respect of the assessment year 1963-64. the accounting year which was the previous year was a period from december 1, 1961, to november 30, 1962. under s. 4 of the super profits tax act, 1963, profits in excess of the standard deduction, which is an amount equal to 6 per cent. of the capital of the company, are liable to be taxed under the s. p. t. act. the capital is to be computed in accordance with the rules set out in the second schedule to the s. p. t. act. in respect of the assessment year in question, a resolution came to be passed by the.....
Judgment:

Chandurkar, J.

1. This reference in which four questions have been referred to us at the instance of the assessee and two questions at the instance of the revenue arises out of assessment proceedings for super profits tax of the assessee-company in respect of the assessment year 1963-64. The accounting year which was the previous year was a period from December 1, 1961, to November 30, 1962. Under s. 4 of the Super Profits Tax Act, 1963, profits in excess of the standard deduction, which is an amount equal to 6 per cent. of the capital of the company, are liable to be taxed under the S. P. T. Act. The capital is to be computed in accordance with the rules set out in the Second Schedule to the S. P. T. Act. In respect of the assessment year in question, a resolution came to be passed by the board of directors at it meeting held on 15th April, 1963, and the following decisions were taken with regard to the provisions and the reserves to make in the accounts for the year ended 30th November, 1962 :

(i) Rs. 70,039 were to be appropriated to the reserves for bad and doubtful debts making an aggregate total of Rs. 1,08,099 in the reserves for bad and doubtful debts calculated on the basis of all debts outstanding over a year as also at 1 1/2 per cent. on the balance of the trade debts.

(ii) Rs. 4,08,731, which was a provision for staff gratuity, were transferred to reserve for staff gratuity as from 1st December, 1961.

(iii) Rs. 86,545 were to appropriated to the reserve for staff gratuity.

(iv) Rs. 11,580 were to be appropriated for reserve for terminal pay.

(v) Rs. 16,02,675 were to be appropriated to tax exempt dividend reserve under s. 84 of the I. T. Act, 1961.

(vi) Rs. 76,25,519 out of a total amount of Rs. 78,16,689 to the credit of the profit and loss account were to transferred to the account of general reserve as from 1st December, 1961.

(vii) Rs. 15,22,168 being the surplus for the year ended 30th November, 1962, were to be transferred to the general reserve making an aggregate total of Rs. 91,47,687.

2. The accounts of the company were adopted by the shareholders at their meeting held on 29th May, 1963. The question before the SPTO was whether the general reserve, reserve for staff gratuity and the amount of proposed dividend of Rs. 43,05,000 could be included for the purposes of computation of capital under the Second Schedule. The SPTO declined to treat the general reserve as a part of capital as it was not a reserve on December 1, 1961. With regard to the reserve for terminal pay, reserve for staff gratuity, the SPTO took the view that these amounts were appropriated for meeting specific liabilities and did not, therefore, constitute reserves. He also treated the amounts were not treated as reserves for the purposes of computation of capital, the assessee-company filed an appeal to the AAC who, however, dismissed it.

3. The assessee thereafter filed an appeal before the Income-tax Appellate Tribunal. The Tribunal, following the decision in the case of CIT v. Aryodaya Ginning and . : [1957]31ITR145(Bom) , held that when the directors of shareholders decided to transfer the amount of reserve as from a particular date, the reserve as constituted as from the date and, therefore, the amount of Rs. 76,25,519 must be treated as having been transferred to the reserve fund as from 1st December, 1961, and had to be treated as such for the purposes of r. 1 of the Second Schedule to the S. P. T. Act, 1963. The Tribunal, however, declined to accept the contention of the assessee with regard to the reserve of terminal pay, reserve for bad and doubtful debts and the amount of proposed dividend as well as reserve for staff gratuity. The Tribunal, however, declined to accept the contention of the assessee with regard to the reserve for terminal pay, reserve for bad and doubtful debts and the amount of proposed dividend as well as reserve for staff gratuity. The Tribunal took the view that the amounts set apart for terminal pay, for bad and doubtful debts and for staff gratuity to meet gratuity payments falling due from time to time were retained for providing for a known liability of which the amount could not be determined with substantial accuracy and were, therefore, provisions and not reserves as referred to in clause 7 of Pt. III of Sch. VI to the Companies Act, 1956. However, with regard to the tax exempt dividend reserve, the Tribunal took the view that the said amount was set apart as relating to profits exempt from tax under s. 84 so that the working out of exemption of dividend in terms of s. 85 may be facilitated by such segregation and it was not an amount retained by way of providing for any know liability and it did not, therefore, constitute a provision but was a reserve and was properly includible in the computation for S. P. T. purposes. With regard to the amount of Rs. 43,05,000 by way of proposed dividends, the Tribunal found that this amount was not at any stage labelled as a reserve by the directors and the directors had earmarked this amount for distribution as dividend. Thus, the amount having been provided for a specific purpose of meeting the liability on account of payment of dividend, the Tribunal held it could not be said to be includible as a reserve for the purposes of computation of capital. The assessee-company and the revenue both being aggrieved by the order of the Tribunal sought reference of certain questions to this court and, accordingly, the following questions have been referred to this court.

