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Second Income-tax Officer Vs. Borosil Glass Works Ltd. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1986)15ITD390(Mum.)
AppellantSecond Income-tax Officer
RespondentBorosil Glass Works Ltd.
Excerpt:
.....company and the appeal relates to the assessment year 1979-80. the schedules 6(b) and 6(d) to the balance sheet as at 31-12-1978 showing sundry debtors at rs. 1,07,71,747 am loans and advances at rs. 27,52,051 were a s follows : secured considered good : outstanding for a period exceeding six months 24,022 deposit with industrial development bank of india under the companies deposits (surcharge on income-tax) scheme, 1976 (including interest accrued rs. 30,680 previous year rs. 14,965) 2,92,595 it was claimed before the ito in the course of the surtax assessment proceedings that the provision for doubtful debts amounting to rs. 8,41,866 and the provision for doubtful advances amounting to rs. 75,382 were reserves and should, therefore, be included in the capital for the purpose of.....
Judgment:
1. This is an appeal filed by therevenue against the order of the Commissioner (Appeals), Bombay.

2. The assessee is a limited company and the appeal relates to the assessment year 1979-80. The Schedules 6(b) and 6(d) to the balance sheet as at 31-12-1978 showing sundry debtors at Rs. 1,07,71,747 am loans and advances at Rs. 27,52,051 were a s follows : Secured considered good : Outstanding for a period exceeding six months 24,022 Deposit with Industrial Development Bank of India under the Companies Deposits (Surcharge on Income-tax) Scheme, 1976 (including interest accrued Rs. 30,680 previous year Rs. 14,965) 2,92,595 It was claimed before the ITO in the course of the surtax assessment proceedings that the provision for doubtful debts amounting to Rs. 8,41,866 and the provision for doubtful advances amounting to Rs. 75,382 were reserves and should, therefore, be included in the capital for the purpose of determining the surtax liability under the Companies (Profits) Surtax Act, 1964 ('the Act') This claim was not accepted by the ITO but was allowed in appeal by the Commissioner (Appeals). The revenue has, therefore, come up in the present appeal before us.

3. The learned departmental representative, Shri Mahadeshwar, cited before us the ruling of the Hon'ble Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559, the Hon'ble Calcutta High Court in the cases of CIT v. Eyre Smelting (P.) Ltd. [1979] 118 ITR 857 and CIT v. Jugantar (P.) Ltd. [1981] 128 ITR 619 and the rulings of the Hon'ble Bombay High Court in the cases of CIT v. Golden Tobacco Co. Ltd. [1977] 108 ITR 453 and Parke Davis (India) Ltd. v. CIT [1981] 130 ITR 813 in support of the contention that amounts provided to meet any liability, contingency, commitment, or diminution in the value of an asset known to exist at the date of the balance sheet was not a 'reserve' but a 'provision', which could not be included in the capital for the purpose of determining the surtax liability under the Act. Proceeding further, he pointed out that even according to the balance sheet of the assessee-company and the Schedules of the Act annexed thereto, the provision for doubtful debts as well as the provision for doubtful advances was not only called a 'provision' and not a 'reserve' by the assessee-company itself, it was exactly of the identical amount out of the unsecured sundry debtors and unsecured loans and advances, which were considered by the assessee-company to be doubtful on the date of the balance sheet, unlike the other amounts, which were considered good.

4. In these circumstances, both of these amounts were to meet a diminution in the value of sundry debtors and loans and advances known to exist at the date of the balance sheet and these amounts were mere provisions, which could not be treated as a 'reserve'. Summing up Shri Mahadeshwar vehemently argued before us that the Commissioner (Appeals) wrongly directed that these amounts should be treated as 'reserves' and included in the capital computation for the purpose of determining the surtax liability under the Act.

