TMI Blog1978 (1) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... sion in its accounts for bad and doubtful debts aggregating to Rs. 1,02,239, respectively, under two separate heads, namely, " Debts outstanding for a period exceeding six months and considered doubtful " under which a sum of Rs. 39,416.19 was provided and also " Advances recoverable in cash or in kind or value to be received unsecured and considered doubtful " the amount provided hereunder being Rs. 62,721 as on the 1st January, 1962. In its assessment to super profits tax the assessee claimed that the said sum of Rs. 1,02,239 should be considered as " reserve " and included in the computation of its capital under the Second Schedule to the S.P.T. Act, 1963. The ITO did not accept the assessee's contention and did not include the said amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithin the category of a " reserve " and not that of a " provision ". From this order of the Tribunal, the following question has been referred : " Whether, on the facts and in the circumstances of the case, the amount of Rs. 1,02,239 should be treated as a ' reserve ' for the purpose of computation of capital under the provisions of the Super Profits Tax Act, 1963 ? " Mr. Ajit Sengupta, learned counsel for the revenue, has contended at the bearing that the Tribunal erred in both appreciating and applying the principles laid down by the Supreme Court in the case of Metal Box Company of India Ltd. [1969] 73 ITR 53 ; 39 Comp Cas 410. He submitted that it was categorically laid down in that case that an amount set aside out of profits desig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d at page 372. Mr. Sengupta also cited the decision of the Supreme Court in the case of Metal Box Company of India [1969] 73 ITR 53 as also a decision of this court in the case of Duncan Brothers and Co. Ltd. v. CIT [1978] 111 ITR 885 (Cal), where a Division Bench of this court considered the concepts of " reserves " and " provisions " in the background of both the S.P.T. Act, 1963, and the C. (P.) S.T. Act, 1964. Mr. Pranab Pal, learned counsel for the assessee, however, submitted that the Supreme Court in the case of Metal Box Company of India, [1969] 73 ITR 53, has made it clear that a provision can be made only for a known liability and not for an unknown liability, the amount of which cannot be ascertained. He drew our attention to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusion there is no particular reason indicated in the judgment on which the decision is based. Mr. Pal next cited a decision of the Bombay High Court in the case of CIT v. Jupiter General Insurance Co. [1975] 101 ITR 370 (Bom). The facts in that case were, inter alia, that in calculating the capital for the purpose of super profits tax the ITO had excluded an amount standing as reserve for doubtful debts on the ground that as the amount was earmarked for a specific liability it could not be regarded as a reserve. The AAC on appeal reversed the decision of the ITO. The matter went up to the Tribunal which upheld the order of the AAC. From this order of the Tribunal, a question was sought to be raised in a reference to the Bombay High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the P L 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 (See Spicer and Pegler's Book-keeping and Accounts, 15th Edition, page 42). An amount set aside out of profits and other surpluses, not designed to meet a liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance-sheet is a reserve bat an amount set aside out of profits and ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this item, though not determined with accuracy, was estimated. Characteristics of a reserve which appear from the observation of the Supreme Court in the cases of Metal Box Company of India [1969] 73 ITR 53 (SC) and CIT v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499 [which has been considered in detail in the case of Duncan Brothers and Co. Ltd. [1978] 111 ITR 885 (Cal)] are as follows : (a) Reserves are appropriation of profits which are retained to form part of the capital employed in the business. (b) A reserve is not designed to meet any liability, contingency, commitment or diminution in the value of assets known to exist at the date of the balance sheet. (c) A reserve is something set apart for future use or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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