COMMISSIONER OF INCOME TAX Vs. CYNAMID INDIA LIMITED

JUDGEMENT

(1.) IN this Departmental reference relating to the assessee's surtax assessment for the asst. year 1970 71, the Tribunal has referred to this Court the following two questions of law under S. 256(1) of the IT Act, 1961, as applied to surtax by S. 18 of the Companies (Profits) Surtax Act, 1964 :

(2.) LEARNED counsel are agreed that, in view of the Supreme Court judgment in the case of Second ITO vs. Stumpp, Schuele and Somappa P. Ltd. (1990) 94 CTR (SC) 160 : (1991) 187 ITR 108, the second question is required to be answered in the affirmative and in favour of the assessee. This question is so answered.

(3.) IN our judgment, the arguments advanced by Mr. Dalvi, though ingenuous, cannot be accepted. The reason is that, in tax matters, what is material is what has been done and not what could have been done. In the case before us, it is a fact that the assessee had set apart an amount to the credit of the retiring gratuity reserve. In that year, it was admittedly taken to be a provision and not as a reserve. The mere fact that it has been subsequently transferred to the general reserve cannot and should not, in our opinion, make any difference. To say the least, it will be too obvious a device to avoid tax. No doubt, in Vazir Sultan Tobacco Co. Ltd. vs. CIT (supra), there was a provision for gratuity and the observations made therein are naturally in connection therewith. Since, however, in our view, mere transfer of an amount from a reserve under one head to another does not and should not make any difference, in our opinion, the Supreme Court judgment is squarely applicable. Accordingly, we hold that even though during the year in question there is no retiring gratuity reserve as such, out of the amount standing to the credit of that reserve was transferred to the general reserve (sic). Only that part of the reserve will constitute a reserve as is found to be in excess of the assessee's liability in that regard on the basis of actuarial valuation as on the relevant date. The answer to the first question will, therefore, also be in the negative and in favour of the Revenue. However, while giving effect to our judgment, the Tribunal will have to find out the excess, if any, in the said amount of reserve over the assessee's liability and treat that part as a reserve.