4. At the instance of the assessee :

'1. Whether, on the facts and in the circumstances of the case, the reserves for terminal pay of Rs. 74,279 is not includible in the capital computation for super profits tax purposes

2. Whether, on the facts and in the circumstances of the case, the reserve for bad and doubtful debts of Rs. 38,060 is not includible in the capital computation for super profits tax purposes

3. Whether, on the facts and in the circumstances of the case, the reserve for staff gratuity of Rs. 4,08,731 is not includible in the capital computation for super profits tax purpose

5. At the instance of the department :

5. Whether, on the facts and in the circumstances of the case, the general reserve of Rs. 76,25,510 is properly includible in the capital computation for super profits tax purposes

6. Whether, on the facts, and in the circumstances of the case, the tax exempt dividend reserve of Rs. 1,91,170 is properly includible in the capital computation for super profits tax purposes

6. Before we deal with the questions as to whether a particular amount should be treated as a reserve or a provision, we may state that it is not now in dispute that question No. 5 is concluded by a decision of the Supreme Court in CIT v. Mysore Electrical Industries Ltd. : [1971]80ITR566(SC) . In the instance case, the SPTO and the AAC had declined to include the general reserve amount of Rs. 76,25,519 for the purpose of computation of capital only on the ground that the decision of the board of directors was taken on 15th April, 1963, i.e., much after the accounting year ending 30th November, 1962, had ended. The SPTO had taken the view that the reserve had been crated by a resolution passed at the meeting held on 15th April, 1963, which was much after the close of the accounting year, viz., 30th November, 1962. The Tribunal, following the decision of this court in CIT v. Aryodaya Ginning and . : [1957]31ITR145(Bom) , held that the sum of Rs. 76,25,519 must be taken as constituting a valid reserve as on December 1, 1961. Since it is now conceded by Mr. Joshi on behalf of the revenue that the answer to question No. 5 has to be in favour of the assessee in view of the decision of the Supreme Court in CIT v. Mysore Electrical Industries Ltd. : [1971]80ITR566(SC) , it is not necessary to deal with that question further.

7. We shall now deal with the other questions. As already pointed out, s. 4 of the S. P. T. Act of 1963 provides for charging a tax called 'super profits tax' on every company for every assessment year commencing on and form the 1st day of April, 1963, in respect of so much of its chargeable profits of the previous year as exceed the standard deduction at the rate or rates specified in the Third Schedule. Section 2 (5) defines the expression 'chargeable profits' to mean the total income of an assessee computed under the I. T. Act, 1961, for any previous year and adjusted in accordance with the provisions of the First Schedule. Section 2 (9) defines the expression 'standard deduction' to mean an amount equal to six per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of fifty thousand rupees, whichever is greater. Therefore, in order to determine 'standard deduction', it becomes necessary to compute the capital of the company in accordance with the rules laid down in the Second Schedule, the material provisions of which is r. 1. The relevant part of r. 1 reads as follows :

'1. Subject to the others provisions contained in this Schedule, the capital of a company shall be the sum of the amounts, as on the first day of the previous year relevant to the assessment year, of its paid up share capital and of its reserve, if any created under the proviso (b) to clause (vib) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922, or under sub-section (3) of section 34 of the Income-tax Act, 1961, and of its other reserves in so far as the amounts credited to such others reserves have not been allowed in computing its profits for the purposes of Indian Income-tax Act, 1922, or the Income-tax Act, 1961......'

