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Commissioner of Income-tax Vs. Periakaramalai Tea and Produce Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Reference Nos. 91 to 93 of 1970
Judge
Reported in[1973]92ITR65(Ker)
ActsCompanies (Profits) Surtax Act, 1964 - Schedule - Rule 1; Companies Act, 1956
AppellantCommissioner of Income-tax
RespondentPeriakaramalai Tea and Produce Co. Ltd.
Appellant Advocate P.A. Francis and; P.K. Ravindranatha Menon, Advs.
Respondent Advocate T.L. Viswanatha Iyer and; E.R. Venkateswaran, Advs.
Cases ReferredBombay Cycle & Motor Agency Ltd. v. Commissioner of Income
Excerpt:
direct taxation - reserve - rule 1 of companies (profits) surtax act, 1964 - whether amount standing to credit of 'retirement gratuity reserve' be treated as reserve and taken into account for calculating capital - reserve for retirement gratuity not to be considered as reserve for meeting liability that had already arisen - such amount be treated as other reserve under rule 1 and be taken into account in computing capital for purpose of statutory deduction - held, amount standing to credit of 'retirement gratuity reserve' be treated as reserve and taken into account for calculating capital. - - by way of return on the capital and for this purpose the capital as well as the return are to be determined after making allowances for such deductions and additions as are provided in the.....subramonian poti, j.1. these are three references under section 256(1) of the income-tax act, 1961, as applied to the companies (profits) surtax act, 1964, by section 18 of the said act. the references concern assessment years 1964-65, 1965-66 and 1966-67. the question in all the three cases is common and a consolidated statement of the case has been drawn up by the income-tax appellate tribunal, cochin bench, which has referred the case to us. the question referred is :'whether, on the facts and in the circumstances of the case theappellate tribunal is correct in law in holding that the amount standingto the credit of the 'retirement gratuity reserve' is to be treated as'reserve' and has to be taken into account for the purpose of calculatingthe capital under the provisions of the second.....
Judgment:

Subramonian Poti, J.

1. These are three references under Section 256(1) of the Income-tax Act, 1961, as applied to the Companies (Profits) Surtax Act, 1964, by Section 18 of the said Act. The references concern assessment years 1964-65, 1965-66 and 1966-67. The question in all the three cases is common and a consolidated statement of the case has been drawn up by the Income-tax Appellate Tribunal, Cochin Bench, which has referred the case to us. The question referred is :

'Whether, on the facts and in the circumstances of the case theAppellate Tribunal is correct in law in holding that the amount standingto the credit of the 'retirement gratuity reserve' is to be treated as'reserve' and has to be taken into account for the purpose of calculatingthe capital under the provisions of the Second Schedule to the Companies(Profits) Surtax Act, 1964 ?'

2. The assessee is a public limited company owning certain estates andderiving income from tea, coffee and cardamom. Its issued and subscribedcapital during the relevant periods was Rs. 57,94 880. In the balance-sheet of the company as on March 31, 1963, the following sums were shownunder the heading 'reserves and surplus':

Rs.

General reserve

19,00,000

Reserve for retirement gratuity

11,50,000

Development reserve

1,68,711

Profit and loss account balance

58,308

3. For determining the capital for the purpose of standard deduction under the Companies (Profits) Surtax Act (hereinafter referred to as the Act), for the assessment year 1964-65, the assessee claimed that the sum of Rs. 11,50,000 shown as 'reserve for retirement gratuity' must also be taken into account. For the year 1965-66, the sum standing to the credit of the reserve for retirement gratuity was Rs. 11,60,727 and for the year 1966-67, the amount was Rs. 13,98,000. The dispute before the Income-tax Officer was whether these sums which were treated by the assessee as reserve for retirement gratuity were really to be treated as reserves in computing the statutory deduction permissible under the Act. The Income-tax Officer did not agree to the inclusion of this item in the assessment for the three years in the computation of the capital as, according to the officer, this could not be termed 'reserve' in view of the Explanation to Rule 1 of the Second Schedule to the Act. He, therefore, computed the capital after excluding the amount standing to the credit of the reserve for retirement gratuity. The assessments for all the three years were taken up in appeal before the Appellate Assistant Commissioner, Trichur, who, by his order, found that a provision for gratuity payments to staff is not a current liability, but all the same it does not mean that this amount is in the nature of a general reserve either. He took the view that though in the balance-sheet it is classified by the appellant as 'retrenchment gratuity reserve', actually the nature of the reserve is seen from the fact that it is earmarked for a specific purpose, namely, of meeting a future liability to pay retirement gratuity to staff. He, therefore, upheld the order of the Income-tax Officer. The Appellate Tribunal in the appeals filed by the assessee accepted the assessee's contention. The relevant discussion is found in paragraph 9 of the order of the Tribunal which, we may extract here :

