Bad debts reserves and dividend deduction under surtax law were decided on reserve classification and declaratory amendment principles.

Amounts set apart ad hoc for future contingencies, without any known or existing liability, were treated as other reserves rather than provisions, so they were includible in capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964, and the assessee succeeded on that issue. In computing chargeable profits, the court treated the amendment introducing the Explanation to the First Schedule as declaratory of the pre-existing law, so deduction was confined to the dividend amount actually included in total income, not the gross dividend received, and the Revenue succeeded on that issue. The reference was thus answered in part for each side.

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Issues: (i) Whether amounts set apart for bad and doubtful debts were to be treated as provisions or as other reserves for inclusion in capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964. (ii) Whether, in computing chargeable profits, the entire gross dividends were deductible or only the net dividends included in total income.

Issue (i): Whether amounts set apart for bad and doubtful debts were to be treated as provisions or as other reserves for inclusion in capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The amounts were not set apart against any known or existing liability. They were created ad hoc to meet future contingencies of bad or doubtful debts after actual bad debts had already been debited to the profit and loss account. Such sums did not bear the character of provisions.

Conclusion: The sums were other reserves and were includible in capital. The finding is in favour of the assessee.

Issue (ii): Whether, in computing chargeable profits, the entire gross dividends were deductible or only the net dividends included in total income.

Analysis: The court treated the statutory amendment introducing the Explanation to the First Schedule as declaratory of the law already existing, following the principle that retrospectively expressed amendments may declare the pre-existing legal position. On that basis, the deduction under the surtax computation was confined to the dividend amount actually included in total income, not the gross amount received.

Conclusion: Only the net dividends were deductible. The finding is in favour of the Revenue.

Final Conclusion: The reference was answered by accepting the assessee's claim on the reserve issue and the Revenue's claim on the dividend-computation issue, resulting in a mixed outcome on the questions referred.

Ratio Decidendi: Amounts set apart ad hoc for future contingencies without any known existing liability are reserves and not provisions, and a statutory amendment that is declaratory of the pre-existing law applies to earlier assessment years as well.

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