TMI Blog1986 (7) TMI 88X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of the High Court was right in treating it as reserve. - - - - - Dated:- 31-7-1986 - Judge(s) : SABYASACHI MUKHERJEE., R. S. PATHAK JUDGMENT The judgment of the court was delivered by SABYASACHI MUKHARJI J.-In Civil Appeal No. 1546 of 1974, the following items were involved: (a) Capital reserve, (b) Stocks and Stores reserves, (c) Bad and Doubtful Debts reserves, (d) Obsolescence reserve, (e) Loans and Insurance reserve, (f) Investment reserve, and (g) Forfeited Moneys. The question was whether these were to be included in the computation of capital according to the provisions in the Second Schedule to the Super Profits Tax Act, 1963. Under section 4 of the Super Profits Tax Act, 1963, every company shall be charged for every assessment year commencing from April 1, 1963, a tax called super profits tax in respect of so much of its chargeable profits of the previous year as exceed the standard deduction at the rate or rates specified in the Third Schedule. " Standard deduction " had been defined in clause (9) of section 2 as follows: " An amount equal to six per cent. of the capital of the company as computed in accordance with the provisions of the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... priation account. The amount involved was Rs. 5,00,000. It was submitted on behalf of the assessee by Shri Salve that this was created by transfer from the appropriation account and not as a charge against profit. Furthermore, a separate provision was made for bad and doubtful debts which provision was reduced from the value of the assets. 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. If the amount, as it appears to be, is more than the amount reasonably necessary to be provided in respect of bad and doubtful debts, then it constituted a " reserve ". It is not correct to state that by the very nomenclature, this was not a reserve. The true nature of the transaction has to be examined. The next item is Obsolescence reserve of Rs. 1,72,259. This was created in 1959 by transferring a sum of Rs. 12,05,000 from the Profit and Loss account. Some amounts were written off out of this reserve in 1960 and 1961. This appears to be a provision to meet future liability and contingency. But there are not much facts about it. Had it been necessary, we might have remanded the matter to the High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Forfeited Moneys reserve 8,000 (e) Bad and Doubtful Debts reserve 25,000 The Income-tax Officer rejected the assessee's claim. On appeal, the Appellate Assistant Commissioner allowed the claim of the assessee in part. The Revenue and the assessee both went up in appeal before the Tribunal. The Tribunal allowed the claim of the assessee in full. The Revenue, feeling aggrieved, referred the following question to the High Court: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that: (a) Capital reserve, (b) Rehabilitation reserve, (c) Stores reserve, (d) Forfeited Moneys reserve ; and (e) Bad and Doubtful Debts reserve, were to be included in computation of capital according to the provisions of the Second Schedule to the Super Profits Tax Act, 1963 ? " So far as the capital reserve is concerned, in the light of the discussion in Civil Appeal No. 1665 of 1974-CIT v. Elgin Mills Ltd. reported in [1986] 161 ITR 733 (SC) and also in Civil Appeal No. 1546 of 1974-CIT v. British India Corporation Ltd.-the High Court was right in treating this account as reserve. It must be further noted that so far as capital reserve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its order dated June 20, 1977, the Bombay High Court allowed the application only in relation to the Reserve for Special Survey for Rs. 13,04,600 and rejected the application so far as other items are concerned. Being aggrieved, the assessee has come up in special leave petition. The facts regarding the same as found by the Tribunal are as follows: " (i) The Gratuity Reserve of Rs. 2,00,000 was created for the first time during the preceding year. The amount was not claimed as revenue expenditure. Some payments were actually made during the preceding accounting year. The amount was to be included in the capital base as 'Other Reserves'. (ii) Reserve for Special Survey: Rs. 13,04,600 : The balance in this reserve account on the first day of the preceding accounting year was Rs. 9,32,500 to which was added Rs. 15 lakhs by a transfer from the Profit and Loss account making a total of Rs. 24,32,500. During that preceding year, expenses of Rs. 11,26,900 were incurred and debited to this reserve and the balance of Rs. 13,04,600 was carried forward. This amount was to be included in the capital base. (iii) Reserve for Contingencies : Rs. 56,00,000: This reserve account was meant ..... X X X X Extracts X X X X X X X X Extracts X X X X
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