5. On the other hand, the assessee's learned counsel, Shri Dastur, submitted on the authority of the ruling of the Hon'ble Bombay High Court in the case of Goodlass Nerolac Paints Ltd. v. CIT [1984] 150 ITR 484 that where amounts were transferred to an account styled as 'provision for bad debts' year after year but the bad debts as and when they occurred were debited to the profit and loss account and not to the provision, the amount standing to the credit of the provision, which was carried forward from year to year in the balance sheet was in the nature of a reserve, which should be included in the computation of capital for the purposes of surtax under the Act. He also referred to another ruling of the Hon'ble Bombay High Court in the case of CIT v.Jupiter General Insurance Co. [1975] 101 ITR 370, where the Hon'ble High Court upheld the finding of the Tribunal that the amount standing to the credit of the accounts of the company as 'reserve for doubtful debts' was includible in the capital computation under the Act. Shri Dastur filed before us copies of the orders of the Tribunal in the assessee's own case for the assessment years 1976-77 and 1977-78 [ST Appeal Nos. 53 and 54 (Bom.) of 1981] and 1978-79 [ST Appeal No. 54 (Bom.) of 1982] where the Tribunal had held that the provision for doubtful debts and the provision for doubtful advances should be included in the capital computation for the purpose of determining the surtax liability under the Act. Shri Dastur submitted to us that the facts for the earlier three years were identical to those for the year under appeal and, therefore, there was no reason why we should not follow our order for the earlier three years particularly in the assessee's own case. He, therefore, vehemently argued before us that the provision for doubtful debts as well as the provision for doubtful advances should be treated as a reserve and included in the capital computation for the purpose of determining the surtax liability under the Act for this assessment year as well.

6. We have carefully considered the rival submissions. At the outset it will be necessary to point out that we have gone through the orders of the Tribunal in the appeals for the assessment years 1976-77 and 1977-78 and for the assessment year 1978-79 and do not find that the fact that what was shown as provision for doubtful debts and provision for doubtful advances was the identical amount, which on the date of the balance sheet, was considered by the assessee-company to be doubtful out of sundry debtors and out of loans and advances was brought to the notice of the Tribunal or considered by the Tribunal while deciding the appeals for these years. When there are additional facts, which do not appear to have been considered by the Tribunal while deciding the appeals for the earlier years, there is no reason why we should follow the orders of the earlier years and not take a decision on merits after considering the additional facts brought to our notice in the appeal for this year. In the case of Jupiter General Insurance Co. (supra), the Hon'ble Bombay High Court held that the question whether the reserve for bad and doubtful debts was to meet a specific liability or was a 'reserve' not earmarked for any specific liability was decided by the Tribunal on a consideration of the factual position following the principles laid down by the Hon'ble Supreme Court and, therefore, no question of law arose out of the order of the Tribunal. This ruling of the Hon'ble Bombay High Court, therefore, is of no help to us in the present case. In the other case of Goodlass Nerolac Paints Ltd. (supra) decided by the Hon'ble Bombay High Court, the amount transferred to the reserve for doubtful debts had been determined ad hoc without reference to any specific anticipated liability and without any meticulous calculation of chances of recovery unlike in the present case where the amount transferred to provision for doubtful debts and provision for doubtful advances was the identical amount, which, on the date of the balance sheet, was considered by the management of the assessee-company to be doubtful out of sundry debtors and out of loans and advances. This ruling of the Hon'ble Bombay High Court also, therefore, will not be applicable to the facts of the present case. We have the authority of the Hon'ble Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. (supra). The Hon'ble Bombay High Court in the cases of Golden Tobacco Co. Ltd. (supra) and Parke Davis (India) Ltd. (supra) and the Hon'ble Calcutta High Court in the cases of Eyre Smelting (P.) Ltd. (supra) and Jugantar (P.) Ltd. (supra) that any amount set aside to meet a liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance sheet is not a 'reserve' but a 'provision'.

Viewed in this context it cannot be disputed that what was shown as provision for doubtful debts and provision for doubtful advances was the identical amount, which, on the date of the balance sheet, was considered to be doubtful out of sundry debtors and out of loans and advances according to the balance sheet of the company itself. These provisions were, therefore, to meet a diminution in the value of assets known to exist at the date of the balance sheet. These two amounts were, therefore, merely provisions as rightly described by the assessee-company also in its balance sheet and not. reserves as claimed by the assessee-company before the lower authorities and before us. We have, therefore, no hesitation in holding that these two amounts of provision for doubtful debts and provision for doubtful advances were mere provisions, which could not be treated as reserves and consequently, could not be included in the capital computation for the purpose of determining the surtax liability under the Act. On this issue, therefore, the order of the Commissioner (Appeals) appears to be incorrect and is hereby reversed.

7. Before we close, we would like to place on record our deep appreciation of the very able manner in which both, the learned departmental representative, Shri Mahadeshwar, as well as the assessee's learned counsel, Shri Dastur, put forward their respective arguments.


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