COMMISSIONER OF INCOME TAX Vs. CYNAMID INDIA LIMITED

JUDGEMENT

(1.) THIS reference arises under S. 256(1) of the IT Act by the reason of S. 18 of the Companies (Profits) Surtax Act, 1964. The assessee is a limited company and the period involved is asst. yr. 1971 72. The relevant previous year was 1st Dec., 1969 to 30th Nov., 1970. All the questions pertain to the computation of capital which is required to be done on the first day of the accounting period for the purposes of calculation of sur tax. The question which are referred to us are as follows :

(2.) AS far as the first question is concerned, the Division Bench of our High Court in the case of this very assessee has considered an amount of Rs. 6,96,000 which initially stood to the credit of "retirement gratuity reserve"by which was later transferred to the general reserve account. This is the case of CIT vs. Cynamid India Ltd. (1991) 96 CTR (Bom) 222 : (1991) 192 ITR 499 (Bom). The Division Bench has said that the assessee had set apart an amount to the credit of the retiring gratuity reserve. In the year in which the amount was set apart it was admittedly taken to be a provision and not a reserve. The mere fact that it has been subsequently transferred to the general reserve account cannot make any difference. The Division Bench has held that 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. This ratio directly applies to the present case. Hence, question No. 1 is answered as follows : Question No. 1 is answered in the negative and in favour of the Revenue, save and except to the extent that, the amount is found in excess of the actuarial valuation of the liability of the assessee in this regard on the relevant date, it may be treated as a reserve and not be deducted while computing the assessee company's capital base.

(3.) QUESTION No. 3. This question is in two parts. Question No. 3(a) deals with the provision for taxation which was in excess of the actual tax liability. In view of the decision in the case of Vazir Sultan Tobacco Co. Ltd. vs. CIT (1981) 25 CTR (SC) 186 : (1981) 132 ITR 559 (SC), this question must be answered in the affirmative and in favour of the assessee. The second part, that is to say part 3(b), deals with the provision for contingencies. The provision for contingencies was made against certain claims advanced by the staff for additional salary, dearness allowance, etc. The amount set apart in this account was not allowed as an expenditure by the ITO for the purposes of income tax assessment. Moreover, although these demands had been made by the staff, the demands were not accepted by the company and there was no liability on the company to pay these amounts on the first day of the relevant accounting year. Therefore, the provision for contingencies is not in the nature of a provision for any liability. It must be treated as a reserve and hence it should not be deducted while computing the assessee's capital base for the relevant assessment year under the Companies (Profits) Surtax Act, 1964. The question No. 3(b) is, therefore, answered in the affirmative and in favour of the assessee. No order as to costs. *****