Sabyasachi Mukharji, J.
1. In this case, a short question has been referred to us under Section 256(1) of the I.T. Act, 1961. The question is as follows :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that, the reserve for gratuity should be included in the computation of capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?'
2. This relates to the assessment year 1970-71 for which the previous calendar year was 1969 ending on the 31st December, 1969. The ITO excluded the reserve for staff gratuity for Rs. 1,43,000 from the computation of capital for the purpose of determining the net chargeable profits under the C. (P.) S.T. Act, 1964.
3. The assessee preferred an appeal before the AAC. He held that the gratuity payments have been made by debiting to the relevant profit and loss account and the reserve for gratuity had been made on an ad hoc basis and the sum had not been touched for making any payment in respect of gratuity and thus the reserve for gratuity- was, according to the AAC, a free reserve. He, therefore, included the reserve for gratuity in the computation of capital under Schedule II to the C. (P.) S.T. Act, 1964. The revenue preferred an appeal before the Tribunal. On behalf of the revenue, it was urged that the AAC was not justified in holding that the reserve for gratuity was a free reserve. On behalf of the assessee, it was urged that Rs. 1,43,000 was transferred from the general reserve to the staff gratuity and it was a free reserve and was not a provision and thus the order of the AAC was supported by the assessee. The Tribunal referred to the several decisions dealing with this aspect of the matter and after discussing the relevant facts held that it was clearly a reserve for payment to the employees as and when the liability with regard to the gratuity to staff might arise in future. The Tribunal thereafter observed that it was clearly a reserve. It further held, as from the facts it appeared to the Tribunal, that the company was in the habit of making payment of gratuity to the employees and in the past such payments were made by debiting the profit and loss account. It also held that this company had also specific reserves like general reserve, development reserve and the gratuity reserve. The Tribunal also found that it was clearly a reserve for payment to the employees as and when the liability regarding the payment of gratuity might arise in future.
4. It is true, as was urged on behalf of the assessee, that there was no scheme as such, and there was no statutory obligation for making any payment as staff gratuity, but having regard to the nature of the reserve and having regard to the fact that this reserve had been made specifically by those who were competent to take a decision and also read in conjunction with the finding of the Tribunal that the company was in the habit of making the payment of gratuity, from the commonsense point of view, it appears to us, it is more appropriate to hold that this money was not afree reserve available to the company for any other purpose for use in future. In the present context, therefore, it cannot be allowed as free reserve. In this connection, we may refer to the observations of this court in the case of CIT v. Jugantar P. Ltd. : 128ITR619(Cal) . We may, however, point out that in that case the facts were slightly different, that is to say, there was a scheme for the payment of gratuity. But here there used to be payments of gratuity in the past and this was, as the Tribunal held, clearly earmarked for the payment of gratuity distinguishing it from other reserves. In that view of the matter and in the context of the facts the observations of the Bombay High Court in the case of CIT v. Forbes Forbes Campbell & Co. Ltd. : 107ITR38(Bom) perhaps would not be strictly applicable. In the premises we are of the opinion that this was not a reserve which was freely available to the company for future use and, therefore, we would answer the question in the negative and in favour of the revenue.
5. In the facts and circumstances of the case, the parties will pay and bear their own costs.
C.K. Banerji, J.
6. I agree.