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1999 (7) TMI 45 - HC - Income Tax

Issues involved:
Interpretation of the term "reserve" under the Companies (Profits) Surtax Act, 1964 for the purpose of capital computation.

Analysis:
The High Court of BOMBAY was tasked with determining whether a provision for doubtful debts and doubtful advances should be considered a "reserve" within the meaning of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The case involved an assessee-company claiming inclusion of sums representing provisions for doubtful debts and advances in their capital computation for two assessment years. The Income-tax Officer initially disallowed the claim, but the Commissioner of Income-tax (Appeals) allowed it, directing a recomputation based on a previous decision of the Bombay High Court. The Revenue appealed to the Income-tax Appellate Tribunal, which upheld the Commissioner's decision. The Tribunal's view was challenged through a reference to the High Court.

The High Court referred to a previous judgment regarding a similar issue involving a provision for doubtful debts and advances. In that case, it was established that whether an amount kept aside by the assessee is a provision or a reserve depends on the true nature and purpose of the amount. If the provision exceeds what is reasonably necessary for the intended purpose, the excess is considered a reserve. The court also highlighted the provisions of section 36, indicating that amounts set aside for future losses on bad debts are not considered for income computation. It was concluded that a provision for doubtful debts or advances is essentially a reserve and forms part of the capital until actual losses occur.

Applying the principles from the previous judgment, the High Court found that the amounts set aside by the assessee for doubtful debts and advances were to anticipate losses and not to provide for known liabilities. As the sums reserved were not utilized unless debts turned bad, they were deemed to be reserves. Therefore, the High Court upheld the Tribunal's decision, stating that the provision for doubtful debts and advances should be included in the computation of capital under the Companies (Profits) Surtax Act. The question was answered in favor of the assessee, and the reference was disposed of without costs.

 

 

 

 

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