Alkapuri Investment Pvt. Ltd. vs Commissioner of Surtax

R.K. Abichandani, J.—At the instance of the assessee, the Tribunal, Ahmedabad Bench "B" has referred for the opinion of this Court the following questions under s. 18 of the Companies (Profits) Surtax Act, 1964, r/w s. 256(1) of the IT Act, 1961 :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the amount of Rs. 91,513 for asst. yr. 1969-70 and Rs. 1,46,775 for asst. yr. 1970-71 in the reserve for bad and doubtful debts was not includible in capital computation for the purpose of computing the capital base while determining the surtax liability of the assessee ?"

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that sum of Rs. 14,24,627 was correctly treated as ''provision'' and not ''reserve'' capacity when the same was admittedly excess provision for other expenses ?"

The relevant assessment years are 1969-70 and 1970-71. The assessee had shown the reserve for bad and doubtful debts account for the asst. yr. 1969-70 at Rs. 43,837 and Rs. 91,513. The amount of Rs. 91,513 was deducted from doubtful debts while Rs. 43,837 was treated as a part of capital employed. The ITO refused to treat the amount of Rs. 91,513 as reserve, as according to him the said amount represented estimated bad debts. For the asst. yr. 1970-71, the ITO was of the view that the entire amount was deducted from the debts and, therefore, the said amount was in fact a provision and could not be treated as a reserve. He therefore, held that the said amount for the respective years was not includible in computing the capital base. The CIT(A) on appeal, held that the amount was only provision which was made in the balance sheet amongst the estimated bad debts which was sought to be excluded from the capital base on the ground that a provision against an estimated liability cannot be treated as a reserve and as such was not includible in computing the capital base. He, therefore, upheld the decision of the ITO. The Tribunal, on appeal, found that no material was placed on behalf of the assessee to show that the amounts in question were free reserves and did not represent any provision against estimated bad debts. The Tribunal, therefore, agreed with the reasoning and conclusion arrived at by the CIT(A) and upheld the decision of the lower authorities. We are of the view that the said amounts represent the estimated bad debts and, therefore, the authorities were right in treating the same as ''provision'' and not as ''reserve''. The Tribunal was, in the facts of the case, justified in holding that the amount of Rs. 91,513 for asst. yr. 1969-70 and Rs. 1,46,775 for asst. yr. 1970-71 in the reserve for bad and doubtful debts was not includible in capital computation for the purpose of computing the capital base while determining the surtax liability of the assessee. Question No. 1 is answered in the affirmative, in favour of the Revenue and against the assessee.

As regards question No. 2, it transpires from the record that the original provision was made against the specific liabilities for expenses and it was continued to be shown as such even in the year under consideration. It has not been contended on behalf of the assessee at any point of time that the specific liabilities for which the provision was made had ceased or that the expenses were not required to be carried out towards such liabilities. The learned counsel for the assessee tried to contend that there is already a finding arrived at that there was an excess provision for other expenses. He submitted that even in the question referred to there is reference to admitted excess provision for other expenses. We, do not accept this submission for the simple reason that all the authorities below have clearly found that the original provision was made against specific liability of expenses, which was continued to be shown even in the year under consideration and this factual finding has not been disputed at any level. We, therefore, hold that in the facts of the case, the Tribunal was justified in law in holding that sum of Rs. 14,24,627 was correctly treated as ''provision'' and not ''reserve''. The question No. 2 is, therefore, answered in the affirmative in favour of the Revenue and against the assessee. The reference stands disposed of as above with no order as to costs.