Provision for doubtful debts is not a reserve where it meets known asset diminution, excluding it from surtax capital computation.

Amounts set aside in the balance sheet to meet identifiable doubtful debts and doubtful advances, where the diminution in asset value was already known on the balance-sheet date, are provisions and not reserves. As such, they are excluded from capital computation under the Companies (Profits) Surtax Act, 1964. The earlier orders for other years were not followed because the relevant factual aspect had not been considered there, and the Commissioner's direction treating the sums as reserves was set aside.

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Issues: Whether the amounts set aside as provision for doubtful debts and provision for doubtful advances were reserves includible in the capital computation for surtax purposes under the Companies (Profits) Surtax Act, 1964.

Analysis: The amounts in question were shown in the balance sheet as provisions and represented the exact sums considered doubtful out of sundry debtors and loans and advances on the date of the balance sheet. They were, therefore, earmarked to meet a diminution in the value of assets known to exist at that date. Amounts set aside for such an identifiable diminution are provisions and not reserves. Earlier orders for other assessment years were not followed because the relevant factual element had not been considered there.

Conclusion: The amounts were held to be mere provisions, not reserves, and were not includible in the capital computation for surtax purposes; the issue was decided against the assessee.

Final Conclusion: The revenue's appeal succeeded and the Commissioner (Appeals)'s direction to treat the amounts as reserves was set aside.

Ratio Decidendi: An amount set aside to meet a known diminution in the value of assets existing on the balance-sheet date is a provision and cannot be treated as a reserve for capital computation under the surtax law.

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