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TMI Blog1981 (11) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... at for the purpose of computing its capital as on May 1, 1971, this amount must be regarded as a reserve. The ITO rejected this claim. He held that the amount only represented " provision against anticipated loss or liability ". On appeal, the Tribunal held that the amount credited to this account was a reserve and must be taken as part of the company's capital, subject only to the officer verifying a matter of detail, namely, whether a sum of Rs. 14,482 can be included in that account. The present reference before us is at the instance of the Department on the following question of law: " Whether, on the facts and in the circumstances of the case, the reserve for doubtful debts amounting to Rs. 1,02,995 (or such other amount as verified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ropriation out of current profits falls under the classification " provision ". If it is a provision, then, the amount will have to be excluded from the computation of capital. But even where the appropriation or retention is not a provision, it will still have to be decided whether the amount so retained or appropriated is a reserve or not. This must be done by reference to the nature and character of the amount appropriated, the intention and purpose of the account created, and other surrounding circumstances. The Second Schedule to the Surtax Act refers to the development rebate reserve in r. 1(ii). Rule 1(iii) refers to " other reserves ". The question is whether the reserve created in this case as a " reserve for doubtful debts " fall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this manner by charging the profit and loss account. It is not done by making an appropriation, after the profit is struck in the profit and loss account. It is clear, therefore, that even where the balance-sheet nominally speaks of a "reserve for doubtful debts " it is really a provision. But the provision must be a real provision in the sense that the amount provided for is the end result of an evaluation of the doubtful debts and is equivalent to the sum total of the doubtful items alone. Where a lump sum or an ad hoc amount is charged to profit and loss towards doubtful debts, willy-nilly, and without regard for the recovery aspects, then it cannot be a provision; it is only a reserve. So too where there is an over-provision, as when g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be treated as a reserve, according to the assessee, is provided by an important feature of the assessee's practice. It is said that every year bad debts are written off, not by debit to this so-called reserve, but by debit to the P & L a/c. Year after year, it is said, this " reserve is being only augmented, and is not " raided " at all for write-off of bad debts. In this very year ended April 30, 1972, we gather that the assessee wrote off something like Rs. 1,42,008,69, but that was also by debit to the P & L a/c. and not by debit to this particular " reserve ". This feature, it is urged, really makes the " reserve for bad debts " as good as its name. The suggestion is that the situation, in effect, is the same as if there is an ad hoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t can be considered at all as relevant to the discussion. In our view, the fact that an assessee, having made what is truly a provision in the balance-sheet, proceeds to treat it with scant respect, cannot convert a provision into reserve. A reserve and a provision are what they are because of how they are created and for what purpose they are created. They do not lose their respective character and assume a different one for no other reason than that they were practically ignored by their creator subsequently. More honoured in the breach than in the observance it may be, but that cannot alter the character of the provision. There is yet another consideration for holding that Rs. 1,02,995 is only a provision and not a reserve. Before the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee how the Tribunal could say at the same breath, that there is no specific tie-up with doubtful debts, or that the reserve is built up for some unforeseen " future contingency " in the case of " large bad debts ". There is nothing to show how many of the debts are big and how many are small in the, provision made, so far, for Rs. 1,02,995. Besides, where is the unknown "future contingency " when the Tribunal themselves say " it is clear that the measure of the reserve is in terms of the amount considered as bad and doubtful debts. The Tribunal have also sought to draw parallel from the dividend equalization account, without saying what are the characteristics of that account which make it a revenue account. Lastly, it is said that the amou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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