1987 (3) TMI 154 - AT - Income Tax

Summary

Issues:
1. Classification of Debenture Redemption Reserve as a reserve or a provision for computing capital under the Company's Sur-tax Act.
2. Treatment of provision for doubtful debts as a reserve or a provision.
3. Interpretation of Rule 4 of the Second Schedule to the Sur-tax Act regarding income not includible in total income under the Income-tax Act.

Detailed Analysis:

Issue 1:
The controversy in the judgment revolves around whether the Debenture Redemption Reserve should be considered a reserve or a provision for calculating capital under the Second Schedule to the Company's Sur-tax Act. The Sur-tax Officer treated the reserve as a provision due to it being set aside for a known liability. However, the Commissioner of Sur-tax (Appeals) followed a previous decision and considered the reserve as includible in capital. The ITAT Bombay-E, following a Bombay High Court decision, ruled that the reserve should be regarded as a provision made by the company to redeem debentures when they become due, thus overturning the Commissioner's order.

Issue 2:
The second issue pertains to the treatment of the provision for doubtful debts. The Sur-tax Officer disallowed the provision, stating it was set aside to meet anticipated losses and, therefore, not a reserve. The Commissioner of Sur-tax (Appeals) followed previous decisions and considered the provision as a reserve. The ITAT Bombay-E, after examining the nexus between the provision and doubtful debts, concluded that the provision had a direct connection with the debts considered doubtful, distinguishing it from a reserve. The tribunal vacated the Commissioner's order and upheld the Sur-tax Officer's decision.

Issue 3:
The final issue concerns the interpretation of Rule 4 of the Second Schedule to the Sur-tax Act regarding income not included in the total income as computed under the Income-tax Act. The Commissioner of Sur-tax (Appeals) relied on a Bombay High Court decision and held that the income not includible did not refer to deductions under Chapter VI A of the Income-tax Act. The ITAT Bombay-E upheld the Commissioner's decision on this point, partially allowing the revenue's appeals for the relevant assessment years.

In conclusion, the judgment addresses the classification of reserves and provisions for calculating capital under the Sur-tax Act, distinguishing between provisions for doubtful debts and reserves. It also interprets the scope of income not includible in total income under the Income-tax Act.