Commissioner of Income Tax vs Cynamid India Ltd.

Mrs. Sujata Manohar, J.—This reference arises u/s 256(1) of the Income Tax Act, 1961, by reason of section 18 of the Companies (Profits) Surtax Act, 1964. The assessee is a limited company and the period involved is the assessment year 1971-72. The relevant previous year was December 1, 1969, to November 30, 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 surtax. The questions which are referred to us are as follows :

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the sum of Rs. 6,96,000, which initially stood to the credit of ''retirement gratuity reserve'' and was later transferred to the ''General Reserve Account'' should not be deducted by the Surtax Officer, while computing the assessee company''s capital base ?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, could not be invoked by the Surtax Officer for the purpose of diminishing the assessee-company''s capital base for the assessment year 1971-72 proportionately having regard to the deductions given to it under sections 80-I and 80L of the Income Tax Act, 1961 ?

(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the following items should not be deducted by the Surtax Officer while computing the assessee-company''s capital base for the assessment year 1971-72 under the Companies (Profits) Surtax Act, 1964 :

(a) Provision for taxation which was in excess of the actual tax liability, and

(b) Provision for contingencies standing at Rs. 6,29,080 ?"

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 the "retirement gratuity reserve" but which was later transferred to the general reserve account. This is the case of Commissioner of Income Tax Vs. Cynamid India Limited, . The Division Bench has said that the assessee had set apart an amount to the credit of the retirement 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 found in excess of the actuarial valuation of the liability of the assessee in this regard on the relevant date, may be treated as a reserve and not be deducted while computing the assessee-company''s capital base.

In respect of the second question, the answer is governed by the decision of the Supreme Court in the case of Second Income Tax Officer and Another Vs. Stumpp Schuele and Somappa (P) Ltd., . In the light of this judgment, the question is answered in the affirmative and in favour of the assessee.

"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., Hyderabad and Others Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad, , 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 Income Tax Officer 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 of 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. Question No. 3(b) is, therefore, answered in the affirmative and in favour of the assessee.

No order as to costs.