Mrs. Ranjana Desai, J.
1. By this reference under section 256(1) of the Income-tax Act, 1961 read with section 18 of the Companies (Profits) Surtax Act, 1964, the Income-tax Appellate Tribunal has referred the following question of law to this Court for opinion at the instance of revenue;
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the reserve for doubtful debts and doubtful advances was a 'reserve' within the meaning of Rule 1 of the Second Schedule of the Companies (Profits) Surtax Act, 1964 and was, therefore, includible in the computation of the capital for the purpose of the said Act?'
2. The facts relevant for the purposes of this reference are as follows :-
For the assessment year 1976-77 the assessee company claimed that the sum of Rs. 7,04,278/- representing provision for doubtful debts and the sum of Rs. 63,315/- representing provision for doubtful advances should be included in their capital computation for the purposes of Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. For the assessment year 1977-78 similar claim was made in respect of the sum of Rs. 9,01,411/- representing provision for doubtful debts and for the sum Rs. 60,164/- representing doubtful advances. The Income-tax Officer disallowed the claim of the assessee. The assessee carried the matter before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals)allowed the appeal and directed the Income-tax Officer to re-compute the capital on the lines of the decision of the Bombay High Court in C.I.T. v. Golden Tobacco Co. Ltd. : 108ITR453(Bom) . Being aggrieved the revenue preferred an appeal before the Income-tax Appellate Tribunal ('Tribunal'). The Tribunal vide its order dated 21st June, 1982, confirmed the view taken by the Commissioner of Income-tax (Appeals). It is against this background that the present reference is made to this Court.
3. We have heard Mr. R.V. Desai, learned Counsel for the revenue and Mr. J.D. Mistry, learned Counsel for the asseseee.
4. Our attention is drawn to the judgment of this Court in Glaxo Laboratories (India) Ltd. v. C.I.T., : 206ITR335(Bom) . In that case the assessee was a limited company. During the previous year relevant to the assessment year 1975-76, the assessee made a provision for doubtful debts amounting to Rs. 19,56,668/- and also a provision for doubtful advances amounting to Rs. 1,20,933/-. In course of the assessment of the assessee under the Companies (Profits) Surtax Act, 1964, it was contended by the assessee that these two amounts, though named as provision, were in fact reserves and were part of the capital of the assessee and, therefore, those amounts should not be deducted in the computation of the capital of the assessee-company for the purpose of surtax. On appeal, the order of Income-tax Officer was confirmed by the Commissioner of income-tax (Appeals) and the Tribunal. Thereafter, at the instance of the assessee, a reference was made to this Court on the question whether Tribunal was right in holding that the provision for doubtful debts and the provision for doubtful advances cannot be treated as free reserves and cannot be included for the purpose of computing the capital of the company for the purposes of surtax. This Court held that whether a particular amount kept apart by the assessee for a particular purpose will be a provision or a reserve will depend upon true nature and character of the provision, A particular amount set apart by the assessee can be termed as a provision if it so kept apart for providing for any known or existing liability. But, if such provision is made in excess of the amount that would be reasonably necessary for such purpose, the excess of the amount would be reasonably necessary for such purpose, the excess would be treated as a 'reserve'. This Court also considered the relevant provision of section 36, as it stood at the material time, and held that section 36(1)(vii) read with sub-section (2) thereof dearly goes to show that any amount keep apart by the assessee for meeting future losses on account of bad debts is not taken into consideration for computation of the income. What is allowed as a deduction is only the amount of bad debts which are written off as irrecoverable in the accounts of the assessee and established to have become bad debts in the previous year in question. It was held that this section supports the view that ha provision for bad debts, though named as a provision, is in effect a reserve because it is the assessee who has decided to keep aside part of its capital or income which forms part of the capital to meet future contingencies arising out of losses caused by bad debts. This amount remains at all times and for all purposes the capital of the assessee till any debt actually becomes bad and part of it is utilised in writing off that amount in the books of account. This C6urt concluded that in that view of the matter, a provision for doubtfuldebts or doubtful advances is nothing but a reserve and it is a part of the capital of the assessee and, therefore, the Tribunal was not right in refusing to treat the same as a reserve for computing the capital of the company for the purpose of surtax.
5. In our opinion, the facts of the case on hand are clearly covered by the above decision. The amounts which have been set aside by the assessee as representing doubtful debts and doubtful advances are merely to meet anticipated losses. They are not retained by way of providing for any known liability or existing liability. Therefore, the said amounts ought to be classified as 'reserves'. The actual losses by way of bad debts and advances, whenever they occur are debited to the profit and loss account and not to the doubtful debts or doubtful advances account. In fact the sums reserved for doubtful debts or doubtful advances are not even touched.
Therefore, the provision for doubtful debts and doubtful advances remains the capital of the assessee till such time as any debt actually becomes bad and part of it is utilised in writing off that amount in the books of account. The Tribunal was, therefore, justified in holding that the reserve for doubtful debts and doubtful advances was a reserve within the meaning of Rule 1 of the Second Schedule of the Companies (Profits) Surtax Act, 1964, and, therefore, includible in the computation of capital for the purposes of the said Act. We, therefore, answer the question referred to us in the affirmative i.e. in favour of the assessee and against the revenue.
6. Reference disposed of accordingly with no order as to costs.
7. Reference answered in favour of assessee.