1980 (1) TMI 115 - AT - Income Tax

Summary

Issues Involved:
1. Whether the amounts set apart by the assessee during each assessment year constitute a reserve as contemplated under Rule 1(xi)(b) of the First Schedule to the Companies (Profits) Sur-tax Act, 1964.
2. Whether the amounts standing to the credit of the account for bad and doubtful debts on the opening day of the relevant previous year for each assessment year constitute reserves as contemplated under Rule 1(iii) of the Second Schedule to the Companies (Profits) Sur-tax Act, 1964.

Issue 1: Amounts Set Apart as Reserves under Rule 1(xi)(b) of the First Schedule

The first issue concerns whether the amounts set apart by the assessee during each assessment year qualify as reserves under Rule 1(xi)(b) of the First Schedule to the Companies (Profits) Sur-tax Act, 1964. The amounts in question for the relevant years are as follows:
- 1971-72: Rs. 7,00,000
- 1972-73: Rs. 13,78,000
- 1973-74: Rs. 22,11,000
- 1975-76: Rs. 15,98,000

The assessee argued that these amounts were created out of taxed profits and were not appropriated for payment of any debt or doubtful debts. The amounts were shown in the unpublished balance sheets, which are recognized statutory documents under the Banking Regulation Act. The assessee contended that these amounts should be treated as reserves within the meaning of Rule 1(xi)(b) of the First Schedule to the Act.

The Revenue opposed this, arguing that the amounts set apart were provisions, not reserves. They emphasized that the intention of the directors, as reflected in the minutes of the board meetings, was to treat these amounts as provisions. The Revenue also pointed out that the amounts were shown as provisions in the published balance sheets.

The Tribunal, after considering the rival submissions, concluded that the amounts set apart by the assessee were indeed reserves. The Tribunal noted that the Banking Regulation Act recognizes the existence of unpublished balance sheets, which are used for internal purposes and not exposed to the general public. The Tribunal held that the amounts were treated as reserves in substance, even if the nomenclature used was different. Consequently, the Tribunal directed that these amounts be treated as reserves under Rule 1(xi)(b) of the First Schedule to the Act.

Issue 2: Amounts Standing to the Credit of Bad and Doubtful Debts as Reserves under Rule 1(iii) of the Second Schedule

The second issue pertains to whether the amounts standing to the credit of the account for bad and doubtful debts on the opening day of the relevant previous year for each assessment year constitute reserves under Rule 1(iii) of the Second Schedule to the Companies (Profits) Sur-tax Act, 1964. The amounts in question for the relevant years are as follows:
- 1971-72: Rs. 10,58,576
- 1972-73: Rs. 27,21,641
- 1973-74: Rs. 29,91,641
- 1975-76: Rs. 47,16,641

The assessee argued that these amounts were not provisions but reserves, as they were not appropriated for payment of any bad debts. The assessee cited the case of Punjab State Small Industries Corporation Limited, Chandigarh, where similar amounts were treated as reserves under Rule 1(iii) of the Second Schedule.

The Revenue contended that these amounts were provisions, not reserves, as they were intended to meet liabilities for bad and doubtful debts. They argued that the amounts were shown as provisions in the published balance sheets and were treated as such by the directors.

The Tribunal, after considering the relevant case law and submissions, concluded that the amounts in question were reserves. The Tribunal noted that the amounts were not written off or adjusted against bad debts and were not allowed as deductions in computing the income of the company. The Tribunal held that these amounts were treated as reserves and not as provisions, as they were not designed to meet any liability, contingency, commitment, or diminution in the value of assets. Consequently, the Tribunal directed that these amounts be included in the computation of the capital of the company for purposes of surtax under Rule 1(iii) of the Second Schedule to the Act.

Conclusion:

Both issues were decided in favor of the assessee. The Tribunal directed the Surtax Officer to make necessary adjustments in the relevant surtax assessments of the assessee, treating the amounts set apart as reserves under Rule 1(xi)(b) of the First Schedule and the amounts standing to the credit of the account for bad and doubtful debts as reserves under Rule 1(iii) of the Second Schedule to the Companies (Profits) Sur-tax Act, 1964.