TMI Blog1992 (7) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... nsequently, allowing yearwise deduction as under : Rs. 1971-72 7,00,000 1972-73 13,78,000 1973-74 22,11,000 1975-76 15,98,000 (ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the amounts of Rs. 10,53,576, Rs. 27,21,641, Rs. 29,91,641 and Rs. 47,16,641 provided for bad and doubtful debts as at the beginning of the relevant accounting year respectively for the assessment years 1971-72, 1972-73, 1973-74 and 1975-76 qualified as a reserve for inclusion in the capital of the assessee under the Second Schedule to the Companies (Profits) Surtax Act ?" The sole point which requires determination for answering both these questions is whether the amounts set apart by the assessee during each assessment year for bad and doubtful debts in the balance-sheets of the relevant periods constitute a "reserve" as contemplated under rule 1(xi)(b) of the First Schedule and rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964 (hereinafter called "the 1964 Act"). The 1964 Act imposes a special tax on the profits of certain companies. Under section 4 of this Act, there shall be charged on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-sheet in so far as the sums transferred to such reserves are attributable to income chargeable to tax under the Income-tax Act and have not been allowed as a deduction in computing its-total income under that Act, and in so far as the aggregate of such sums does not exceed the highest of the aggregate of such sums, if any, so transferred during any one of the three years prior to the previous year, whichever is higher . . . .. Rule 1 of the Second Schedule.-Subject to the other provisions contained in this Schedule, the capital of a company shall be the aggregate of the amounts, as on the first day of the previous year relevant to the assessment year, of -. . . . (iii) its other reserves as reduced by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or the Income-tax Act, 1961 (43 of 1961)." During the course of the assessment proceedings under the 1964 Act, the assessee herein which is a banking company claimed the following amounts mentioned against the relevant assessment years as deductions from its chargeable profits since such amounts had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal in the case of Punjab State Small Industries Corporation Ltd., Chandigarh, and since the Tribunal in that case had held that the amounts set apart for bad and doubtful debts were "reserves", these were to be held as "reserves" in the case of the assessee as well. The Tribunal while accepting the contentions of the assessee allowed the appeal and recorded the following findings : "We also find that no amount on account of bad debts was factually written off or adjusted by the assessee against these amounts claimed as reserves, that in fact the assessee also did not make a claim for any deduction for any of the assessment years under consideration on account of bad debts, that no such claim was either made or allowed by the Incometax Officer, that the assessee made contra entries in the unpublished balance-sheets only and no such entries were passed in books and that the published balance-sheets did not contain any contra entries. The amounts were in fact treated as reserves..." While dealing with the second issue, the Tribunal referred to the earlier case decided by it and relied upon by the assessee and observed as under: " .... The facts on the second issue befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Parliament by Act No. 23 of 1960, and its constitutional validity in the wake of the practice prevalent in India came to be challenged before the apex court. While examining the constitutional validity of this provision, their Lordships of the Supreme Court in All India Bank Employees' Association v. National Industrial Tribunal [1962] 32 Comp Cas 414 ; AIR 1962 SC 171, outlined very lucidly the history of the steps which led to the enactment of this provision and noticed the practice that banks do have undisclosed or secret reserves which they acquire in a number of ways and such undisclosed reserves cannot be ascertained from the published balance-sheets. Even the provision pertaining to bad and doubtful debts cannot some time be discovered. It is true that balance-sheet of every company is required to give a "true and fair view of the state of affairs of that company" at the end of the financial year as provided in section 211 of the Companies Act, 1956. However, section 34A of the Banking Regulation Act has given statutory recognition to the maintenance of secret accounts by banking companies. While judicially recognising the practice of banking companies having secret accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d meaning that is attributed to it by men of business, trade and commerce and by persons interested in and dealing with companies. The intention of those who are authorised to treat an amount as a reserve or a provision is sometimes material. This matter came up for consideration before their Lordships of the Supreme Court in Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53, where the distinction between the two concepts was brought out in the following words (at page 67) : "The distinction between a provision and a reserve is in commercial accountancy fairly well-known. Provisions made against anticipated losses and contingencies are charges against profits and, therefore, to be taken into account against gross receipts in the profit and loss account and the balance-sheet. On the other hand, reserves are appropriations of profits, the assets by which they are represented being retained to form part of the capital employed in the business. Provisions are usually shown in the balance-sheet by way of deductions from the assets in respect of which they are made whereas general reserves and reserve funds are shown as part of the proprietor's interest ( Spicer and Pegler' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eated or a sum of money set apart to meet any liability which the assessee can reasonably and legitimately anticipate on the date of preparation of the balance-sheet though the quantum of that liability is not yet determined, has also been equated with a present known liability and the fund to meet such liability cannot be treated as a reserve. If, on the other hand, a fund is created to meet some future unknown liability which has not yet arisen and which could not legitimately and reasonably be anticipated by the assessee at the time of the preparation of the accounts, the fund would be treated as "reserve". Whether in respect of bad and doubtful debts, an account could be treated as a reserve or a provision would depend upon the facts and circumstances of each case. Again, whether a particular liability could reasonably and legitimately be anticipated by the assessee on the date of the balance-sheet would be a question of fact to be determined in the circumstances of each case and the nature of the business carried on by the assessee would be a relevant factor. Applying these tests to the case in hand, one cannot lose sight of the fact that the assessee before us is a banking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as far in excess, of such debts and the extent to which it was in excess was treated as a reserve includible in computing the capital base of the company. Strong reliance was placed on the decision of the apex court in CIT v. Saran Engineering Co. Ltd. [1986] 161 ITR 741 to contend that bad and doubtful debts "reserve" must be treated as a reserve. In that case a reserve for this purpose was created in 1956 through the profit and loss appropriation account. Further, a separate provision had been made for bad and doubtful debts which provision was reduced from the value of the assets and it was not the Revenue's case that the provision for bad and doubtful debts provided was less than the amount reasonably necessary to be provided. It was in these circumstances that the bad and doubtful debts " reserve" created in 1956 was treated as a "reserve". This is not so in the instant case. This decision of the apex court rather supports the case of the Department as has been discussed in the earlier part of this judgment. In Siemens India Ltd.'s case [1988] 173 ITR 136 (Bom), both a reserve and a provision had been made for bad and doubtful debts which were not meant to be utilised for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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