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Goodlass Nerolac Paints Ltd. Vs. Commissioner of Income-tax, Bombay City, Bombay - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-Tax Reference No. 32 of 1975
Judge
Reported in(1984)41CTR(Bom)172; [1984]150ITR484(Bom); [1984]18TAXMAN288(Bom)
ActsCompanies (Profits) Surtax Act, 1964
AppellantGoodlass Nerolac Paints Ltd.
RespondentCommissioner of Income-tax, Bombay City, Bombay
Excerpt:
.....doubtful debtors account in relevant assessment years includible in computation of capital of assessee-company in respective years - quantum of amounts transferred to 'reserve for doubtful debts' determined ad hoc without reference to any specific anticipated liability - reserve not been utilized for purpose of adjustment of bad debts - full quantum of reserve carried forward from year to year - funds constituting these reserves and excess amount obtained after deducting debts considered doubtful from said reserves to be considered as 'reserve' - question referred answered in affirmative. - - in the profit and loss account, bad debts have been written off. the reserve for doubtful debts has not been utilised for the adjustment of bad debts. secondly, the reserves have in fact not..........for the assessment year 1964-65 the amount so claimed as reserve is rs. 21,210, for the assessment year year 1965-66 the amount so claimed is rs. 17,239, for the assessment year 1966-67 the amount so claimed is rs. 652, for the assessment year 1967-68 the amount so claimed is rs. 1,994, for the assessment year 1968-69 the amount so claimed rs. 5,308 and for the assessment year 1969-70 the amount so claimed rs. 53,561.6. in the statement of case it has been stated that out of the amount transferred to 'reserve for doubtful debts' in each year, the assessee-company had appropriated the amounts to the extent to which the debts had become doubtful in each year. it is an accepted position that this is not a correct statement, in view of the position as disclosed in the relevant years,.....
Judgment:

Sujata V. Manohar, J.

1. This reference pertains to the assessment years 1964-65 to 1969-70. In respect of these assessment years the following questions have been referred to us for determination under s. 256(1) of the I.T. Act, 1961 :

'(1) Whether, on the facts and in the circumstances of the case, the amounts of Rs. 21,210, Rs. 17,239, Rs. 652, Rs. 1,994, Rs. 5,308 and Rs. 53,561 standing to the credit of the reserve for doubtful debtors account in the assessment years 1964-65 to 1969-70 were includible in the computation of the capital of the assessee-company in respective years ?

(2) Whether, on the facts and in the circumstances of the case, the amount of Rs. 3,60,000 standing to the credit of the dividend reserve account in the assessment years 1965-66 and 1966-67 were includible in the computation of the capital of the assessee-company for the assessment year 1965-66 and 1966-67 ?

(3) Whether on the facts and in the circumstances of the case, the amounts of Rs. 5,89,039, Rs. 5,63,020 and Rs. 5,32,671 standing to the credit of the gratuity reserve account in the assessment year 1965-66 to 1967-68, respectively, were includible in the computation of its capital for the respective years ?'

2. During the relevant assessment years, the petitioner-company had shown in its balance-sheet for the relevant previous years and amount styled as 'reserve for doubtful debts'. The amounts which were shown against this item were transferred ad hoc by the assessee-company out of its profit and loss account. Thus, in the balance-sheet as of December 31, 1962, a sum of Rs. 50,000 had been carried forward from the previous balance-sheet as reserve for doubtful debts and a further amount of Rs. 25,000 was transferred to this account from the profit and loss and amount.

3. As on December 31, 1963, in the balance-sheet, the said sum of Rs. 75,000 was shown as reserve for doubtful debts, as carried forward from the previous balance-sheet. In the balance-sheet for the year ending December 31, 1964, in the item 'reserve for doubtful debts' the said sum of Rs. 75,000 was shown as carried forward and a further amount of Rs. 50,000 was transferred to this account the profit and loss account. In the balance-sheet as of December 31, 1965, in the item 'Reserve for doubtful debts', a sum of Rs. 1,25,000 was shown as carried forward from the previous balance-sheet and a further amount of Rs. 1 lakhs was transferred to this account from the profit and loss account. The total reserve of Rs. 2,25,000 was carried forward to the balance-sheet as of December 31, 1966. A further sum Rs. 1,60,000 was transferred to this account from the profit and loss account. The total sum of Rs. 3,85,000 was carried forward and shown as reserve for doubtful debts in the balance-sheet as of December 31, 1967.

