1998 (2) TMI 53

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....he capital should not be proportionately reduced in terms of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, consequent to the deductions allowed under Chapter VI-A of the Income-tax Act, 1961, for the assessment years 1969-70, 1972-73 and 1973-74 ? 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the reserve for bad and doubtful debts should be taken as capital for the levy of surtax for the assessment year 1969-70 ? 3. Whether, the Appellate Tribunal was right in holding that the dividends declared subsequent to the first day of the accounting period should not be deducted from the general reserve while computing the capital for levy of surtax ....

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.... the Tribunal was not correct in holding that a sum of Rs. 1,49,999 should not be reduced from a general reserve though the dividend was declared subsequent to the end of the year. Accordingly, the third question is liable to be answered in favour of the Revenue. So far as the second question is concerned, we have gone through the order of the Surtax Officer. The order passed by the Surtax Officer for the various assessment years do not disclose how the Surtax Officer came to the conclusion that the reserve for bad and doubtful debts cannot be taken as capital for the levy of surtax. We have also gone through the orders of the Commissioner of Income-tax (Appeals). The orders passed by the Commissioner of Income-tax (Appeals) do not discl....

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.... decision, in the case of State Bank of Patiala v. CIT [1996] 219 ITR 706, the Supreme Court also adopted the test laid down in CIT v. Saran Engineering Co. Ltd. [1986] 161 ITR 741 (SC), and held that the provision made for bad and doubtful debts can be included as a part of the capital in certain contingencies. The test laid down by the Supreme Court is extracted as under : "In CIT v. Saran Engineering Co. Ltd. [1986] 161 ITR 741, the Supreme Court observed that where the liability has actually arisen or is anticipated legitimately by the assessee though the quantum of the liability has not been determined, a fund to meet such present liability cannot be treated as a reserve. Where the transfer of an amount is made ad hoc, when there is....