COMMISSIONER OF INCOME TAX Vs. GOLDEN TOBACCO COMPANY LIMITED

JUDGEMENT

(1.) TWO questions have been referred to us for our opinion in this reference at the instance of the CIT, Bombay City VI, Bombay, which run thus :

(2.) SO far as the first question is concerned, the admitted facts are that the assessee company followed a systematic method of transferring an ad hoc amount to the doubtful debt reserve account each year. The amount transferred to the said account was not computed on the basis of the debts which were expected to become bad during the year or even in the future. It did not consider the soundness of every debt individually and did not ascertain which of the debts were likely to become bad in the near future; in other words, it transferred to the doubtful debt reserve account ad hoc amounts year after year which had no connection with the possibility of the debts becoming bad in the near future. Admittedly, the assessee company did not claim the deduction of the amounts so transferred to the said account in the computation of its total income nor the ITO allowed it as a deduction. The debts which became bad during any year were debited directly to the profit and loss account and not to the doubtful debt reserve account. After a number of years, a large amount, which stood accumulated to the doubtful debt reserve, was transferred by it to the general reserve. Before the ITO the assessee company claimed that the balance in the doubtful debt reserve account should be included in the capital computation for surtax purposes. The ITO rejected the claim on the ground that the amounts transferred to the "reserve accounts" were not free reserves but were held for a specific purpose and as such the same were not includible in the capital computation for surtax purposes. The AAC, when the matter was carried in appeal, disagreed with the view of the ITO and included the amount in the capital computation. When the matter was carried in further appeal by the Revenue it was contended that the said amount could not be regarded as a reserve but will have to be regarded as a provision for doubtful debts in view of the tests which have been laid down by the Supreme Court in CIT vs. Century Spinning and Manufacturing Co. Ltd. (1953) 24 ITR 499 (SC). Reliance was also placed upon the Supreme Court decision in Metal Box Company of India Ltd. vs. Their Workmen (1969) 73 ITR 53 (SC); 39 Comp Cas 410 (SC), where a distinction between provision and reserve had been clearly pointed out by the Supreme Court. The Tribunal took the view that the amounts transferred to the doubtful debt reserve account had no relation to the debts which had become bad or which were likely to become bad, that when the debts actually became bad they were directly debited to the profit and loss account, that the amount accumulated in this account was ultimately transferred to the general reserve and that the amounts were transferred to this account in order to create a secret reserve. It took the view that the said reserve was not created to meet any known or existing liability and it was a reserve and required to be included in the computation of the capital of the company. At the instance of the CIT, Bombay City VI, Bombay, the first question has been referred to us for our opinion.

(3.) SO far as the second question is concerned, in view of the judgment which has been delivered by us today in I. T. Ref. No. 316 of 1975 (CIT vs. Marrior (India) Ltd. (1977) 107 ITR 35 (Bom)) it was fairly conceded by counsel for the assessee, so far as this Court was concerned, that the question will have to be answered against the assessee. The question is, therefore, answered thus: The amounts in the dividend reserve account were not includible in the computation of the capital of the company for the purposes of the Companies (Profits) Surtax Act, 1964. There will be no order as to costs.