9911796707
TMI Blog1984 (8) TMI 92X X X X Extracts X X X X X X X X Extracts X X X X ..... r asst. yr. 1980-81, the common ground agitated by the assessee as also the Revenue is against claim of bad debt reserve of the assessee for inclusion in the capital base for the purpose of Surtax Act, 1964. 3. In respect of the first common ground, the facts as leading to the present appeals as found in the order of the Surtax Officer are as follows: "The assessee was given an opportunity of being heard as per this office letter dt. 24th Jan., 1978 requesting it to attend my office on 28th Jan., 1978 and to state its objections, if any, to the proposed working of capital computation, in the matter of general reserve as under: Balance as per last year Rs. 4,89,000 Less : Adjustment debit balance in the P L Appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share capital; 2. Cash premium received on the issue of shares and outstanding to the credit of share premium account, as forming part of its paid up share capital; 3. Development Rebate Reserve; 4. Other reserves-minus the amounts credited to such reserves and allowed as a deduction in computing the income of the company under the IT Act of 1922 or of 1961; 5. Debentures; 6. Borrowings from the specified institutions. Rule 2 provides for deduction from the above aggregate the cost of certain assets the income of which is exempt under the Act. Now if your Honour would kindly refer to the company of balance set filed alongwith the returns for the relevant assessment years, it would be found that the debit balance of P L a/c a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been reduced to the extent to debit balances as per the profit and loss Appropriation Account, the assessee's contention that the reserve before deduction of debit balance in the P L a/c should be considered, cannot be accepted. I, therefore, treat the balance of the General Reserve at Rs. nil as worked out above." 4. On appeal, the CIT (A) confirmed the order of Surtax Officer vide para 5 of the order extracted below: "The perusal of the audited balance sheet for the year ended 19th Oct., 1971 and 6th Nov., 1972 pertaining to asst. yr. 1972- 73 and 1973-74 shows the following decision: 19th October, 1971 Reserve surplus As per last balance sheet Rs. 4,89,000 Less : Deducted as per contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... namely; general reserve was created out of the profits of the company in past. The true nature and character of the appropriation towards the general reserve must be determined with reference to the substance of the matter, intention with which and the purpose for which such appropriation was made, etc., as held by the Supreme Court in the case of Vazir Sultan Tabacco Co. Ltd. The following aspects provide some guidelines: "(a) a mass of undistributed profits cannot automatically become a reserve and 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 of a specific reserve. (b) th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble. The scheme of the SPT Act and the Surtax Act is similar. Hence, this ground is rejected. 7. Coming to the second common ground, it is seen from the accounts and the records that usually the debts which have become bad debts are written off to the debit of P L a/c and not to the bad debts reserve account Amounts are credited to the account of bad debt reserve account only on ad hoc basis. The matter would be further clear from the submission made in writing before the CIT (A) at the time of hearing for asst. yr. 1980-81 as follows: "It is respectfully submitted that in the instant case, ad hoc amount was transferred from General Reserve account to Bad Debt Reserve account and thereafter ad hoc amounts were again transferred from P ..... X X X X Extracts X X X X X X X X Extracts X X X X
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