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Issues Involved:
1. Inclusion of the entire amount standing to the credit of the General Reserves in capital computation without reducing the amount capitalized for issuing bonus shares. 2. Determination of the amount to be reduced from General Reserves if the first issue is decided against the assessee. 3. Classification of the amount standing to the credit of the reserves for bad and doubtful debts as a reserve or provision. Issue-wise Detailed Analysis: Issue 1: Inclusion of General Reserves in Capital Computation The primary issue was whether the entire amount standing to the credit of the General Reserves as of the first day of the previous year should be included in the capital computation for the purpose of the Surtax Act, 1964, without reducing the amount subsequently capitalized for issuing bonus shares. The Tribunal held that the amount of Rs. 27,18,000, which was capitalized for issuing bonus shares, should not be deducted from the General Reserves as of July 1, 1966, because no liability for issuing bonus shares existed until the shareholders passed the resolution on October 31, 1966. The Tribunal's decision was supported by the Supreme Court ruling in Kesoram Industries and Cotton Mills Ltd. v. CWT, which established that no liability accrues until a resolution is passed by the shareholders. The court concluded that the amount in the General Reserves could not be considered a provision until the resolution was passed, thereby answering the first question in the affirmative and against the Department. Issue 2: Determination of Amount to be Reduced from General Reserves This issue was contingent upon the first issue being decided against the assessee. Since the first issue was resolved in favor of the assessee, the second question became moot. The court noted that the question was framed as an alternative and pertained to the amount to be deducted from the General Reserves, not the computation of the paid-up capital. Therefore, the court did not address this issue further. Issue 3: Classification of Reserves for Bad and Doubtful Debts The third issue was whether the amount standing to the credit of the reserves for bad and doubtful debts should be classified as a reserve or a provision. The Tribunal found that the amount of Rs. 16,854 had been carried forward in the assessee's books since 1955 and was not used to write off bad debts directly. Instead, bad debts were directly charged to the profit and loss account. This practice indicated that the amount was a reserve and not a provision. The court supported the Tribunal's finding, citing the principle that an amount set aside out of profits not designed to meet a specific liability is a reserve, as established in Vazir Sultan Tobacco Co. Ltd. v. CIT and Parke Davis (India) Ltd. v. CIT. Consequently, the court answered the third question in the affirmative and in favor of the assessee. Conclusion: The court concluded that: 1. The entire amount standing to the credit of the General Reserves should be included in the capital computation without reducing the amount capitalized for issuing bonus shares. 2. The second issue was not addressed as it was contingent upon the first issue being decided against the assessee. 3. The amount standing to the credit of the reserves for bad and doubtful debts was a reserve and not a provision. The Department was ordered to pay the costs of the reference to the assessee.
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