TMI Blog1996 (3) TMI 128X X X X Extracts X X X X X X X X Extracts X X X X ..... , where the company "ought and can" anticipate on the date of the preparation of the balance-sheet. Decided in favour of the assessee - - - - - Dated:- 13-3-1996 - Judge(s) : B. P. JEEVAN REDDY., K. S. PARIPOORNAN JUDGMENT The judgment of the court was delivered by K. S. PARIPOORNAN J. --- Leave granted in all the special leave petitions. These are all connected cases. The matter arises under the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as "the Act"). The parties in all the appeals are the same. The appellant in the appeals is "The State Bank of Patiala" and the respondent is the "Commissioner of Income-tax, Patiala". The civil appeals filed from Special Leave Petitions (C). Nos. 2392-2395 of 1993 are the main cases. They relate to the four assessment years 1971-72, 1972-73, 1973-74 and 1975-76. The appellantassessee set apart amounts as "reserve" for "bad and doubtful debts" in all the years. A claim was laid that such sums qualified as reserves for the purpose of rule 1(xi)(b) of the First Schedule and rule 1(iii) of the Second Schedule of the Act and such sums, representing reserves, should be included in the capital of the appellant for appropria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 987-88 except 1985-86. For those years, identical claims put forward by the appellant-assessee were rejected by the Income-tax Officer. In appeal, the Commissioner of Income-tax allowed the claims. In the meanwhile, the decision of the High Court for the previous four years, i.e., 1971-72, 1972-73, 1973-74 and 1975-76, had been rendered and so the Tribunal, following the decision of the High Court, held against the assessee. The plea of the assessee to refer the matter either to the appropriate High Court or to this court was disallowed. The assessee has filed special leave petitions in this court directly against the aforesaid order of the Appellate Tribunal. Special Leave Petition (C) No. 27551 of 1995, relating to the same assessee and involving consideration of the same question, relates to the assessment year 1985-86. The Appellate Tribunal finally decided against the assessee following the earlier decision of the High Court in CIT v. State Bank of Patiala [1993] 203 ITR 150. The attempt to get the matter referred to the High Court was unsuccessful and so the assessee filed the special leave petition in this court against the order of the Appellate Tribunal. All the 13 app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be excluded from such total income, namely : --- ... (xi) in the case of a banking company --- (a) any sum which during the previous year is transferred by it to a reserve fund under sub-section (1) of section 17 of the Banking Companies Act, 1949 (10 of 1949), or is deposited by it with the Reserve Bank of India under sub-clause (ii) of clause (b) of sub-section (2) of section 11 of that Act, not exceeding the amount required under the aforesaid provisions to be so transferred or deposited, as the case may be, or (b) any sum transferred by it during the previous year to any reserves in India including reserves not shown as such in its published balance-sheet in so far as the sums transferred to such reserves are attributable to income chargeable to tax under the Income-tax Act and have not been allowed as a deduction in computing its total income under that Act, and in so far as the aggregate of such sums does not exceed the highest of the aggregate of such sums, if any, so transferred during any one of the three years prior to the previous year, whichever is higher ; . . Explanation. ---Notwithstanding anything contained in any clause of this rule, the amount of any inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As per section 2(8) of the Act statutory deduction is defined to mean an amount equal to ten per cent. of the capital of the company as computed in accordance with the provisions of the Second Schedule. Rule 1 of the Second Schedule mandates that the capital of the company shall be the aggregate of the amounts taking within its fold its other reserves as specified in rule 1(iii) of the Second Schedule. If the sums set apart in the balance-sheets are only "provisions" the assessee will not be entitled to the relief claimed by it. If, on the other hand, the sums set apart are "reserves" within the meaning of the Act, the assessee will be entitled to appropriate relief. After referring to the relevant decisions, dealing with reserves and provisions, the Income-tax Appellate Tribunal posed the question thus : ".....in order to constitute a reserve a particular amount set aside out of the profits and other surpluses, not designed to meet a liability, contingency, commitment or diminution in the value of assets known to exist at the date of the balance-sheets, is a reserve. In other words, if the amount set apart is designed to meet a liability, contingency, commitment or results i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred to it, by judgment dated July 27, 1992 (see [1993] 203 ITR 150), adverted to the landmark decisions of this court in Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 ; Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 ; CIT v. Elgin Mills Ltd. [1986] 161 ITR 733 and CIT v. Saran Engineering Co. Ltd. [1986] 161 ITR 741, and stated