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TMI Blog1996 (2) TMI 130X X X X Extracts X X X X X X X X Extracts X X X X ..... ver, the Division Bench of the High Court by consent of the parties refrained the question as under : "Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that rehabilitation reserve, reserve for doubtful debts and gratuity reserve created by the assessee were includible in computing the capital for the purpose of computing statutory deduction ?" The said refrained question was answered against the Revenue and in favour of the assessee and that is how at the instance of the Revenue the present proceedings have arisen on certificate granted by the High Court. At the time of final hearing of these appeals, learned counsel for the appellant-Commissioner of Income-tax placed for our consideration only the following aspects of the question : 1. Whether reserve for meeting doubtful debts was a reserve or a provision ? 2. Whether gratuity reserve created by the assessee was a reserve or a provision ? So far as the aforesaid two aspects of the question are concerned we may at the outset note a few introductory facts leading to these proceedings. Introductory facts : The concerned assessment years are 1967-68 and 1968-69, the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted August 19, 1973, while considering the question of computation of the capital base of the respondent-assessee-company itself for the previous years. The pertinent observations are found at page 25 of the paper book : " So far as reserve for doubtful debts is concerned, ordinarily the provision for doubtful debts is created with reference to the sundry debtors and shown as a deduction from the sundry debtors in the balance sheet. Such reserves, which are specifically created to write off the bad debts are usually in the nature of provision. In the instant case, the reserve was created out of profit and loss account without reference to the outstand ing sundry debtors and was not created with a view to meeting any anticipated liability. We are told that this amount was also written off as the general reserve account in the year 1966. Having regard to the facts of the case, we agree with the Appellate Assistant Commissioner that the reserve for doubtful debts was not in the nature of provision for meeting any anticipated liability and as such should be included in the computation of the capital base for both the years under appeal." As a clear finding of fact was reached by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bad and doubtful reserves were concerned the amounts set apart must be treated as a reserve. On the facts of the present case, as noted earlier, it could not be said that there was any ascertained liability for which a provision was made by creating the aforesaid reserve for bad and doubtful debts. In the present case, it was also not the Revenue's case that the amount set apart for bad and doubtful debts reserve was less than or equal to the amount necessary to be provided for meeting ascertained liability. On the other hand, the amount appeared to be more than what was reasonably necessary to be provided for in respect of the bad and doubtful debts as the amount of bad and doubtful debts itself was not an as certained amount. Consequently, no fault can be found with the decision rendered by the authorities below and the High Court that the provision of Rs. 85,000 for doubtful debts had to be treated as reserve which could be legitimately included in computing the capital base of the respondent-assessee-company so far as the relevant assessment years were concerned. That takes us to the consideration of the question whether an amount of Rs. 5,60,000 set apart by way of gratuity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sumed that merely because the assessee-company had not thought it fit to resort to any actuarial valuation and had styled the amount as forming part of a reserve, almost automatically the Surtax Officer had to treat the said amount as set apart by way of a reserve and not a provision. That this would amount to giving complete lat itude to the concerned assessee-company. If the assessee-company resorts to any actuarial valuation of liability to pay gratuity to its employees, then it would be a provision, but if the assessee-company does not choose to do so, by its very inaction, it could insist that the provision made for discharging the liability to pay gratuity should be treated as a reserve. That such an absolute discretion given to the assessee would denude the Surtax Officer of his statutory power and obligation to compute the correct capital base of the assessee-company for the purpose of assessing the surtax liability of the concerned company. We find considerable force in the aforesaid contention of learned counsel for the Revenue. In the case of Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53, a Division Bench of this court consisting of J. M. Shelat and C. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee member Bench of this court consisting of V. D. Tulzapurkar, E. S. Venkataramiah and Amarendra Nath Sen JJ., in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559. In that case, this court was concerned with a similar question which is posed for our consideration in the present proceedings. Amongst other questions one of the questions which fell for consideration in that case was whether a gratuity reserve created by the company was a reserve in the true sense of the term or was merely a provision which could not be included in the capital base of the assessee-company for computing its surtax liability under the Surtax Act. In this connection, Tulzapurkar J., speaking for himself and Venkataramiah J., made the following pertinent observations (headnote) : " The expression 'reserve' has not been defined in the Super Profits Tax Act, 1963, or the Companies (Profits) Surtax Act, 1964. The dictionaries do not make any distinction between the two concepts 'reserve' and 'provision' while giving their primary meanings, whereas in the context of those Acts a clear distinction between the two is implied. Though the expression 'reserve' is not defined, since it occurs in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Sixth Schedule to the Companies Act includes any expenditure contracted for and arising under a contingent liability ; but if the sum so appropriated is shown to be in excess of the sum required to meet the estimated liability (discounted present value on a scientific basis) it is only the excess that will have to be regarded as a reserve under clause 7(2) of Part III of Schedule VI to the Companies Act, 1956. " For the aforesaid observations strong reliance was placed by the court on the earlier judgment of this court in Metal Box Co.'s case [1969] 73 ITR 53. Applying this principle to the facts of the case before the court, Tulzapurkar J., at page 574 of the Report, laid down as under : " . . . . the assessee-company did not clarify by placing material on record as to whether the appropriation of the amount was based on any actuarial valuati on or whether it was an appropriation of an ad hoc amount, an aspect which, as we shall presently point out, has a vital bearing on the question whether the appropriation could be treated as a provision or a reserve. In the absence of proper material touching this vital aspect, we are afraid, the issue in question will have to be remande ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or ascertaining the extent of provision for such contingent liability for gratuity required to be met by the assessee-company in the concerned assessment years. It would have been equally open to the Surtax Officer to call upon the assessee-company to get actuarial valuation of such liability to enable the Surtax Officer to compute the correct capital base of the company in this connection. As no such exercise was done both by the assessee as well as by the Surtax Officer the issue in question will have to be remanded to the taxing authority through the Tribunal for disposal in the light of the well-settled principles in this behalf as discussed earlier by us. The course adopted by this court in Vazir Sultan Tobacco Co.'s case [1981] 132 ITR 559, in this connection, is therefore required to be adopted in the present case also. In the result, these appeals are partly allowed. The reframed question is answered partly in the affirmative in favour of the assessee and against the Revenue in so far as the reserve for doubtful debts and rehabilitation reserve are concerned. However, so far as the answer given by the High Court on gratuity reserve is concerned, it is set aside and the iss ..... X X X X Extracts X X X X X X X X Extracts X X X X
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