1985 (10) TMI 88 - HC - Income Tax

Summary

Issues:
1. Whether deferred taxation reserve and doubtful debts reserve constitute 'reserves' as per the Companies (Profits) Surtax Act, 1964?

Analysis:
The judgment by the High Court of Bombay dealt with references made by the Revenue regarding the inclusion of deferred taxation reserve and doubtful debts reserve as 'reserves' under the Companies (Profits) Surtax Act, 1964. The court examined whether these reserves should be considered as part of the capital of the assessee for the purpose of computation under the Second Schedule of the Act. The deferred taxation reserve and doubtful debts reserve in question were reflected in the balance sheets of the assessee for various assessment years. The Income-tax Officer initially excluded the deferred taxation reserve from capital computation, arguing it was not a free reserve. However, the Appellate Assistant Commissioner disagreed, and the Tribunal ruled that the doubtful debts reserve, designed for future contingencies, was indeed a reserve and should be included in capital computation.

The court referred to the Supreme Court's decision in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559, emphasizing that an amount set aside from profits not meant to address existing liabilities constitutes a reserve, while a provision is specifically for known liabilities. The court also cited Goodlass Nerolac Paints Ltd. v. CIT [1984] 150 ITR 484, where a reserve for doubtful debts was considered a reserve rather than a provision due to being determined ad hoc and not utilized for bad debts adjustments. In the present case, the doubtful debts reserve had been carried forward over several years without specific anticipated liabilities, indicating its nature as a reserve. Similarly, the deferred taxation reserve was deemed ad hoc without a specific liability in mind, leading the Tribunal to include it in capital computation.

Conclusively, the court answered both questions affirmatively in favor of the assessee, determining that both the deferred taxation reserve and doubtful debts reserve qualified as 'reserves' under the Companies (Profits) Surtax Act, 1964. The Revenue was directed to bear the costs of the references.