thus : Thus, where a fund has been created to meet a liability which has actually arisen and is known on the date of the preparation of the balance-sheet, it would obviously be a provision. Again, a fund created or a sum of money set apart to meet any liability which the assessee can reasonably and legitimately anticipate on the date of preparation of the balance-sheet though the quantum of that liability is not yet determined, has also been equated with the present known liability and the fund to meet such liability cannot be treated as a reserve. If, on the other hand, la fund is created to meet some future unknown liability which has not yet arisen and which could not legitimately and reasonably be anticipated by the assessee at the time of the preparation of the accounts, the fund would be treated as a 'reserve'. Whether in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich 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 but an amount set aside out of profits and other surpluses to provide for any known liability of which the amount cannot be determined with substantial accuracy is a provision (see William Pickles Accountancy, Second edition, page 192 ; Part III, clause 7, Schedule VI to the Companies Act, 1956, which defines provision and reserve)." (emphasis supplied). In Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 (SC), after referring to the above observations in Metal Box Co.'s case [1969] 73 ITR 53 (SC), the court held at page 569, thus : " In other words, the broad distinction between the two is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Having regard to the type of definitions of the two concepts which are to be found in clause 7 of Part III, the proper approach in our view would be first to ascertain whether the particular retention or appropriation of a sum falls within the expression 'provision' and if it does then clearly the concerned sum will have to be excluded from the computation of capital, but in case the retention or appropriation of the sum is not a provision as defined, the question will have to be decided by reference to the true nature and character of the sum so retained or appropriated having regard to several factors as mentioned above and if the concerned sum is in fact a reserve then it will be taken into account for the computation of capital." (emphasis supplied). In CIT v. Elgin Mills Ltd. [1986] 161 ITR 733 (SC), the court stated the guidelines to be borne in mind to distinguish between "provision" and "reserves" in the following words : " The distinction between 'provision' and 'reserve' must be found out bearing in mind the main features of the reserve. These are : (1) it must be an appropriation of profits, current or accumulated, and not a charge against the profits for the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of bad debt was actually written off or adjusted against the amount claimed as reserves. No claim for any deduction by way of bad debts were made during the relevant assessment years. The assessee never appropriated any amount against any bad and doubtful debts. The amounts throughout remained in the, account of the assessee by way of capital and the assessee treated the said amounts as "reserves" and not as "provisions" designed to meet liability, contingency, commitment or diminution in the value of assets known to exist at the relevant dates of the balance-sheets. These facts have been found by the Tribunal. On the facts, the amount set apart as reserves cannot be said to be so earmarked, when any liability has actually arisen or was anticipated by the assessee. It cannot be said either, that the amounts set apart out of the profits were designed to meet any known liability, that existed at the date of the balance-sheet. Tested in the light of the decisions of this court, referred to hereinabove, it appears to us, that the amounts set apart towards bad and doubtful debts in these cases are "reserves" qualifying for appropriate relief under rule 1(xi)(b) of the First Schedul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and doubtful debts". The High Court was in error in surmising that the assessee being a banking company is bound to have bad and doubtful debts. It need not necessarily be so. It is not bound to anticipate on the date of the preparation of the balance-sheet that all or any of its debts "are bound to be bad and doubtful". It all depends upon the facts and circumstances. We are of the view that the High Court misunderstood the scope of the observations in Saran Engineering Co.'s case [1986] 161 ITR 741 (SC) and surmised that the observations quoted at page 748 will even cover cases, where the liability was not factually anticipated on the date of the preparation of the balance-sheet, but also will apply to cases, where the company "ought and can" anticipate on the date of the preparation of the balance-sheet. We set aside the judgment of the High Court, rendered in Income-tax References Nos. 235-238 of 1990, dated July 27, 1992 (see [1993] 203 ITR 150 (P H)) and restore the order passed by the Appellate Tribunal dated January 23, 1980. We answer the questions, referred to the High Court, in the affirmative, in favour of the assessee and against the Revenue. It was agreed that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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