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TMI Blog1986 (2) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... aid assessment years 1969-70 and 1970-71, the Income-tax Officer, in computing the capital of the assessee, allowed the inclusion of the reserve for doubtful debts and advances and for the said assessment year 1970-71, the Income-tax Officer also included an amount under the head " Tax equalisation reserve ". The Commissioner of Income-tax, West Bengal III, by his letter dated 31st May/ 1st June, 1974, informed the assessee that he proposed to revise the assessments of surtax for the said assessment years 1969-70 and 1970-71 under section 16 of the Surtax Act. In its reply to the said letter of the Commissioner, dated June 26, 1974, the assessee requested the Commissioner to drop the proceedings under section 16 and also made representa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal. For the assessment years 1971-72 and 1972-73, the Income-tax Officer, while computing the capital base of the assessee for the purpose of surtax, did not take into consideration for the computation of capital base of the assessee the following reserves (a) Tax equalisation reserve. (b) Reserve for doubtful debts and advances. The assessee also preferred appeals against the assessments for the said assessment years 1971-72 and 1972-73. The Appellate Assistant Commissioner by his consolidated order dated March 30, 1974, held that the tax equalisation reserve should be included in the capital base under the Second Schedule to the Surtax Act but the reserve for doubtful debts and advances should not be so included. Against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the Tribunal was correct in holding that diminution of the capital, in proportion to the deduction allowed under section 80-0 of the Income-tax Act, 1961, in computing the total income of the assessee under the latter Act, was not permissible ? " Assessment years 1969-70, 1970-71, 1971-72 and 1972-73: " Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that amount set apart as " Reserve for Doubtful Debts and Advances " and " Tax Equalisation Reserve were "reserves " within the meaning of rule I of the Second Schedule to the Companies (Profits) Surtax Act, 1964, and should be included in computing the capital of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and doubtful debts under two separate heads being " Debts outstanding for a period exceeding six months and considered doubtful " and " Advances recoverable in cash or in kind or value to be received unsecured and considered doubtful" was to be treated as a reserve for the purpose of the computation of capital under the provisions of the Super Profits Tax Act 1963. It was held that the amount set apart in that case did not have the characteristics of a reserve as laid down by the Supreme Court in the case of Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC) and also in CIT v. Century Spinning and Manufacturing Co. Ltd. [1953] 24 ITR 499 (SC), but that the said amounts had all the characteristics of a provision. It was held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disputes in this reference ; (c) Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 (SC): In this case, the Supreme Court again considered and construed the expression " provisions " and " reserves " in the context of the Companies (Profits) Surtax Act, 1964. The Supreme Court observed as follows (at pages 570, 571): " Though the term 'provision' is defined positively by specifying what it means, the definition of 'reserve' is negative in form and not exhaustive in the sense that it only specifies certain amounts which are not to be included in the term 'reserve'. In other words, the effect of reading the two definitions together is that if any retention or appropriation of a sum falls within the definition of 'provision', it can ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distributed profits cannot automatically become a reserve and that somebody possessing the requisite authority must clearly indicate that a portion thereof has been earmarked or separated from the general mass of profits with a view to constituting it either a general reserve or a specific reserve, (b) the surrounding circumstances should make it apparent that the amount so earmarked or set apart is in fact a reserve to be utilised in future for a specific purpose and on a specific occasion." In the instant case, it has been found by the Tribunal that when debt or advance is more than six months old, a percentage of the same is set apart out of the current year's profit as a reserve. When the recovery is extremely doubtful, 100% of the de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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