Commissioner of Surtax Vs. Suhrid Geigy Ltd. - Court Judgment

Excerpt:
- r.k. abichandani, j. 1. at the instance of the revenue, the tribunal, ahmedabad bench 'b' has referred for the opinion of this court the following question under s. 18 of the companies (profits) surtax act, 1964 r/w s. 256(1) of the it act, 1961 : 'whether, on the facts and in the circumstances of the case, the tribunal was right in law in holding that the gratuity reserve amount of rs. 1,47,327 for asst. yr. 1965-66 and rs. 1,93,802 for asst. yrs. 1966-67 and 1968-69 was includible in computation of capital employed for the purpose of the surtax under r. 1 of the second schedule of the surtax act, 1964 ?' 2. the relevant assessment years are 1965-66, 1966-67 and 1968-69. the assessee, a limited company, carried on business of manufacture of medicines. in respect of the amounts shown in gratuity reserve account for the respective years, the surtax officer in the course of assessment proceedings held that the amount standing to the credit of gratuity reserve account did not represent reserve for the purpose of inclusion in the capital employed. in appeal, the aac disagreeing with the surtax officer and allowing the appeal of the assessee, directed the surtax officer to include the amount of gratuity reserve as part of the capital to be computed for the purpose of second schedule of the act. the revenue, thereupon, preferred an appeal before the tribunal and the tribunal held that the gratuity reserve was includible in computing the capital of the company for the purpose of surtax. 3. as held by the supreme court in vazir sultan tobacco co. ltd. vs . cit : [1981]132itr559(sc) ordinarily an appropriation to gratuity reserve will have to be regarded as a provision made for a contingent liability, for, under a scheme framed by a company the liability to pay gratuity to its employees on determination of employment arises only when the employment of the employee is determined by death, incapacity, retirement or resignation - an event (cessation of employment) certain to happen in the service career of every employee. if a scientific method is adopted and appropriation is made for gratuity, such appropriation would constitute a provision representing fairly accurately a known and existing liability for the year in question. the supreme court has further held that if, however, an ad hoc sum is appropriated without resorting to any scientific basis, such appropriation would also be a provision intended to meet a known liability, though a contingent one, for, the expression 'liability' occurring in clause 7(1) (a) of part iii of the sixth schedule to the companies act includes any expenditure contracted for and arising under a contingent liability. however, if the sum so appropriated is shown to be in excess of the sum required to meet the estimated liability, it is only the excess that will have to be regarded as a reserve under clause 7(2) of part iii to the sixth schedule to the companies act. we do not find any material on record as to whether the appropriation of the amount was based on any actuarial valuation or whether it was an appropriation of an ad hoc amount - an aspect which has a great bearing in deciding the question whether the appropriation could be treated as a provision or a reserve. in the absence of proper material touching this vital aspect, we are of the view that the question will have to be remanded to the tribunal for disposal in the light of the principles laid down by the supreme court in vazir sultan tobacco co. ltd. (supra) 4. in this view of the matter, the question referred to us is unanswered. the tribunal will decide the matter in accordance with the principles laid down by the supreme court in vazir sultan tobacco co. ltd. (supra). the reference stands disposed of accordingly with no order as to costs.