4. As against these reserves, the assessee-company has made an accounting entry showing debts which are considered doubtful by the assessee-company. Under Schedule VI to the Companies Act, 1956, a company is required to show in the balance-sheet its sundry debts. Under this head, it is required to show separately debts which are considered as doubtful. Accordingly, in the balance-sheet as of December 31, 1962, the assessee-company has shown on the assets side, under the item 'sundry debts', a sum of Rs. 53, 791 as 'debts considered doubtful'. It has reduced the quantum of 'reserve for sundry debts' by this account. On the liabilities side, in the item 'reserve for doubtful debts', there is a contra entry for the said sum of Rs. 53,791. This amount is not, however, deducted from the 'reserve for doubtful debts', and the full amount of reserve is carried forward to the balance-sheet for the next year and is shown as reserve for doubtful debts available during that year. There are similar entries in the relevant balance-sheets for each relevant succeeding year. In the profit and loss account, bad debts have been written off. The reserve for doubtful debts has not been utilised for the adjustment of bad debts.

5. The assessee-company has claimed that in respect of each assessment year, the balance amount standing in the reserve for doubtful debts after notionally deducting from it debts which are shown as 'considered doubtful' should be considered as reserve for the computation of capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964. Thus for the assessment year 1964-65 the amount so claimed as reserve is Rs. 21,210, for the assessment year year 1965-66 the amount so claimed is Rs. 17,239, for the assessment year 1966-67 the amount so claimed is Rs. 652, for the assessment year 1967-68 the amount so claimed is Rs. 1,994, for the assessment year 1968-69 the amount so claimed Rs. 5,308 and for the assessment year 1969-70 the amount so claimed Rs. 53,561.

6. In the statement of case it has been stated that out of the amount transferred to 'reserve for doubtful debts' in each year, the assessee-company had appropriated the amounts to the extent to which the debts had become doubtful in each year. It is an accepted position that this is not a correct statement, in view of the position as disclosed in the relevant years, balance-sheets and profit and loss accounts which are on record. In these circumstances, we have to consider whether the assessees are entitled to claim the aforesaid amount as a reserve for the computation of capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964.

7. In the case of Vazir Sultan Tobacco Co. Ltd. v. CIT : [1981]132ITR559(SC) , the Supreme Court has described the distinction between a provision a reserve. The broad distinction between the two is that where a 'provision' is a charge against the profits to be taken into account against gross receipts in the profit and loss account, a 'reserve' is an appropriation of profit, the asset or assets by which it is represented being retained to from part of the capital employed in the business. Whether any amount retained is a provision or a reserve will have to be decided having regard to the true nature and character of the sums so retained. This will depend on several factors, including the intention with which and the purpose for which such retention has been made. In the present case, the quantum of amounts which are transferred to 'reserve for doubtful debts' has been determined ad hoc without reference to any specific anticipated liability. Secondly, the reserves have in fact not been utilised for the purpose of adjustment of bad debts, i.e., these reserves have not been utilised for the purpose for which they were earmarked. The full quantum of reserve gas been carried forward from year to year. The fund constituting these reserves, therefore does not appear to be in the nature of a provision. It partakes more of the character of a reserve.

8. In the case of CIT v. Indian Express (Madurai) Ltd. : [1983]141ITR583(Mad) , the Madras High Court was required to consider the case of an assessee in whose balance-sheet there was a reserve for doubtful debts. In that case, the assessee-company had made an exact calculation of the debts which, it considered as doubtful. Accordingly, this exact amount was set aside as reserve for doubtful debts in each years. The court held, on the facts of that case, that the way in which, and the precise amounts with which this account had been built over the years furnished evidence of a meticulous evaluation of the debts by the assessee to find out the chances their recovery and of the making of an appropriate provision only for those debts which were doubtful in that regard. Looking to the character and aim of that account, the Madras High Court held that it was a provision and not a reserve. The court, however, observed that where a lump sum or an ad hoc amount is charged to the profit and loss account towards doubtful debts without any regard for the recovery aspect, it cannot be treated as a provision. It is only reserve.

9. The facts of the present case are different from the facts which were before the Madras High Court. Looking to the Nature of this account and looking to the fact that the amounts have been transferred to this account on an hoc basis only and not after a meticulous calculation of the chances of recovery, we are of the view that the amount in the present case is in the nature of a reserve. We find support for our view in the reasoning of a Division Bench of this court in the case of CIT v. Golden Tobacco Co. Ltd. : [1977]108ITR453(Bom) .

10. In any event, the excess amount after deducting from the said reserves, the debts considered doubtful, must be considered as a reserve and not as a provision. In the case of Vazir Sultan Tobacco Co. Ltd. : [1981]132ITR559(SC) , the Supreme Court has observed that if provision for a known existing liability is in excess of the amount that would be reasonably necessary for the purpose, the excess should be treated as reserve and, therefore, would be includible in the capital computation. Assuming that 'reserve for doubtful debts' in the present case can be considered as a provision, the excess provision made would, in any event, be a reserve.

11. In the premises, question No. 1 is answered in the affirmative that is to say, in favour of the assessee and against the Department.

12. As far as question Nos. 2 and 3 are concerned, it is an accepted position that in view of the decision in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT : [1981]132ITR559(SC) referred to earlier, both these questions have to be answered in the negative, that is to say, against the assessee.

13. There will be no order as to costs.


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