1996 (2) TMI 130 - SC - Income Tax

Whether reserve for meeting doubtful debts was a reserve or a provision ? Whether gratuity reserve created by the assessee was a reserve or a provision ? Held that - 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 issue regarding gratuity reserve is directed to be remanded through the Tribunal for reconsideration by the Surtax Officer for deciding it afresh in the light of the aforesaid principles in Vazir Sultan Tobacco Co. s case 1981 (9) TMI 105 - SUPREME Court after giving an opportunity to the assessee-company to place additional relevant materials before him.

Summary

Issues Involved:
1. Whether the reserve for meeting doubtful debts was a reserve or a provision.
2. Whether the gratuity reserve created by the assessee was a reserve or a provision.

Detailed Analysis:

1. Reserve for Doubtful Debts:
The primary issue was whether the reserve for doubtful debts amounting to Rs. 85,000 should be included in computing the capital base of the respondent-company for the purpose of statutory deduction under the Surtax Act. The Appellate Assistant Commissioner and the Tribunal had previously included this reserve in the capital base, relying on assessments from earlier years for the same respondent-company. The High Court upheld this view.

The Tribunal noted that the reserve for doubtful debts was created out of the profit and loss account without reference to the outstanding sundry debtors and was not intended to meet any anticipated liability. This was supported by the fact that the amount was written off as a general reserve in 1966. The Tribunal concluded that this reserve was not in the nature of a provision for any ascertained liability, and thus, it should be included in the capital base.

The Supreme Court affirmed this view, citing the case of CIT v. Saran Engineering Co. Ltd., which distinguished between a provision and a reserve. A provision is for a liability that has arisen or is anticipated, while a reserve is for liabilities that have not yet arisen. Given that the bad debt reserve was created without reference to specific liabilities, it was deemed a reserve.

2. Gratuity Reserve:
The second issue was whether the gratuity reserve amounting to Rs. 5,60,000 should be considered a reserve or a provision. The Tribunal had previously ruled that this amount should be included in the capital base, noting that it was not determined by actuarial valuation and was transferred to the general reserve account, indicating it was not meant for any ascertained liability.

The Supreme Court, however, found merit in the Revenue's argument that treating the amount as a reserve merely because it was not actuarially valued would give undue discretion to the assessee-company. The court referred to the case of Metal Box Co. of India Ltd. v. Their Workmen, which clarified that an estimated liability for gratuity, if properly ascertainable, should be deducted from gross receipts and treated as a provision. The court also cited Vazir Sultan Tobacco Co. Ltd. v. CIT, which emphasized that an actuarial valuation is crucial for determining whether an amount set aside for gratuity is a provision or a reserve.

The Supreme Court concluded that the issue of whether the gratuity reserve was a provision or a reserve could not be determined without an actuarial valuation. Since neither the assessee nor the Surtax Officer had conducted such an exercise, the matter was remanded to the taxing authority through the Tribunal for reconsideration. The Surtax Officer was directed to decide the issue afresh, allowing the assessee to present additional relevant materials.

Conclusion:
The appeals were partly allowed. The reframed question was answered partly in the affirmative in favor of the assessee and against the Revenue concerning the reserve for doubtful debts and rehabilitation reserve. However, the High Court's decision regarding the gratuity reserve was set aside, and the issue was remanded for reconsideration by the Surtax Officer. There was no order as to costs since no one appeared for the respondent.