Provision for doubtful debts treated as excluded from surtax capital base because substance, not label, controlled classification.

For surtax capital computation under the Second Schedule to the Companies (Profits) Surtax Act, 1964, the character of an amount depends on its substance, purpose, and surrounding circumstances, not its label. An amount created against doubtful debts is a provision if it reflects an anticipated non-recovery and is set aside to meet a known or expected liability; it is a reserve only if it is an appropriation of surplus profits as a free reserve. On the balance-sheet materials, the account was built up from transfers linked to doubtful debts and was not a free reserve. It was therefore a provision and excluded from the capital base for surtax.

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Issues: Whether the amount described as a reserve for doubtful debts was a reserve or a provision, and whether it was includible in the capital base for surtax under the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The distinction between a provision and a reserve depends on the nature and character of the amount, the purpose for which it is created, and the surrounding circumstances. A provision is made against a known or anticipated charge or liability and is excluded from capital computation, whereas a reserve is an appropriation out of profits. An account for doubtful debts, though nomenclaturally described as a reserve, is in substance a provision if it represents an evaluation of doubtful items and is set apart to meet their possible non-recovery. On the balance-sheet materials, the amount was built up by transfers tied to doubtful debts and was not shown to be a free reserve. Subsequent treatment of the account by the assessee did not alter its true character.

Conclusion: The amount was a provision and not a reserve, and it was not includible in the capital base for surtax.

Final Conclusion: The question referred was answered against the assessee, and the Department succeeded with costs.

Ratio Decidendi: For surtax capital computation, an amount set apart for doubtful debts is excluded if, in substance, it is a provision made to meet anticipated non-recovery and not an appropriation of surplus as a free reserve.

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