'We consider that the amount standing to the credit of the 'retirement gratuity reserve' is to be treated as 'reserve' and to be taken into account for the purpose of calculating the capital under the rules to the 2nd Schedule to the Surtax Act. This does not represent any liability but only certain sums appropriated from and out of its profits from time to time and kept back for future use. They are certainly reserves as understood in common parlance. The contingency of paying the entire amount would arise only when the company goes into liquidation. But the capital that has to be computed is of a going concern. The amount standing to the credit of this reserve will be available to the company for any of its purposes. It is not a specific provision to meet any known liability. We consider that the Explanation to Rule 1 in the 2nd Schedule does not affect the character of this reserve. We direct the officer to recompute the capital by taking the reserve for retirement gratuity as part of the assessee's capital.'

4. The reference is at the instance of the revenue and the case of the revenue is that, on the facts and in the circumstances, the retirement gratuity reserve cannot be treated as a reserve and, therefore, cannot be taken to be part of the capital.

5. Before us, it is urged by counsel for the department that the amount in dispute is not a reserve at all and even if it be a reserve in any sense of the term, since it is in the nature of one or other of the items falling under the heading 'current liabilities and provisions' in the column relating to liabilities in the form of balance-sheet given in Part I of Schedule VI to the Companies Act, 1956 (hereinafter referred to as 'the Companies Act'), it has to be excluded from the computation of capital.

6. We will now refer to the relevant provisions of the Act to which we may have to advert to in due course. Section 4 of the Act is the charging section. That reads:

'4. Subject to the provisions contained in this Act, there shall be charged on every company for every assessment year commencing on and from the first day of April, 1964, a tax (in this Act referred to as the surtax), in respect of so much of its chargeable profits of the previous year or previous years, as the case may be, as exceed the statutory deduction, at the rate or rates specified in the Third Schedule.'

7. The charge is in respect of so much of the chargeable profits of the previous year as exceeds the statutory deduction and the rate is as mentioned in the Third Schedule. 'Chargeable profits' is defined in Section 2(5) of the Act to mean the total income of an assessee computed under the Income-tax Act, 1961, for any previous year or years, as the case may be, and adjusted in accordance with the provisions of the First Schedule. In determining the chargeable profits for the purpose of the Act, the total income as determined under the Income-tax Act, 1961, is varied by certain exclusions, deductions and additions mentioned in the First Schedule. The statutory deduction referred to in Section 4 is defined in Section 2(8) of the Act and that (without the provisos which are not material for the purpose of this case) reads thus:

''Statutory deduction' means an amount equal to ten per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule, or an amount of two hundred thousand rupees, whichever is greater.'

