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Issues: Whether the amount shown as bad and doubtful debts reserve could be treated as a reserve forming part of the company's capital base for surtax purposes under the Companies (Profits) Surtax Act, 1964.
Analysis: The relevant computation under the Second Schedule to the Companies (Profits) Surtax Act, 1964 required the capital of the company to be taken as on the first day of the previous year, with reserves included in the capital base. The label used in the accounts was not ative by itself, and the real nature of the amount had to be ascertained. A prior assessment year did not operate as res judicata for the year under reference. On the facts found, there was no material to show that the sum in question was an excess provision or that any identifiable excess had ceased to be reasonably necessary for bad and doubtful debts. The Tribunal had relied mainly on the earlier year's treatment, which was insufficient to establish that the amount was a true reserve.
Conclusion: The amount was not justified as a reserve for capital computation purposes and could not be included in the company's capital base; the answer was against the assessee and in favour of the Revenue.
Ratio Decidendi: For surtax computation, a bad and doubtful debts item can be treated as a reserve only if the excess over the amount reasonably necessary for that liability is shown to have emerged as a true reserve; the accounting label and treatment in an earlier year are not conclusive.
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