8. The effect of r. 1 is that before any amount or sum can qualify for inclusion in the capital computation of a company two conditions are required to be satisfied, viz., (a) that the amount or sum must be a 'reserve', and (b) the same must not have been allowed in computing the company's profits for the purposes of the Indian I. T. Act, 1922 or I. T. Act of 1961. The test in order to decide whether a particular amount should be treated as a provision or it could be treated as a reserve is now well settled by the Supreme Court in Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC . The Supreme Court has laid down the test as follows :

An amount set aside out of profits and other surpluses, not designed to meet a liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance-sheet is a reserve but an amount set aside out of profits and other surpluses to provide for any known liability of which the amount cannot be determined with substantial accuracy is a provision.'

9. The above test will have to be applied for ascertaining whether the several amounts in question constituted reserves for the purpose of computation of capital under r. 1.

10. In question No. 1, the amount which is sought to be treated as includible in the capital computation is an amount of Rs. 75,279 stated to be reserves for terminal pay. The Tribunal has taken the view that this provision was for providing for a known liability of which the amount could not be determined with substantial accuracy.

11. Now, it is not in dispute that the amount which is set apart as a reserve for terminal pay is in substance an amount set apart to meet a possible claim for retrenchment compensation in future. There is no known liability for retrenchment compensation, nor is there evidence to show that there was any demand for retrenchment compensation, nor is there evidence to show that there was any demand for retrenchment compensation likely to arise in respect of which the provision can be said to have been made. If this is merely an amount set apart for a possible claim for retrenchment compensation which may or may not arise in future and it was not in respect of any known liability, it is difficult to see how this amount can be treated as a provision. If it is not in respect of any known liability, then, in our view, it had to be treated as a reserve.

12. A similar question arose in CIT v. Otis Elevator Co. (India) Ltd. : [1977]107ITR241(Bom) . The company in that case had been appropriating various sum to an account called 'Reserve for Employees' Indemnities' and this reserve was created in order to pay retrenchment compensation arising out of any retrenchment of any member of the staff. The ITO had not considered for surtax purposes treating it as in the nature of a contingent liability. That amount was subsequently transferred to the gratuity reserve and it had become a part of the provision for gratuity payment. The Tribunal had taken the view in that case that the appropriation for employees' indemnity could not be said to be an appropriation designed to meet any liability as there was no liability to pay any retrenchment compensation for which the reserve had been set apart and, therefore, the amount was a reserve which was includible for the purpose of capital computation for surtax purposes. The matter was brought to this court on behalf of the revenue and this court held that the Tribunal was right in taking the view that the item which had been set apart under the heading 'Reserve for Employees' Indemnities' had not been set apart for providing for a known liability and, as such, was reserve includible in the capital computation. In our view, therefore, the first question had to be answered in favour of the assessee.

13. The second question relates to reserves for bad and doubtful debts. It is contended on behalf of the assessee by Mr. Dastur that the reserve for bad and doubtful debts is made on an ad hoc basis and, according to Mr. Dastur, this reserve had no relation whatsoever to any debts which had actually become bad. According to the learned counsel, there was no known liability in respect of bad and doubtful debts and the Tribunal was in error in not permitting this item to be taken into account for the purposes of capital computation. Mr. Dastur has drawn our attention to the orders of the authorities in assessments for the subsequent years, i.e., assessment years 1966-67, 1967-68, 1968-69 and 1969-70. According to Mr. Dastur, for the abovementioned years, reserve for bad and doubtful debts had in fact been held to be in the nature of a reserve following the decision of the Tribunal in respect of a similar claim in the assessment year 1965-66. It was pointed out that when the revenue came to this court for seeking a reference on the questions as to whether the reserve for bad and doubtful debts should have been held in the nature of a provision and not reserve, the application under s. 256(1) was rejected by this court. That application was Income-tax Application No. 109 of 1974, which was sent for by us. The Tribunal while disposing of the appeals, referring to the decision of the Tribunal for the assessment year 1965-66, had observed as follows :

'The reserve for bad and doubtful debts was also held by them to be in the nature of a reserve and not provision because the appropriations were made on an artificial basis - hundred per cent. for the dues remaining unpaid for over a year and a one and half per cent. for dues unpaid for less than a year. In their opinion, real liability for bad and doubtful debts could have certainly no relation to the basis of the provision. Morever, whatever debts actually became bad were never debited to this account and were always debited to the regular profit and loss account of each year.'