8. Now we have to turn to the Second Schedule to the Act to read the rules for computing the capital of a company for the purpose of surtax, Rule 1 is relevant for the case before us. That rule is ;

'Subject to the other provisions contained in this Schedule, the capital of a company shall be the aggregate of the amounts, as on the first day of the previous year relevant to the assessment year, of-

(i) its paid-up share capital;

(ii) its reserves, 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;

(iii) its other reserves as reduced, by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the Indian Income-tax Act, 1922, or the Income-tax Act, 1961;

(iv) its debentures, if any ; and

(v) any moneys borrowed by it from Government or the Industrial Finance Corporation of India or the Industrial Credit and Investment Corporation of India or any other financial institution which the Central Government may notify in this behalf in the Official Gazette or any banking institution (not being a financial institution notified as aforesaid) or any person in a country outside India:

Provided that such moneys are borrowed for the creation of a capital asset in India and the agreement under which such moneys are borrowed provides for the repayment thereof during a period of not less than seven years. Explanation.--For the removal of doubts it is hereby declared that any amount standing to the credit of any account in the books of a company as on the 1st day of the previous year relevant to the assessment year which is of the nature of item (5) or item (6) or item (7) under the heading 'Reserves and surplus' or of any item under the heading 'Current liabilities and provisions' in the column relating to 'Liabilities' in the 'Form of balance-sheet' given in Part I of Schedule VI to the Companies Act, 1956, shall not be regarded as a reserve for the purposes of computation of the capital of a company under the provisions of this Schedule.'

9. The parties have no case that reserve for gratuity falls within any of the items mentioned in this rule other than item (iii), namely, 'other reserve'. Whether it is a reserve at all to bring it within this clause and even if it is a reserve whether it is excluded by reason of the Explanation to the rule are matters about which parties are at issue before us.

10. The scheme of the charging section is apparently to charge to surtax more than 10 per cent. by way of return on the capital and for this purpose the capital as well as the return are to be determined after making allowances for such deductions and additions as are provided in the Act.

11. The dispute in this case necessitates the consideration of two questions. The first of them is as to what exactly is 'reserve' and the other whether 'reserve for gratuity' shown in the balance-sheet in the present case is a reserve in the nature of any item under the heading 'Current liabilities and provisions' in the form of balance-sheet given in Part I of Schedule VI to the Companies Act.

12. The term 'reserve' is not defined in the Act, though a definition of this term is seen in the Companies Act, 1956. To that we will refer in due course. The term 'reserve' as a verb is defined in the Random House Dictionary of the English Language as 'to keep back or save for future use' and as a noun its meaning is 'something reserved, as for some purpose or object'. The meaning of this term as noted in the Webster's Third New International Dictionary, as a verb, is 'to keep in store for future or special use : held or kept in reserve' and as a noun, 'something kept back or held available (as for future use)'. Apart from this dictionary definition of the term 'reserve', we think it cannot be disputed that reserve can only mean anything to be kept back or kept for the purpose of use in the future and in the context of a reserve in business it must necessarily refer to the amounts kept back for future use against a contingency which will arise in the future. The contention on behalf of the revenue is that if any reserve is made, as in this case, for a specific purpose such as to meet the commitment by way of liability that may arise in future, but not already arisen, that cannot be treated as a reserve. Before examining this question further, we will refer to the decisions relied on by counsel for the revenue and also by counsel for the assessee before us to support their respective view-points.

13. There was a provision very much analogous to the provision in Section 4 of the Act in the Business Profits Tax Act, 1947. That Act was designed to assess large profits made by the companies. Section 4 of the Business Profits Tax Act permitted the levy of tax on the amount of the taxable profits equal to sixteen and two-thirds per cent. of such taxable profits. 'Taxable profits' was defined as the amount by which the profits during a chargeable accounting period exceeded the abatement in respect of that period, 'Abatement' was defined in Section 2(1) of that Act thus:

''Abatement' means, in respect of any chargeable accounting period ending on or before the 31st day of March, 1947, a sum which bears to a sum equal to--(a) in the case of a company, not being a company deemed for the purposes of Section 9 to be a firm, six per cent. of the capital of the company on the first day of the said period computed in accordance with Schedule II, or one lakh of rupees, whichever is greater.'

