ISMAIL J. - The Income-tax Appellate Tribunal, Madras Bench, under section 256 (1) of the Income-tax Act, 1961, has referred the following question for the opinion of this court :
'Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the amounts of Rs. 15,50,000 being provision for tax liability Rs. 1,36,060 being provision for payment of gratuity to employees and Rs. 5,69,000 being provision for payment of bonus to employees as on 1st April, 1962, being the first day of the previous year relevant to the assessment year 1963-64, were not to be included in computing the assesees capital for the purpose of the Super Profits tax Act, 1963 ?'
The matter lies within a very narrow compass and it concerns the questions as to what constitutes, 'reserve' as contemplated by Paragraph 1 of Schedule II of the Super Profits Tax Act, 1963 (hereinafter called 'the Act').
The assessee is a public limited company registered under the companies Act and is running a composite spinning and weaving mills at Mettur Dam, Salem District. Before the Income-tax Officer, certain amounts under various heads had been claimed as reserve for the purposes of computation of capital besides the opening share capital of Rs. 60,00,000. The Income-tax Officer was of the view that only general reserve, raw material fluctuation and assests replacement reserve were in the nature of reserves to qualify as reserves for inclusion in the capital. According to him, credit balance in profit and loss account, advertisement reserve, reserve for bonus, reserve for tax, reserve for gratuity and proposes dividends would not fall under 'reserve'. On appeal preferred by the assessee the Appellate Assistant Commissioner held against the assessee with regard to reserve for proposed dividends, reserve for taxation, reserve for gratuity and reserve for bonus. On further appeal to the Tribunal, the Tribunal also held that the three amounts involved in the question, namely, the provision for tax liability of Rs. 15,50,000 the provision for payment of gratuity to employees of Rs. 1,36,060 and provision for payment of bonus to employees of Rs. 5,69,000 cannot be said to be reserves within the scope of Paragraph 1 of Schedule Ii of the Act. It is the correctness of this conclusion in the present reference in the form of the question extracted above.
Consequently, we have to consider the three provisions, namely, provision for tax liability in the sum of Rs. 15,50,000, the provision for payment of gratuity in the sum of Rs. 1,36,060 and the provision for payment of bonus to the employees in the sum of Rs. 5,69,000 Seperately. As far as then first amount being the provision for payment of tax liability is concerned, this court has already held that the said provision will constitute only 'provision' and will not constitute 'reserve'. The Supreme Court in Metal Box Co. Of India Ltd. v. Their Workmen has held that an amount set aside out of the profit and other surplus not designed to meet a liability, contigency, commitment or diminution in value of assests known to exist at the date of the balance-sheet is a reserve but an amount set aside out of the profits and other surplus to provide for any known liability so that the amount cannot be determined with substantial accuracy is a provision. The Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax , has held that liability to pay income-tax was a present liability though the tax became payable after it was quantified in accordance with the ascertainable data. Consequently, the provision made by the assessee for tax liability in the sum of Rs. 15,50,000 cannot be said to be reserve at all and can only be a provision and, therefore, the Tribunal, rightly held that the same cannot be included in the capital. The learned counsel for the assessee sought to contend, relying upon a decision of this court in Nagammal Mills LTD. v. Commissioner of Income-tax , that excess provision which was avaliable to the company for its use has to be treated as a reserve. No case was put forward by the assessee before any of the authorities that the sum of Rs. 15,50,000 set apart towards tax liability consisted of any amount by way of excess provision. Consequently, such an argument or case cannot be said to arise out of the order of the Tribunal.
As far as provision for payment of gratuity to employees in a sum of Rs. 1,36,060 is concerned, it is clear form the order of the Tribunal that the said sum was not set apart in any one particular year. It would appear that the assessee was setting apart a lump sum of Rs. 54,000 towards the payment of gratuity to its employees year after year and, after actual payment, the amount stood to the credit of this account as on April 1,1962, was Rs. 1,36,060 41. There is absolutely no material before the Tribunal to show that the lump sum provision made year after year was on the basis of any ascertainable amount due to the employees in a particular year. Therefore, it will merely mean a provision made to meet a contingent liability. If it is a provision made to meet a contingnent liability, then the result will be that the amount cannot be said to be a 'provision' but it could only be a re-serve. The Supreme Court in Standard Mills Co. Ltd. v. Commissioner of Wealth-tax had actually to deal with the provision made for gratuity payable to its employees. In that case, on the basis of an award, gratuity was payable to the employees when the employment was determined by death, incapcity, retirement or resignation. The Supreme Court observed :
'There is little doubt on the plain terms of the awards that the liability to pay gratuity to the employees of the appellant-company on determination of employment is a mere contingent libility which arises only when the employment of the employee is determined by death, incapacity, reitrement or resignation.'
After extracting the terms of the awards, the Supreme Court proceeded to point out (page 474).
'The right to obtain gratuity under the awards arises only when there is determination of employment and not before. The libility does not exist in presenti; it is contigent upon the determination of employment.'
It is clear that the amount set apart to meer such a contingnent libility cannot be said to be a 'provision' but can only be said to be a 'reserve'. This court in Commisioner of Income-tax v. Indian Steel Rolling Mills Ltd. has taken the same view. Therefore, we hod that as far as this sum of Rs. 1,36,060, is concerned, this constituted a 'reserve' and should be taken into account in the computation of the capital as provided for in paragraph 1 of the Second Schedule to the Act.
Then remains the last question regarding the provision for payment of Rs. 5,69,000 to the employees of the assessee as bonus. The Tribunal has stated in paragraph 6 of its order that the said amount had been debited under the caption 'expenses' to the profit and loss account and its nature was appearent from the following extract from the report of the directors to the shareholders.
'Regarding bonus provision for the year 1961-62, the shareholders will observe that a sum of Rs. 5,69,000 has been provided in the accounts. This amount has been computed by the bonus formula agreed to between the union representatives and the management in an agreement which was effective until the end of March, 1962.'
Thus, it is clear that the said amount did not represent any amount to meet an unforseen, contingent or unexpected liablity but was set apart for the purpose of meeting the known present libility of payments of bonus to the employees according to the bonus formula in terms of the agreement in force between the employer and its employees. Consequently, the Tribunal rightly held that this amount would not constitute 'reserve' within the Explanation of the paragraph 1 of schedule II to the Act. The result is, we answer the question referred to us in the affirmative so far as the two amounts of Rs. 15,50,000 and Rs. 5,69,000 are concerned and against the assesee and in the negative in respect of Rs. 1,36,060 and against the revenue. There will be no order as to costs.