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TMI Blog2002 (2) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... debts were correctly classed as reserves by the Tribunal becomes relevant in view of the Companies (Profits) Surtax Act, 1964. Under that Act the capital base of the company has an effect on the incidence of the liability of surtax. The profit remaining the same, the surtax would become lessened as the capital base of the company became broadened. It was thus in the interest of the assessee-respondent to emphasize that the bad and doubtful debts also form reserves in the true sense of the term. This is because a reserve true and proper, and not merely so-called by the accountant of the company, is, without doubt a part of the capital base. Under the Second Schedule to the said Act the computation of the company's capital is to be made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng back of the said amount of Rs. 15,40,400, the company had followed its usual practice of charging an ad hoc percentage of the bad and doubtful debts to its profit and loss account in every different previous year. It is the clear contention of the assessee that this writing back of the ad hoc percentage of the sum total of bad and doubtful debts did not bear any particular relation to any specified debt owed to the company. The Commissioner of Income-tax (Appeals) had found in favour of the Revenue. From the decision of the Tribunal, we find that the bad and doubtful debt reserve of Rs. 18,09,370 as the opening balance on January 1, 1975, was noted by the Tribunal; it further noted that identical contentions as raised by the assessee b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end of the matter altogether. The basic difference of approach to the present issue as between the Revenue and the assessee was that the Revenue characterized the amount in question as a provision made by the company for bad and doubtful debts and, therefore, this could not form the company's capital base; the assessee on the other hand was at pains to argue that this amount formed a reserve by the company not merely as called by the accountants and not merely as accepted even by the Commissioner of Income-tax (Appeals) in the very earlier year, but as a true and correct picture of the actual accounting position, as shown by the company's practice followed from year to year. Mr. Deb, appearing in support of the Revenue, placed before us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 85,000 was opined by their Lordships of the Supreme Court to be a reserve, although the sum came under the heading of bad and doubtful debt. Their Lordships pointed out that it was a sum which was more than reasonably necessary to cover any known liability and no actual bad debt could be pointed out which could be fitted to this sum. The amount, therefore, got released into the area of reserve. If we take the case of Saran Engineering [1986] 161 ITR 741 (SC) almost a similar position would be found; the passage at page 744 is important in this regard. A sum of Rs. 5 lakhs was in issue. Justice Sabyasachi Mukharji, as his Lordship then was, delivered the judgment there as his Lordship had delivered the judgment in the above Jugantar's c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... btful reserve was an unreasonably unnecessary excess which the company did not reasonably need to provide for its bad and doubtful debts reasonably and properly so called, then and in that event the excess provision could be called reserves and perhaps even reserves for bad and doubtful debts, but there is absolutely no justification to come to this conclusion from the facts found by the Tribunal. Before parting with this case, we would point out that although the accountants are free to use their technique in the manner they best think fit, and no doubt they know the techniques and speciality of their subject more than a lay man, yet a bad and doubtful debt, although strictly an asset, is supposed to be an asset which has practically gon ..... X X X X Extracts X X X X X X X X Extracts X X X X
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