14. In the case before the Supreme Court in Commissioner of Income-tax v. Century Spg. and Mfg. Co. Ltd., [1953] 24 I.T.R. 499, 504, 503; 23 Comp. Cas. 462 ; [1954] S.C.R. 203 (S.C.) the question that arose was whether an amount of Rs. 5,08,637 was a part of the 'reserves' of the assessee-company as on 1st April, 1946, within the meaning of Rule 2(1) of the rules in Schedule II to the Business Profits Tax Act. That was the undistributedprofits of the company, which, at the end of the year, was treated as such. Later, by a decision of the board of directors, the amount was distributed to the shareholders as dividend. All the same, the company claimed that the amount, in so far as it had not been utilised as profit or treated as profit at the end of the year, was entitled to be treated as reserve. On the facts of that case the Supreme Court was not prepared to accept the contention. The company or those who were authorised to act on behalf of the company had not earmarked that amount towards reserve and, therefore, the court took the view that there was no warrant for treating such amount as reserve. The court said thus :

' . . . . nobody possessed of the requisite authority had indicated on that date the manner of its disposal or destination. On the other hand, on the 28th February, 1946, the directors clearly earmarked it for distribution as dividend and did not choose to make it a reserve.'

15. The court took the view that it was not correct to say that the amount was kept back. But the scope of the term 'reserve' had to be examined in that case and dealing with this, the court said :

'The term 'reserve' is not defined in the Act and we must resort to the ordinary natural meaning as understood in common parlance. The dictionary meaning of the word 'reserve' is :

'1. (a) To keep for future use or enjoyment; to store up for some time or occasion ; to refrain from using or enjoying at once.

(b) to keep back or hold over to a later time or place or for further treatment.

6. To set apart for some purpose or with some end in view ; to keep for some use.

11. To retain or preserve for certain purposes' (Oxford Dictionary, Vol. VIII, p. 513).

In Webster's New International Dictionary, second edition, page 2118, 'reserve' is defined as follows:

'1. To keep in store for future or special use; to keep in reserve; to retain, to keep, as for oneself.

2. To keep back ; to retain or hold over to a future time or place.

3. To preserve.'.... Thus the profits lying unutilized and not specially set apart for any purpose on the crucial date did not constitute reserves within the meaning of Schedule II, Rule 2(1),'

16. When, in a later case, before the Supreme Court, First National City Bank v. Commissioner of Income-tax, [1961] 42 I.T.R. 17, 23, 24; [1961] 3 S.C.R. 371 (S.C.) a similar question arose, the court referred to what it had said about the scope of reserve in the earlier decision and said thus :

'As to what the word 'reserves' as used in the Business Profits Tax Act connotes, was considered by this court in Commissioner of Income-tax v. Century Spinning and . It was held that the true nature and character of a sum disputed as reserve was to be determined with reference to the substance of the matter. The amount in dispute in that case was the profits after the deduction of depreciation and tax which amount was carried to the balance-sheet and was later recommended by the directors to be appropriated mainly to dividends and balance to be carried forward to the next year's account. Thus, on the crucial date, i.e., April 1, 1946, from which the chargeable accounting period began the sum in dispute had not been declared as reserve; on the other hand the directors had earmarked it for distribution as dividend and it remained as a mass of undistributed profits available for distribution. At page 504, Ghulam Hassan J. said:

'The reserve may be a general reserve or a specific reserve, but there must be a clear indication to show whether it was a reserve either of the one or the other kind. The fact that it constituted a mass of undistributed profits on the 1st January, 1946, cannot automatically make it a reserve ... A reserve in the sense in which it is used in Rule 2 can only mean profit earned by a company and not distributed as dividend to the shareholders but kept back by the directors for any purpose to which it may be put in future'.'

17. The decision of the Supreme Court in Commissioner of Income-tax v. Century Spg. and Mfg. Co. Ltd., [1953] 241.T.R. 499; 23 Comp. Cas. 462; [1954] S.C.R. 203 (S.C.) was considered and applied by the Calcutta High Court in the decision in Indian Steel & Wire Products Ltd. v. Commissioner of Income-tax, [1958] 33 I.T.R. 579 (Cal.). Dealing with the nature of a reserve, Chakravartti C.J. said at page 588 of that decision thus:

'A reserve is created only out of the whole or a part of the surplus profits as they are found to be in the hands of the company at the end of the year and it is a reserve against a contingency which still lies in the future.'

