(Appeals by special leave against the judgment and order dated July 30,1976, of the Bombay High Court in I.T.R. No.152 of 1975).

Income-tax---

----Company---Surtax---Computation of capital---No approved gratuity scheme---Ad hoc amounts transferred to gratuity reserve---No attempt to estimate present liability ---Amounts transferred not reserve---Not to be included in capital computation---Indian Companies (Profits) Surtax Act, 1964, Sched. II, R.1(iii)---[CIT v. Forbes Forbes Campbell & Co. Ltd. (1977) 107 ITR 38 reversed on this point].

Against that part of the judgment of the Bombay High Court in C.I.T. v. Forbes Forbes Campbell & Co. Ltd. (1977) 107 ITR 38 to the effect thatamounts standing to the credit of gratuity reserve, when there was no approved gratuity scheme, and ad hoc appropriations were made and credited to the gratuity reserve without making any attempt to estimate the present liability qualified as reserves and were to be included in the computation of capital of the assessee-company under rule 1 (iii) of Schedule II to the Companies (Profits) Surtax Act, 1964, the Department appealed to the Supreme Court. The Supreme Court, upon concession, allowed the appeal holding that the amounts representing provision for gratuity were not reserves and could not be included in the computation of capital of the assessee-company for the purpose of surtax.

Vazir Sultan Tobacco Co. Ltd. v. CIT (1981) 132 ITR 559 (SC) applied.

CIT v. Forbes Forbes Campbell & Co. Ltd. (1977) 107 ITR 38 reversed on this point.

Ms. A. Subhashini, Advocate for Appellant.

Mrs. A.K. Verma, Advocate (of J.B. Dadachanji & Co., Advocates) for Respondent.

JUDGMENT

These appeals arise out of the judgment of the. Bombay High Court dated July 30, 1976, in Income-tax Reference No.152 of 1975 (CIT v. Forbes Forbes Campbell & Co. Ltd. (1977) 107 ITR 38) which related to the assessment years 1964-65, 1965-66 and 1966-67. The following two questions were referred to the High Court (at page 39):

"(1)Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sums of Rs.98,730 for the assessment year 1964-65, Rs.1,10,000 for the assessment year 1965-66 and Rs.81,000 for the assessment year 1966-67, representing provision for gratuity were includible in computing the capital of the assessee company under rule 1 of Schedule II of the Companies (Profits) Surtax Act, 1964, for the purpose of surtax?

(2)Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sums of Rs.3,20,000 for the assessment year 1964-65, Rs.3,48,943 for the assessment year 1965-66 and Rs.4,62,609 for the assessment year 1966-67, representing dividend reserves were includible in the computation of the capital of the assessee-company under rule 1 of Schedule II of the Companies (Profits) Surtax Act, 1964, for the purpose of surtax?"

The High Court answered question No.l in favour of the assessee and question No.2 in favour of the Revenue. The appeals relate to question No.l. Learned counsel for the respondent concedes that the matter is now covered by the decision of this Court in Vazir Sultan Tobacco Co. Ltd. v. CIT (1981) 132 ITR 559. In view of the said decision, question No.1 must also be answered in the negative. The appeals are, therefore, allowed and the order of the High Court is set aside, and question No.l is answered in the negative, i.e., in favour of the Department and against the assessee. There will be no orders as to costs.

M.BA./2293/TAppeals allowed.