Doubtful debts as reserve: provision held includible in capital for surtax computation under the Companies (Profits) Surtax Act.

Amounts set aside to meet anticipated losses, rather than known or existing liabilities, are treated as reserves for capital computation under the Companies (Profits) Surtax Act, 1964. On that basis, provision for doubtful debts and doubtful advances was held to remain part of capital until an actual bad debt or loss arose and was written off, with the treatment of bad debts under the Income-tax Act supporting that characterisation. The provision was therefore includible in the computation of capital for surtax purposes, and the issue was answered in favour of the assessee and against the Revenue.

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Issues: Whether the provision for doubtful debts and doubtful advances was a reserve within the meaning of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, and therefore includible in the computation of capital for surtax purposes.

Analysis: Amounts set aside to meet anticipated losses, and not to provide for any known or existing liability, are to be treated as reserves. The amounts retained for doubtful debts and doubtful advances were not utilised until an actual bad debt or loss arose, and the treatment of bad debts under section 36 of the Income-tax Act, 1961 supported the view that such amounts remained part of the assessee's capital until written off against an actual loss.

Conclusion: The provision for doubtful debts and doubtful advances was rightly treated as a reserve and was includible in the computation of capital for surtax purposes; the question was answered in the affirmative in favour of the assessee and against the Revenue.

Ratio Decidendi: A sum set aside to meet anticipated losses, and not a known or existing liability, is a reserve and not a mere provision for purposes of capital computation under the Companies (Profits) Surtax Act, 1964.

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