Judgment:
M.B. Shah, J.
1. The Income-tax Appellate Tribunal has referred the following two questions for our opinion :
'1. Whether, on the facts and in the circumstances of the case, an amount of Rs. 63,304 forming part of the gratuity provision which was not considered as allowable deduction while computing the total income would qualify for inclusion in the capital base?
2. Whether, on the facts and in the circumstances of the case, an amount of Rs. 75,000 should be considered as a reserve liable to be included in the computation of capital base ?'
2. The aforesaid questions arise with regard to the assessment year 1975-76 for surtax liability of the assessee which is a limited company. Apart from other deductions, the assessee contended that in the computation of capital, an amount of Rs. 65,304 forming part of the gratuity provision ought not to have been deducted as it was not considered as allowable deduction while computing the total income. The assessee-company also contended that the reserve for doubtful debts amounting to Rs. 75,000 should be included in the computation of capital.
3. Question No. 1 :
In our view, this question is concluded by the decision of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT : [1981]132ITR559(SC) wherein the court has held that 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. Therefore, the aforesaid amount, which is a provision for gratuity, cannot be included in the computation of capital. In the present case, the provision for gratuity was not considered as a permissible deduction, as the conditions laid down in section 40A(7) of the Income-tax Act were not satisfied. Still, however, it was a provision for gratuity amount. Therefore, in our view, in the facts and on the circumstances of the case, the amount of Rs. 65,304 being a part of the gratuity provision would not qualify for inclusion in the capital base. Hence, question No. 1 is answered in the negative, i.e., in favour of the Revenue and against the assessee.
4. Question No. 2 :
The fact-finding authority has considered that the reserve of amount of Rs. 75,000 is for doubtful debts. It is also not disputed that the said amount of Rs. 75,000 is not considered as bad debts and not included in computing the profits for the purpose of the Income-tax Act. That means, the amount is kept as other reserve. These reserve are appropriation of profits and are being retained in the form of capital employed in the business. In this view of the matter, the Tribunal has rightly held that on the facts and in the circumstances of the case the amount of Rs. 75,000 should be considered as reserve liable to be included in the computation of capital base. Hence, question No. 2 is answered in the affirmative, i.e., in favour of the assess and against the Revenue.
5. Reference stands disposed of accordingly with no order as to costs.