18. Reference has been made before us to the decision of the SupremeCourt in Standard Mills Co. Ltd. v. Commissioner of Wealth-tax, [1967] 63 I.T.R. 470, 474; [1967] 1 S.C.R. 768 (S.C.). The questionwhich arose in that case concerned the admissibility of a claim for deduction of amounts set apart for gratuity from the net wealth of an assesseeunder the Wealth-tax Act, 1957. The assessee claimed that, though thegratuity had not become payable, it was a liability which he had to meetand, therefore, any provision made for that purpose must necessarily be anitem of admissible deduction in determining the net wealth. Counsel whoappeared for the assessee conceded before the High Court that the liabilityto pay gratuity to the employees whose services were not terminated in the relevant year of account was merely contingent, since it arose on the happening of certain events such as death, physical incapacity, voluntary retirement or resignation and was on that account not a debt within the meaning of Section 2(m) of the Act. But it was contended before the High Court that the present value of the liability for payment of gratuity was a permissible deduction in valuing the assets of the business of the assessee under Section 7(2)(a) of the Wealth-tax Act. The High Court did not accept the contention. At the hearing before the Supreme Court, it was contended that no such concession was made and, therefore, the question had to be decided on the merits. That question was examined by the Supreme Court. Referring to the character of gratuity, the court said thus :

'The right to obtain gratuity under the awards arises only when there is determination of employment and not before. The liability does not exist in praesenti: it is contingent upon the determination of employment.'

19. Referring to the earlier decision of the court in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax, [1966] 59 I.T.R. 767 ; [1966] 2 S.C.R. 688 (S.C.) the Supreme Court said :

''..... the following definition is unanimously accepted :

' a debt is a sum of money which is now payable or will become payable in future by reason of a present obligation: debitum in praesenti, solvendum in futuro''.'

20. The Supreme Court further said that:

'The said decisions also accept the legal position that a liability depending upon a contingency is not a debt in praesenti or in futuro till the contingency happened. But, if there is a debt, the fact that the amount is to be ascertained does not make it any the less a debt if the liability is certain and what remains is only the quantification of the amount. In short, a debt owed within the meaning of Section 2(m) of the Wealth-tax Act can be defined as a liability to pay in praesenti or in futuro an ascertainable sum of money.'

21. It is also necessary to notice here that the court referred to the decision of the Gujarat High Court in Commissioner of Wealth-tax v. Ajit Mills Ltd., [1965] 55 I.T.R. 556 (Guj.) in which that court took the view that deduction for an amount claimed on account of liability for gratuity for workers and employees based on awards of the labour courts and agreements will be admissible deductions in the computation of the net wealth. The Supreme Court noticed that this view taken by the Gujarat High Court was not correct.

22. It appears to us in the light of what has been said by the Supreme Court in the decisions to which we have adverted that a reserve is any sum of money which has been kept back for future use whether the purpose for which it is so kept back be general or specific. Naturally, therefore, there is nothing strange if some specific purpose is indicated in the reservation, since a reserve for a specific purpose is as much a reserve as for a general purpose. The reservation in regard to payments to be made on account of liabilities which have already arisen cannot be properly termed 'reserves' in the above sense. Equally so, it cannot be said that reserves made for specific purposes, though not to meet liabilities which have already arisen but as a prudent provision for a future liability which may arise, are not reserves but are only provisions to meet liabilities. It is not disputed that the reservation in the present case is not for any commitment which has already arisen or payment of which has fallen due but is only a provision in regard to gratuity which may have to be paid to the employees as and when the liability may arise in future.

