1985 (10) TMI 88

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....uary 1, 1966, and January 1, 1967, constituted 'reserves' as contemplated under rule I of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ? (2) Whether, on the facts and in the circumstances of the case, the doubtful debts reserve of Rs. 45,000 as on January 1, 1965, January 1, 1966, and January 1, 1967, Rs. 70,000 as on January 1, 1968, and Rs. 4,007 as on January 1, 1969, constituted 'reserves' as contemplated under rule of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ? " Under section 4 of the Companies (Profits) Surtax Act, 1964, surtax was charged on every company for every assessment year commencing on and from April 1, 1964, in respect of so much of its profits as exceeded the statutory deduct....

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.... Rs. 45,000 had been brought forward from the year prior to December 31, 1964. To this amount, Rs. 25,000 was added in the year ended December 31, 1967. From this amount, bad debts of the value of Rs. 65,993 were written off in the year ended December 31, 1968. The Income-tax Officer declined to include the deferred taxation reserve in the computation of capital on the ground that it was not a free reserve. The Appellate Assistant Commissioner in appeal did not agree. The Tribunal found that the doubtful debts reserve was not, designed to meet any existing liability at the date of each of the balance-sheets but was designed to meet future contingencies. It held that it was, therefore, a reserve and includible in the computation of the asses....

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....de by the Supreme Court in the context of gratuity reserve have no application to the case of doubtful debts reserve. This court in Goodlass Nerolac Paints Ltd. v. CIT [1984] 150 ITR 484, considered the question of a reserve for doubtful debts in the light of the judgment in Vazir Sultan Tobacco Company's case [1981] 132 ITR 559 (SC). In the Goodlass Nerolac Paints Ltd.'s case [1984] 150 ITR 484 (Born), the quantum of amounts which had been transferred to the reserve for doubtful debts had been determined ad hoc and without reference to any specific anticipated liability. The reserve had not been utilised for the adjustment of bad debts. It had been carried forward from year to year. In the circumstances, the fund constituting the reserv....