Bombay H.C : Whether, on the facts and in the circumstances of the case, the profit and loss account surplus of Rs. 2,08,42,527 constitutes a reserve for the purpose of computation of capital in terms of r.1 of the Second Schedule to the SPT Act, 1963 ?

BY THE COURT :

The following five questions are referred to the High Court for its opinion under s. 256(1) of the IT Act, 1961, by the Tribunal (Bombay Bench-D), at the instance of the assessee, Bombay Tyres International Ltd.

“(1) Whether, on the facts and in the circumstances of the case, the profit and loss account surplus of Rs. 2,08,42,527 constitutes a reserve for the purpose of computation of capital in terms of r.1 of the Second Schedule to the SPT Act, 1963 ?

(2) Whether, on the facts and in the circumstances of the case, the provision for taxation of Rs. 1,45,90,317 constitutes a reserve for the purpose of computation of capital in terms of r.1 of the Second Schedule to the SPT, Act, 1963 ?

(3) Whether, on the facts and in the circumstances of the case, the provision for gratuity of Rs. 20,51,526 constitutes a reserve for the purpose of computation of capital in terms Of r. 1 of the Second Schedule to the SPT Act, 1963 ?

(4) Whether, on the facts and in the circumstances of the case, the excess of Rs. 2,202 of the reserve for development rebate as per the balance-sheet of the company over the reserve statutorily required to be maintained is a reserve created under s. 10(2)(vib) of the Indian IT Act, 1922/s. 34(3) of the IT Act, 1961, as contemplated under r.1 of the Second Schedule to the SPT Act, 1963 ?

(5) If the answer to question No. 4 is in the negative, whether the excess reserve of Rs. 2,202 falls in the category of ‘other reserves’ referred to in r.1 of the Second Schedule to the SPT Act, 1963, and is, therefore, not to be included in the computation of capital to the extent the portion of the amount has been allowed in computing the company’s profits for the purposes of the IT Act, 1961 ?”

Counsel are agreed that the answers to be given to these questions are concluded ; question No. 1 by a decision of the Supreme Court, and the others, namely, questions Nos. 2, 3 and 4, by the decisions of this Court. In view of the answer proposed to be given to question No. 4, question No. 5 will be, required to be ignored. Question No. 1 pertains to surplus in the profit and loss account, and in accordance with the decision of the Supreme Court in CIT vs. Century Spg. and Mfg. Co. Ltd. (1953) 24 ITR 499 (SC), we hold that this is not a reserve but a provision. The question will have to be answered accordingly. Question No. 2 concerns the provision for taxation in the amount of Rs. 1,45,90,317. This is concluded against the assessee by a decision of this Court in Shree Ram Mills Ltd. vs. CIT (1977) 108 ITR 27. It has been held in the said decision that this would be a provision and not a reserve. The question will have to be answered accordingly. Question No. 3 concerns provision for gratuity in the aggregate amount of Rs. 20,51,526. It would appear from annex. G that Rs. 1,80,000 used to be provided every year (that is, up to the accounting year 1962-63). The payments for each year varied. It is clear, therefore, that the amount added to the gratuity provision was not correlated with the liability. These were ad hoc additions and considered as such. It would appear that the answer to be given is concluded in favour of the assessee by a decision of this Court in CIT vs. Forbes-Forbes Campbell & Co. Ltd. (1977) 107 ITR 38. The question will have to be answered in accordance with this decision. Question No. 4 relates to excess of Rs. 2,202 in the reserve for development rebate. This is governed by a circular dt. 11th Jan., 1971, issued by the CBDT, which circular has been noted and applied in CIT vs. Otis Elevator Co. (India) Ltd. (1977) 107 ITR 241. Question No. 4 is required to be answered accordingly. The amount, therefore, is required to be considered as a reserve, and the question has to be answered in favour of the assessee.

The questions referred to us are accordingly answered as follows :

Question No. 1 : The said amount of Rs. 2,08,42,527 would not constitute a reserve for the purpose of computation of capital.

Question No. 2 : The amount of Rs. 1,45,90,317 would not constitute a reserve for the purpose of computation of capital.

Question No. 3 : The provision for gratuity in the amount of Rs. 20,51,526 constitutes a reserve for the purpose of computation of capital.

Question No. 4 : The excess amount of Rs. 2,202 constitutes a reserve. Question No. 5 : Does not arise. Parties to bear their own costs.

[Citation : 141 ITR 710]