23. Our attention is drawn to two decisions of the Bombay High Court which apparently may, to some extent, support the case advanced on behalf of the revenue. We are referring to the decisions in Greaves Cotton & Crompton Parkinson Ltd. v. Commissioner of Income-tax, [1963] 48 I.T.R. 20 (Bom.) and Bombay Cycle & Motor Agency Ltd. v. Commissioner of Income-tax, [1964] 54 I.T.R. 358 (Bom.). The latter case purports to follow the earlier decision. In the case of Greaves Cotton & Crompton Parkinson Ltd. v. Commissioner of Income-tax the court was concerned with the application of Section 23A of the Indian Income-tax Act, 1922. The provision authorises the Income-tax Officer to assess companies to super-tax on undistributed income in certain cases. Sub-section (2) of that section provides that such order shall not be made by the Income-tax Officer in certain cases. It is in connection with this that the question arose before the Bombay High Court and what had to be decided in the reference was the admissibility of the claim by the assessee that a sum of Rs. 1,00,200 which was a provision for retirement gratuity and another provision for bonus of a sum of Rs. 1,04,000 should be excluded in determining the applicant's actual accounting profits. That was for the purpose of deciding whether, having regard to the smallness of the profits, an order under Section 23A ought to be made or not. Therefore, the question that had to be decided was whether these sums could be deducted in arriving at the net profit. The sum of Rs. 1,04,000 was a debt payable in the accounting year itself, namely, as a provision for payment of bonus. Though not paid, it was found to be a liability of the assessee. With regard to the sum of Rs. 1,00,200, it was a provision for gratuity and it was contended by the assessee that the gratuity was due on account of an award. The provision for gratuity was treated as a provision which should be taken into account in determining the profit. It is not possible to ascertain, from the facts narrated in the judgment, whether the amount of Rs. 1,00,200 was the amount due by wayof payment of gratuity at that time or a provision for future liability. Whatever that be, the decision in that case apparently rested on a concession made by the counsel for the revenue as is seen from the following passage:

'Mr. Joshi, appearing for the revenue, does not contend that making provisions for gratuity to meet the liability in that respect would amount to building up of reserves to meet a future liability. It is, however, his contention that the sum of Rs. 1,00,200 is in no way commensurate with nor represents the actual and factual liability of the assessee-company up to that date.'

24. We find nothing in the judgment which would be of assistance to us for resolving the controversy here. In the later decision of the Bombay High Court in Bombay Cycle & Motor Agency Ltd. v. Commissioner of Income-tax, [1964] 54 I.T.R. 358, 382 (Bom.), reference was made to the earlier decision. The question there was whether a sum of Rs. 78,500, set apart as 'gratuity fund', was to be treated as part of the capital and that arose in a reference relating to the application of Section 23A of the Indian Income-tax Act, 1922, to the assessee-company. The company had, in the relevant accounting year, declared a dividend which was more than 55 per cent. but less than 60 per cent. of the balance available after deduction of the tax payable thereon. The Income-tax Officer was of the view that the assessee-company was one which was required under Section 23A to distribute all the balance available by way of dividend. The assessee-company, among other contentions, took up the plea that in determining the distributable profit certain amount specified in the balance-sheet as the gratuity fund should be excluded. It was the company's case that the liability for gratuity had been imposed on the company by the awards made by the labour court earlier and it was in view of this that the amount was set apart. It was contended for the assessee that the amount was a provision for a liability which had to be provided for. Following the earlier decision of the Bombay High Court, the court took the view that the amount of Rs. 78,500 cannot be regarded as accumulated profits and reserves. Referring to the earlier case, the court said :

'This court, however, was not inclined to accept the submission that the provision made for gratuity could be regarded as a reserve. What it pointed out was that a reserve was a fund set apart to meet a future expenditure or a liability which would fall at a future time. Where a liability has actually fallen though the quantum of the liability has not yet been determined, a provision made to meet the present liability is not a provision by way of a reserve.'

25. According to us, the principle has been correctly stated by the Bombay High Court. Possibly, in that case, the liability for payment had alreadyarisen by reason of the award. That again is not quite clear from the facts stated. Whatever that be, the principle stated is quite consistent with what we have said in this judgment.

