Real character of doubtful debt provisions determines surtax capital treatment as reserves, not labels in accounts.

Amounts set aside in accounts must be classified by their real character, not by the label used by the assessee. A provision exists where the sum is made against a known or existing liability, whereas amounts retained for future contingencies without any crystallised liability are reserves. Applying this distinction, sums provided for doubtful debts and doubtful advances were treated as reserves rather than provisions, because they were set apart against possible future losses and not against a present liability. They therefore formed part of the company's capital for surtax computation, and the issue was answered in favour of the assessee.

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Issues: Whether the provision for doubtful debts and the provision for doubtful advances were to be treated as reserves, and therefore included in the company's capital for the purpose of computing surtax.

Analysis: The classification of an amount set aside in the accounts does not depend on the label used by the assessee. The true nature and character of the amount must be determined. An amount is a provision when it is made for a known or existing liability. By contrast, amounts set apart to meet future contingencies, where no existing liability has crystallised, may in substance be reserves. The court relied on the treatment of bad debts under section 36(1)(vii) and section 36(2) of the Income-tax Act, 1961 to hold that sums kept apart for doubtful debts and doubtful advances are not provisions for a present liability but amounts retained against future losses.

Conclusion: The provision for doubtful debts and the provision for doubtful advances were reserves and formed part of the capital of the assessee for surtax purposes; the question was answered in the negative, in favour of the assessee.

Ratio Decidendi: The real character of an amount set apart in the accounts, not its nomenclature, determines whether it is a provision or a reserve; amounts kept aside for future losses without any known or existing liability are reserves and part of capital.

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