TMI Blog1980 (1) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the reserve for bad debt and doubtful debts and reserve for retirement gratuity should be taken into account for the purpose of capital computation ? " We shall take up for consideration questions Nos. 2 and 3 before we go into question No. 1. The relevant assessment came to be made under the Companies (Profits) Surtax Act. The assessment years involved are 1966-67, 1967-68, 1969-70 and 1970-71. The relevant previous years are those ending with 31 st. July, preceding those years, except with reference to the assessment year 1970-71 for which the previous year ended on March 31, 1970. The assessee claimed that in the computation of the capital the following amounts should be included as reserves. 1966-67 Rs. 89,946; 1967-68-Rs. 89,776 ; 1969-70-Rs. 88,353 and 1970-71 Rs. 1,03,352. The ITO did not allow this claim on the ground that these were only provisions and not reserves. On appeal, the AAC confirmed the order of the ITO. The assessee appealed to the Tribunal contending that these sums have to be treated as reserves in accordance with the decision in CIT v. British India Cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amounts transferred to the " reserve accounts " were not " free reserves " but were held for a specific purpose. The AAC disagreed with this view and accepted the assessee's claim and the Tribunal confirmed the order of the AAC. The matter was thereafter taken on reference to the Bombay High Court and it was held that the Tribunal was right in taking the view that the amounts in the doubtful debt reserve account were includible in the computation of the capital of the company as reserves. The distinction between provisions " and " reserves " was taken into account and it was pointed out that, in the case before the court, ad hoc amounts were transferred to the doubtful debt reserve account irrespective of the question whether individual debts had become doubtful or not. We agree with the view of the Bombay High Court and in the light of the principles set out in the above decision, the ad hoc transfers to the bad and doubtful debt reserve account would qualify for being treated as reserve v while the amounts that were actually taken into account as bad, debts as shown, under question No. 2 would not represent reserves. They were merely provisions to that extent. The result is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he question of deductibility of the said amount in arriving at the taxable profits, it was pointed out that the very concept of profit would requite adjustment being made for the claim of the employees for gratuity in so far as it is possible to relate it to the current year and that the claim made in that case was a present estimate of a future liability. It was pointed out that the amount was deductible if it was worked on a legal and scientific basis and that any arbitrary claim in this behalf could not be countenanced. In that case also reference was made to the decisions of this court in CIT v. Indian Steel Rolling Mills Ltd. [1973] 92 ITR 78 and it was submitted that the amount under consideration in that case represented only reserve so that it could not be deducted in arriving at the profits. It was pointed out that whether it was a provision or a reserve which was the subject-matter of the consideration in CIT v. Indian Steel Rolling Mills Ltd. [1973] 92 ITR 78 (Mad) was not strictly relevant in arriving at the question whether it was deductible in arriving at the taxable profits. The decision in the Indian Steel Rolling Mills' case [1973] 92 ITR 78 (Mad) was, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its exclusion. This is not such a case. The fact that the amount is capable of being allowed as deduction under certain conditions is no criteria. In these circumstances the second part of the second question has also to be answered in the affirmative and against the revenue. We now turn to the first question. The assessee claimed that there were reserves to the following extent which should be taken into account in capital computation for 1966-67-Rs. 4,79,523; 1967-68-Rs. 4,55,283; 1969-70-Rs. 4,23,983 and 1970-71-Rs. 4,47,721. The relevant facts do not clearly appear from the order of the Tribunal or the statement of the case. But they are available in the annexures to the statement of the case. We would, therefore, refer to the annexures in setting out the further facts relevant to this point. Taking the balance-sheet as at 31st July, 1965, as typical of all the years under consideration, it is found that a sum of Rs. 4,79,522.40 appears as " stock reserve " under the " liabilities " side of the balance-sheet. The entries in the balance-sheet may now be reproduced. Stock Reserve : Rs. Balance as per last balance-sheet ... 4,79,522.40 Less: Items sold from previous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one year should be taken as " nil ". The stock-in-trade was thus shown at a lower valuation, and the stock reserve amount-was merely a balancing item corresponding to the lower valuation shown with reference to the stock. Then was an interesting discussion before us as, to whether the reserve should be created only out of the profits and through the profit and loss account alone and whether the adjustment of the stock valuation reflected in the balancing entry under the head " Reserves " could be taken into account as a reserve at all. The matter as to whether there was any actual reserve created by the assessee-company has not actually been considered by the Tribunal. There is no discussion as to whether the requisite considerations which go into the concept of reserves would be satisfied in the present case. In the absence of a proper discussion on this point, in the light of all the entries in the balance-sheet for the several years, we do not think it possible to answer the question referred to us. It may be-pointed out that in respect of the bad and doubtful debts, the reserve has been created by appropriation of the profits. How far this aspect impinges on the concept of r ..... 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