26. We proceed to consider the next aspect. We have to examine now whether the reserve is of the nature of any of the items in the current liabilities and provisions in the form of the balance-sheet, given in Part I of Schedule VI to the Companies Act. Schedule VI, Part I, gives the form of balance-sheet. Any trader would like to ascertain his true financial position as at the end of each trading period, and that he could, by the preparation of a profit and loss account. When the net profit is so ascertained in the profit and loss account, he would like to see whether it is correctly ascertained and that must necessarily mean that his capital at the end of the period must necessarily increase to the extent of the profit seen in the profit and loss account. He would also like to see how the capital at the end of the year looks like, that is, its break up. He would like to know what his true financial position is at the end of each trading period. It is to obtain this information that the statement, named the balance-sheet, is prepared. That would give a correct picture of the assets and liabilities of the business. In the column 'liabilities', besides share capital, reserve and surplus, and secured loans and unsecured loans, current liabilities and provisions have to be shown. It is the contention of the revenue that the term 'provisions' include provisions not only for taxation, proposed dividends and provident fund scheme, but for contingencies also. Entry No. 10 in the sub-heading 'provisions' in the 'current liabilities and provisions' refers to 'for contingencies.' It is also pointed out that there is a foot-note and item 5 of the foot-note mentions thus:

'(5) Other money for which the company is contingently liable.'

27. Counsel, therefore, contends that in the balance-sheet under the heading 'current liabilities and provisions' contingencies have to be shown and that means that amounts for which the assessee is contingently liable has also to be shown. It is the case of the revenue that, if a provision for reserve such as reserve for retirement gratuity is a provision in regard to a contingent liability, this must be considered as an item in the nature of one or other of the items under the heading 'current liabilities and provisions'. Of course, if this plea is to be accepted, it would necessarily follow that such provision comes within the scope of the Explanation to Rule 1 to Schedule II of the Act and the declaration for removal of doubts in the Explanation that such item shall not be reserve would, according to counsel, be sufficient to hold that the reserve for retirement gratuity cannot be treated as 'other reserves' within the meaning of Rule 1 in Schedule II. In fact, this is the main argument of counsel.

28. We have already dealt with the question of liability for gratuity. In so far as no current liability has arisen in the accounting year it cannot find a place either in the items of expenditure for the year or in provisions for meeting liabilities. There is no current liability. In regard to a liability which has not arisen (in the sense no debt has become due from the assessee by reason of retirement) any amount reserved does not have the character of amount reserved by way of provision to meet a liability. The argument of counsel for revenue is that even such a reserve is in the nature of liability mentioned in the heading 'current liabilities and provisions'. It is easy to see that it is neither a current liability nor one in the nature of such liability. If 'provision' has to be understood in relation to a balance-sheet for the current year as one for meeting the liabilities of the year, as we feel it should be, it is evident that the disputed reserve is not in the nature of a provision. Counsel for the revenue argues that the term 'contingencies' referred to in the form of balance-sheet has not to be related to the year in question but to any liability that may arise at any point of time. In a balance-sheet where the financial position for the year is reflected and the liabilities as at the end of the year are shown, we see no reason to read the entries in the manner in which the counsel for the revenue wants us to read it. Apart from the fact that by its very nature a reserve such as one for retirement gratuity is not a reserve for meeting any liability that has already arisen, we see no reason to hold that the expression 'other money for which the company is contingently liable' in item 5 of the foot-note or 'for contingencies' as item 10 under the heading 'provisions' means any liability that has not accrued and will not be, by its very nature, liability in the current year. Therefore, we must exclude the application of the Explanation to this case. If that be the case, then the amount is 'other reserve' within the meaning of Rule 1 and should be taken into account in computing the capital for the purpose of 'statutory deduction' as the term is defined in Section 2 of the Act. That is what has been found by the Tribunal and, therefore, we do not think that the question referred to us should be decided in favour of the revenue.

29. In the result, we answer the question referred to us in all the three cases in the affirmative, that is, against the revenue and in favour of the assessee. We direct the revenue to pay the costs of the assessee in all the three references.

30. A copy of this judgment under the signature of the Registrar and the seal of the High Court will be sent to the Income-tax Appellate Tribunal, Cochin Bench, as required under Section 260(1) of the Income-tax Act, 1961.


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