DESAI, J. - (1.) IN this reference the question referred to the High Court under s. 256(1) of the I.T. Act, 1961, is as follows : 'Whether, on the facts and in the circumstances of the case, all or any of the four funds set out in para. 1 above was liable to be included in the computation of the capital of the company under the Second Schedule to the Act for the purpose of determining the standard deduction under section 2(9) of the Super Profits Tax Act, 1963 ? The assessee -company is the Gokak Mills Ltd. The four funds, with which we are concerned in this reference, which are enumerated in the statement of the case, are as follows : Rs.'(a) Provision for staff gratuity 1,62,917(b) Provision for contingencies 74,930(c) Provision for freight, rebate, etc 48,388(d) Proposed dividend 11,88,579 - - - - - - - - - - - -14,74,814'
(2.) THE question very briefly paraphrased would be whether the four amounts or funds were reserves and liable to be included in the computation of the capital of the company. As far as items (a) and (d) are concerned, the question would seem to be concluded by decisions of the Bombay High Court, and we propose to answer them in accordance with the said decisions. As far as items (b) and (c) are concerned, the principles now are well settled (as far as the Bombay High Court is concerned), and the application of the principles presents very little difficulty in the instant case. Thus, an elaborate recital of the facts or statement of law appears to be unnecessary. Item (a) is a provision for staff gratuity. According to the Tribunal the funds in question were set apart not because there was any existing liability, and they had been set apart even when no liability whatsoever existed or even when the liability was so slender and distant that no prudent and reasonable person would have thought of providing against the same. In other words, this was just an ad hoc setting aside and not any setting aside for a known, existing or properly computed liability.
(3.) THIS question has been duly considered in CIT v. Forbes Forbes Campbell and Co. Ltd. : [1977]107ITR38(Bom) . It has been observed by Tulzapurkar J., speaking for the Bench of this High Court, as follows (p. 44) : 'In the absence of any actuarial valuation having been undertaken and also in the absence of setting apart the amounts without there being any gratuity scheme having been framed and got approved by the company, the amounts so set apart will have to be regarded as making a provision for contingent liability the present discounted value whereof had not been ascertained. In the circumstances, we are of the view that these three items which were found credited in the gratuity reserve will have to be regarded as amounts retained not intended to provide for any known or existing liability and as such these will have to be regarded as reserves.' ;