14. These observations were relied upon by Mr. Dastur in order to draw our attention to the fact that it had been the practice of the assessee not to debit the amount of debt which had become bad to the reserve created for bad and doubtful debts, but to the profit and loss account.

15. Now the decision of the board of directors which is on record as annex. 'A' to the statement of case shows that all debts outstanding for over a year have been treated as bad and doubtful debts and so far as debts outstanding for a period of less than a year were concerned, the amount of the reserve was computed at 1 1/2 per cent. of those debts. It is obvious, therefore, that the amounts appropriated to the reserve for bad and doubtful debts were appropriated entirely on an ad hoc basis. That amount had not relation whatsoever to any amount of debts which could actually be said to be bad or doubtful. These appropriations were, therefore, not made after ascertaining as to whether there were any debts which were really bad and doubtful, and it is obvious, therefore, that it cannot be said to be a provision made in respect of any know liability. The record of the subsequent years which is also before us in Income-tax Application No. 109 of 1974 also indicates that any bad and doubtful debts were really debited to the profit and loss account and not to the reserve for bad and doubtful debts.

16. A similar question fell for consideration of this court in CIT v. Golden Tobacco Co. Ltd. : [1977]108ITR453(Bom) . In that case the assessee-company was following a systematic method of transferring an ad hoc amount to the 'doubtful debt reserve' account each year and the company did not consider the soundness of every debt individually, nor did it ascertain which of the debts were likely to become bad during the year or in the near future. Ad hoc amounts were transferred to the doubtful debt reserve account year after year which had no connection with the possibility of the debts becoming bad in the near future. The debts which became bad during any year were debited directly to the profit and loss account and not to the doubtful debt reserve account. The assessee's claim before the ITO that the balance in the doubtful debt reserve account should be included in the capital computation for surtax purposes was rejected by him. The order of the ITO was reversed by the AAC and the Tribunal confirmed that order and, in a reference at the instance of the Commissioner, this court held that it cannot be said that the various amounts which had been transferred to the doubtful debt reserve account were by way of providing for 'diminution in value of assets', nor could it be said that these various amounts were retained by way of providing for any known or existing liability. This court thus found that the Tribunal was right in taking view that the amounts in the doubtful debt reserve account were includible in the computation of the capital of the company for the purpose of the C. (P.) S. T. Act, 1964. On facts, the case of the present assessee is in no way different. As already pointed out, the amounts were determined on an ad hoc basis. There was no existing liability, nor was there any known liability, because it was never ascertained as to which debt was likely to become a bad debt and the practice of the company was to debit bad and doubtful debts to the profit and loss account and not to the reserve in question. The assessee was, therefore, entitled to have the amount of Rs. 38,060 which was treated as a reserve for super profits tax purposes.

17. The third question relates to the staff gratuity reserve of Rs. 4,08,731. Now, even in respect of the amount carried over to the gratuity reserve, it is obvious that it was not in respect of any present or known liability and while creating that reserve and appropriating that amount to the reserve, no attempt was made by the assessee-company to estimate any present liability on an actuarial basis. The reserve created is really and in substance on the footing that some claim for gratuity might arise in future. Such an appropriation could not, in our view, be treated as a provision. We may refer with advantage to a decision of this court in CIT v. Forbes Forbes Campbell Co. Ltd. : [1977]107ITR38(Bom) , where a similar question arose and this court was called upon to decide whether a gratuity reserve to which ad hoc amounts were transferred could be treated as a provision or a reserve. The assessee-company in that case had for the assessment years 1964-65, 1965-66 and 1966-67 in its surtax assessment, included in the capital computation, three amounts of Rs. 98,730, Rs. 1,10,000 and Rs. 81,000 standing to the credit of gratuity reserve in the books of the company. Though the ITO and the AAC had taken the view that these amounts were meant for specific purposes, the Appellate Tribunal had held that these amounts which had been set apart and appropriated towards gratuity reserve were includible in the capital computation. Dealing with the question raised at the instance of the revenue, the Division Bench has observed as follows (p. 41) :

