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TMI Blog1986 (9) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... 1975, respectively. It is not really necessary to state the facts in all the three cases. It would be enough if we state the facts in R.C. No. 105 of 1981. The assessee is holding 38,130 equity shares in Orient Longman Ltd. The shares of this company are not quoted, on the stock exchange. The assessee returned the value of the shares as per the auditor's certificate. But the Wealth-tax Officer did not accept the same and proceeded to value the shares in accordance with rule ID of the Wealth-tax Rules, 1957. While arriving at the value of the shares, the Wealth-tax Officer, inter alia, excluded the following two items with which alone we are concerned in these references, viz., (i) provision for bad debts in a sum of Rs. 1,89,587, and (ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot actually been lost to the company by way of bad debts, the said amount cannot be treated as a liability, much less an ascertained liability, on the relevant valuation date and cannot be debited. It is argued that as and when a debt becomes bad and irrecoverable, it is debited to the profit and loss account as per the normal practice. In this matter, however, the said practice has not been followed. The contention of learned standing counsel for the Department before us is that the said provision is in the nature of a suspense account and in effect is reserve created for absorbing bad debts and accordingly falls under subclause (c) of clause (ii) of Explanation II to rule ID of the Wealth-tax Rules. We find it difficult to agree with lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he break-up value of each unquoted equity share. The next step is to arrive at the market value. The market value of each share shall be 85% of the value so determined. The question we have to decide is: Whether the said provision made on account of doubtful debts is a, liability within the meaning of the said rule ? Before we deal with the said aspect, it may be appropriate to clear the ground by disposing of the question whether it can be called a " reserve " within the meaning of clause (ii) (c) of Explanation II. In Vazir Sultan Tobacco Co. Ltd. v. CITE 1981] 132 ITR 559 (SC), the Supreme Court has pointed out the distinction between " reserve " and " provision " by extracting an observation from Metal Box Company of India Ltd. v. Their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck to the question whether it constitutes a liability, it is true that as on the relevant valuation date, it has not become a bad debt. But the board of directors who are presumed to know the affairs of the company were setting apart a particular specified amount as a provision for bad debts. This is not a case as in CIT v. Golden Tobacco Co. Ltd. [1977] 108 ITR 453 (Bom), where a certain ad hoc amount was credited to the doubtful debt reserve each year by setting apart a certain ad hoc amount every year out of the profits. But this is a case where certain specific known debts are put together and the total amount of those specified debts being doubtful, a provision is made in that behalf and the relevant amount deducted from the assets. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness decision of the board of directors. We may also mention that there is no allegation that this is a device or that it was not a decision arrived at in the ordinary course of the management of the affairs of the company. We may add that the difference in the value of the shares on this account is hardly sixty paise per share. We are, therefore, of the opinion that the first question referred to us must be answered in favour of the assessee and against the Department. Now, coming to the second question, we are of the opinion that the stand taken by the Department is correct. The company had entered into an agreement with the Life Insurance Corporation. On their paying the prescribed premium every year, the liability to pay gratuity to t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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