TMI Blog1981 (1) TMI 65X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 1964 ? " The assessee is a private limited company. The relevant assessment year is 1966-67, in respect of which the corresponding previous year ended on December 31, 1965. It has been publishing a Bengali daily in the name and style of " Jugantar ". In the computation of capital for the purpose of surtax assessment under the provisions of the Companies (Profits) Surtax Act, 1964, the assessee-company included reserves for bad and doubtful debts and for gratuity. In his computation, according to the Second Schedule to the said Act, the ITO refused to treat the said reserves as reserves forming part of the assessee's capital base. The assessee being aggrieved went up in appeal before the AAC. The AAC perused the balance-sheet and he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee's contentions were right and directed the ITO to recompute the capital base and to include the two amounts in question for bad and doubtful debt reserve and the reserve for gratuity in the capital computation in order to ascertain the quantum of statutory deduction in accordance with s. 2(8) of the Surtax Act, 1964. In the circumstances as aforesaid, the question indicated above has been referred to this court. So far as the bad and doubtful debts are concerned, in view of the facts as appearing from the orders of the AAC and in view of the ratio of the decision of this court in the case of CIT v. Eyre Smelling P. Ltd. [1979] 118 ITR 857, it appears to us that the Tribunal was in error in holding that the bad and doubtful deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made out of the reserves and the provision was made to meet the liability to gratuity to the workers and, therefore, it was found that the provision was not a free reserve. In the case of CIT v. Burn and Co. Ltd. [1978] 114 ITR 565 (Cal), we had to discuss this aspect rather exhaustively, though in the context of Super Profits Tax Act, 1963. There, we had reiterated that the question raised was whether in considering the expression "reserve " under the relevant rule whether it had to be understood in its ordinary sense or in the sense in which it was understood in commercial accountancy and we observed that the use of the expression "all other reserves", in so far as the amounts credited to such other reserves had not been allowed in com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed as deduction in the income-tax computation, even though it has not been allowed. Such deduction, either because it had not been claimed or wrongly disallowed, would not be considered as a sum available to the assessee for the purpose of its business in future. Our attention was drawn to the decision of this Bench in the case of CIT v. Indian Standard Wagon Co. Ltd. [1979] 116 ITR 539, where we held in the facts and circumstances of that case that the sum of Rs. 20,60,862 shown by the assessee in its accounts as provision for " labour retiring gratuity " was a reserve so as to be eligible for inclusion in the capital computation under the Second Schedule to the Companies (Profits), Surtax Act, 1964, There in view of the facts whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to go into this aspect of the matter. It appears that in Sch. VI, Part I of the Companies Act, item 12 of the Liabilities side under the heading "Current liabilities and Provisions", is for insurance, pension and similar staff benefit schemes. Now, this is a liability which has to be shown and in the Explanation to the Second Schedule of the Companies (Profits) Surtax Act, 1964, it has been provided as follows: " Explanation.-For the removal of doubts it is hereby declared that any amount standing to the credit of any account in the books of a company as on the first day of the previous year relevant to the assessment year which is of the nature of item (5) or item (6) or item (7) under the heading' RESERVES AND SURPLUS' or of any item un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court; in the case of, Metal Box Company of .India Ltd. v. Their Workmen [1969] 73 ITR 53; .39 Comp Cas 410, observations being at, page 61 onwards of the report. If that is the position, then under r. 1 (III) of the Second Schedule to the said Act, which deals with the rules for computing capital, for the purpose of surtax, the question would arise, if an amount which has been allowed as deduction and which has been created as reserve in the computation of income of an assessee under the I.T. Act, whether such an amount should be treated as a reserve. It was urged that the expression used is " allowed deduction in computing the income but in this case there is no clear evidence whether this item has been claimed as allowable deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X
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