'In the first place, it was not disputed before us that there was no approved gratuity scheme framed as such by the assessee-company until such appropriation to gratuity reserve had been made; secondly, it was not disputed before us that while appropriating the amounts to gratuity reserve ad hoc amounts were appropriated or transferred to that reserve without undertaking any actuarial valuation. In other words, no attempt was made to estimate the present liability that would arise as a result of either retirement, death or superannuation or anything which may require the company to undertake a recourse to gratuity reserve. In view of these facts, which were not disputed, it sees to us quite clear that these appropriations which were made to the gratuity reserve will have to be regarded as reserve and not provision, for these appropriations were not intended to meet a known or existing liability.'

18. Even in the instant case, appropriations to the gratuity reserve have been made without ascertaining any actuarial liability and the amounts have been set apart purely on an ad hoc basis. The amount was, therefore, clearly in the nature of a reserve and it must be held that it is includible for the purposes of computation of capital.

19. The fourth question relates to the amount set apart for being distributed as dividend. So far as this court is concerned, the question really stands concluded against the assessee by a decision of this court in Shree Ram Mills Ltd. v. CIT : [1977]108ITR27(Bom) . It was held in that case that the amount specifically set apart for the purposes of distributing dividend by the directors could not be treated as a reserve and it was, therefore, not liable to be included in the capital computation under r. 1 of Sch. II to the S. P. T. Act, 1963.

20. A similar view has been taken by the Madras and Calcutta High Courts, in Madras Auto Service v. CIT : [1978]112ITR540(Mad) and Braithwaite and Co. (India) Ltd. v. CIT : [1978]111ITR729(Cal) .

21. Mr. Dastur, the learned counsel appearing for the assessee. has, however, argued that a contrary view has been taken by the Gujarat High Court in CIT v. Mafatlal Chandulal & Co. Ltd. : [1977]107ITR489(Guj) . It is no doubt true that in this case the Gujarat High Court has taken the view that the amounts standing in the proposed dividend account had to be taken into account in computing the capital for the purposes of r. 1 of SCh. II to the S. P. T. Act, 1963. We would, however, prefer to follow the decision of our High Court in Shree Ram Mills Ltd.'s case : [1977]108ITR27(Bom) . Question No. 4 must, therefore, be answered against the assessee.

22. The only other question which now remains to be considered is question No. 6 which relates to tax exempt dividend reserve of Rs. 1,91,170. The amount appropriated to this reserve is the amount of profits representing the rebate which is available to the new industrial undertakings under s. 84 of the Act which was then in force. Under that provision income-tax was not payable by the assessee on so much of the profits or gains derived from any industrial undertaking to which that section applied as did not exceed six per cent. per annum on the capital employed in such undertaking. Section dealt with the dividend from a new undertaking and under that provision, it was provided that subject to any rules that may be made in this behalf, income-tax was not payable by a shareholder in respect of so much of the dividend paid or deemed to be paid to him out of the profits or gains derived by a company from an industrial undertaking to which s. 84 applied as was attributable to that part of the profits or gains on which income-tax was not payable under s. 84. It is not in dispute that it was with a view to facilitate identification of the extent of the profits which were allowed as rebate under s. 84 and in respect of which dividend had been excepted under s. 85 that this amount had to be separately set apart. It is obvious that this had nothing to do with any existing liability and it is difficult to see how that amount could be treated as a provision where the entire statutory six per cent. of the profits had been set apart. The amount of Rs. 1,91,170 use, therefore, be held to be properly includible in the capital computation for the purposes of the S. P. T. Act, 1963.

23. Having regard to the aforesaid discussion, the questions referred to us are answered as follows :

Question No. 1 - Reserves for terminal pay of Rs. 74,279 are includible in the capital computation for super profits tax purposes.

