J.S. Varma, J.
1. The reference at the instance of the Revenue is made by the Tribunal under Section 256(1) of the Income-tax Act, 1961, to answer the following question of law, namely:--
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the amount of Rs. 1,38,000 (assessment year 1973-74) and Rs. 2,61,550 (assessment year 1974-75) being provisions for gratuity were a reserve and in directing the Surtax Officer to add the said amounts in the computation of capital base and to allow statutory deduction accordingly ?'
2. The relevant assessment years are 1973-74 and 1974-75. In computing the capital base for the purpose of standard deduction, the Surtax Officer did not take into account the provision for gratuity made by the assessee at the sum of Rs. 1,38,000 for the assessment year 1973-74 and Rs. 2,61,550 for the assessment year 1974-75. The assessee appealed against this decision to the Commissioner of Income-tax (Appeals), who rejected the assessee's claim that it must be treated as 'reserve' in computing the capital base for the purpose of standard deduction. The assessee's further appeal to the Tribunal has, however, been allowed on this point and this contention has been accepted, relying on a decision of the Bombay High Court The Tribunal has held that these amounts are to be treated as 'reserve' in computing the capital base for the purpose of standard deduction. It has, accordingly, made a consequential order, directing the Surtax Officer to proceed on this basis.
3. Aggrieved by the view taken by the Tribunal, the Revenue applied for a reference to this court under Section 256(1) of the Act for deciding the above common question of law arising in both the years of assessment, by filing two different applications relating to the aforesaid two assessment years. This common reference has been made to decide the above common question of law arising out of the Tribunal's order relating to these two years of assessment.
4. There is no dispute that the provision made by the assessee of these amounts for payment of gratuity is by adopting a scientific method representing fairly accurately a known and existing liability for the year in question. This being so, it is settled by the decision of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT : 132ITR559(SC) that such an appropriation will constitute a provision, which cannot be treated as a 'reserve'. The test laid down by the Supreme Court in this decision, while pointing out the distinction between 'provision' and 'reserve' for deciding such a question, clearly indicates that on the basis of facts found proved, these amounts can only be treated as 'provision' and not 'reserve'. The Tribunal was, therefore, not justified in treating these amounts as 'reserve'. The question of considering the justification of making the consequential order, which the Tribunal has made as a result of this conclusion, does not, therefore, arise, since the conclusion on this point reached by the Tribunal is itself contrary to law.
5. Consequently, the reference is answered in favour of the Revenue and against the assessee as under :
6. The Tribunal was not justified in law in holding that the amounts of Rs. 1,38,000 for the assessment year 1973-74 and Rs. 2,61,650 for the assessment year 1974-75, being provision for gratuity, was a 'reserve'.
7. There will be no order as to costs.