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TMI Blog1981 (4) TMI 77X X X X Extracts X X X X X X X X Extracts X X X X ..... e capital with effect from May 25, 1962, should also be included in the computation of its capital for the purpose of the S.P.T. Act. In respect of the first three items, i e., doubtful debts reserve, retirement gratuity reserve and contingency reserve, the ITO held that they represented " provisions against liabilities " and not reserves. The last item of Rs. 1,61,88,099 which represented the proportionate increase in the capital (220/365) as a result of the issue of bonus shares of the face value of Rs. 2,67,36,000 on May 25, 1962, by converting that much amount out of the reserve into capital, was also rejected for the purpose of includibility in the capital on the ground that the assessee could not be given the benefit of an inflated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee-company for the purpose of the super profits tax ?" Now so far as includibility of the amount of reserve created in respect of bad and doubtful debts and the retirement gratuity reserve is concerned the matter really stands concluded by reported decisions and fresh discussion as to whether for the purpose of the S.P.T. Act, 1963, such amounts should be treated as provision or reserve is not necessary. This court has held in CIT v. Golden Tobacco Co. Ltd. [1977] 108 ITR 453, that doubtful debt reserve account is not intended to provide for " diminution in value of assets " nor could it be said that such amount is retained by way of providing for any known or existing liability. This court, therefore, held that the amounts in the do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee-company had purchased some goods but it had no proof with itself to establish that the excise duty had been paid thereon earlier by the vendor and that was why the amount of Rs. 8,35,000 was transferred to the reserve. It was also argued before the Tribunal that the assessee-company did not expect any such claim to be made against it but it was only out of abundant caution that a reserve was created. These arguments were accepted by the Tribunal and the amount was held to be in the nature of reserve. The order of the Tribunal shows that the Tribunal had found as a fact that the excise department had never demanded any duty and that there was no known existing liability of the assessee. The contention which is now raised by Shri Jos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... econd Schedule to the S.P.T. Act, 1963. The contention was rejected by the ITO but was upheld by the AAC as well as by the Tribunal. On a reference, however, the Calcutta High Court took the view that a provision was made for an anticipated contingency, for, the item appeared in the profit and loss account and was intended to meet the anticipated diminution of the value of the assets of the assessee, resulting from unrealised debts. The High Court found that the contingency was known and anticipated at the date of the balance-sheet and the amount set apart for the item, though not determined with accuracy, was estimated. It was further found that the amount set apart did not have the characteristics of a reserve but had all the characterist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epted the argument that a reserve was created by way of abundant caution. If that argument was accepted it has to be held that the contingency reserve was not intended to provide for any liability known to exist at the date of the balance-sheet. The decision in Eyre Smelting Company's case [1979] 118 ITR 857 (Cal) cannot, therefore, be of any assistance to the revenue. On the finding recorded above the amount of Rs. 8,35,000 must also be treated as a reserve and not as a provision. Similar will be the position in respect of reserve created in respect of Rs. 7,15,300 and Rs. 1,50,000 for meeting a possible liability of sales tax which was not expected to accrue at all and in fact never materialised. In view of the findings recorded the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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