Question No. 2 - The reserve for bad and doubtful debts of Rs. 38,600 is includible in the capital computation for super profits tax purposes.

Question No. 3 - The reserve for staff gratuity of Rs. 4,08,731 is includible in the capital computation for super profits tax purposes.

Question No. 4 - The amount of proposed dividend of Rs. 43,05,000 is not includible in the capital computation for super profits tax purposes.

Question No. 5 - The general reserve of Rs. 76,25,519 is properly includible in the capital computation for super profits tax purposes.

Question No. 6 - The tax exempt dividend reserve of Rs. 1,91,170 is properly includible in the capital computation for super profits tax purposes.

24. Since the assessee succeeds substantially in this reference, the assessee shall get the costs of this reference from the revenue.

25. I. T. Reference No. 65 of 1970 (Chandurkar & Desai) (24-1-1979)

26. The assessee in this reference is the same as in Income-tax Reference No. 69 of 1970 (see p. 813 supra) decided today. The assessment proceedings for the purposes of determining surtax liability was, however, in respect of the assessment year 1964-65, i.e., the year next to the one in respect of which Income-tax Reference No. 69 of 1970 (see p. 813 supra) arose. The questions referred to us are also identical so far as the nature of the reserves is concerned. These questions are as follows :

'(1) Whether, on the facts and in the circumstances of the case, the reserve for terminal pay of Rs. 85,859 is not includible in the capital computation for surtax purposes

(2) Whether, on the facts and in the circumstances of the case, the reserve for bad and doubtful debts of Rs. 1,08,099 is not includible in the capital computation for surtax purposes

(3) Whether, on the facts and in the circumstances of the case, the reserve for staff gratuity of Rs. 4,95,276 is includible in the capital computation for surtax purposes

27. At the instance of the department

'(4) Whether, on the facts and in the circumstances of the case, the general reserve of Rs. 91,47,687 is properly includible in the capital computation for surtax purposes ?'

28. The amounts in question and the nature of appropriation were as follows :

Rs.1. General reserve 91,47,6872. Reserve for terminal pay 85,8593. Reserve for bad and doubtful debts 1,08,0994. Tax exempt dividend reserve 7,43,8455. Staff gratuity reserve 4,95,276

29. The ITO had held that except the general reserve, the others reserves were created for meeting the specific liabilities and, therefore, they could not be considered as part of the capital to be computed for the purpose of surtax. The ITO had also held with regard to the general reserve that the sums in question were transferred on 15th April, 1963, and could not, therefore, be treated as a reserve as on 1st December, 1962. The computation made by the ITO was upheld by the AAC and the assessee-company had filed an appeal before the Tribunal.

30. The Tribunal referred to its decision in respect of the assessment year 1963-64, and, accordingly, held that the general reserve of Rs. 91,46,687 and the tax exempt dividend reserve of Rs. 7,43,845 were includible in the capital computation for surtax purposes, but the other three amounts were not includible as reserves in the capital computation for surtax purposes.

31. Consequent on the order of the Tribunal, the assessee sough reference in respect of the reserve for terminal pay, reserve for bad and doubtful debts and reserve for staff gratuity and the department had sought reference in respect of the general reserve and the tax exempt dividend reserve. It is not necessary for us to deal with these questions separately in the view which we have taken in Income-tax Reference No. 69 of 1970 [Parke Davis (India) Ltd. v. CIT (see p. 813 supra]. Having regard to our decision in that case, we answer the questions as follows :

Question No. 1 - Reserve for terminal pay of Rs. 85,859 is includible in the capital computation for surtax purposes.

Question No. 2 - Reserve for bad and doubtful debts of Rs. 1,08,099 is includible in the capital computation for surtax purposes.

Question No. 3 - Reserve for staff gratuity of Rs. 4,95,276 is includible in the capital computation for surtax purposes.

Question No. 4 - General reserve of Rs. 91,47,687 is properly includible in the capital computation for surtax purposes.

Question No. 5 - The tax exempt dividend reserve of Rs. 7,43,845 is properly includible in the capital computation for surtax purposes.

32. The assessee to get the costs of this reference from the revenue.


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