JUDGMENT
Thanikkachalam, J.
1. Both at the instance of the Department as well as at the instance of the assessee, the Tribunal referred the following questions for the opinion of this Court for the asst. yr. 1975-76 under s. 256(1) of the Act.
T.C. No. 319 of 1983
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the contingency reserve of Rs. 1 lakh should be taken for computation of capital for levy of surtax ?”
T.C. No. 320 of 1983
“Whether, on the facts and in the circumstances of the case the Tribunal was right in not including the capital for the asst. yr. 1975-76 the sum of Rs. 24,75,000 being the dividend paid after 31st March, 1974, out of the general reserve as on that date ?”.
T.C. No. 321 of 1983
“Whether, on the facts and in the circumstances of the case the Tribunal was right in not including in the capital for the asst. yr. 1975-76 the provision for bad and doubtful debts amounting to Rs. 4,09,474 ?”.
2. In so far as question No. 3 referred at the instance of the Department is concerned it relates to whether the contingency reserve of Rs. 1,00,000 should be taken for a computation of capital for levy of surtax in determining the capital base. The ITO did not include the contingency reserve of Rs. 1,00,000 in the capital base. The CIT(A) allowed the assessee’s appeal on this point, following his predecessor’s order. On Revenue’s further appeal, the Tribunal agreed that such reserve formed part of the capital, following the earlier orders of the Tribunal in STA No. 47-Madras 76-77 in the assessee’s own case for the asst. yr. 1971-72 dt. 30th November, 1967. A similar question came up for consideration before this Court in the case of the same assessee as reported in CIT vs. English Electric Co. of India Ltd. (1985) 151 ITR 116 (Mad), for the asst. yrs. 1972-73 and 1973-74, wherein this Court held that in regard to the exclusion of the sum of Rs. 1,00,000 of the capital computation, the Tribunal had made a distinction between a provision and the reserve and found that the sum of Rs. 1,00,000 shown as development and contingency reserve bore the same character as general reserve. It had, therefore, to be included in computing the capital for the purpose of surtax. Inasmuch as the order passed by the Tribunal is in accordance with the above stated decision of this Court in the case of the very same assessee, we answer the question in the affirmative and against the Department.
3. In so far as question No. 1 referred at the instance of the assessee is concerned it related to a sum of Rs. 24,75,000 being the dividend paid after 31st March, 1974, out of the general reserve. The said sum being the dividend declared was paid after 31st March, 1974. According to the assessee this item had to be included in the reserve. The AAC allowed the assessee’s claim. The ITO was directed to include the amount of Rs. 24,75,000 in its reserve. The ITO in computing the capital base has rejected the assessee’s claim that the dividend of Rs. 24,75,000 being the dividend declared and paid after 31st March, 1974, out of the general reserve should be treated as capital. The CIT(A) allowed the assessee’s claim on this point. The Tribunal reserved the order passed by the CIT(A) following the Full Bench decision of the Madras High Court in Southern Roadways Ltd. vs. CIT (1981) 130 ITR 545 (Mad) (FB). A similar question came up for consideration before this (sic – the Supreme Court) Court in Indian Tubes (P) Ltd. vs. CIT , wherein the Supreme Court held that though the general body of the shareholders resolved and appropriated the sum of Rs. 76,00,000 towards the dividend from the reserve of Rs. 90,00,000 on 31st May, 1963, the appropriation related back to the calendar year 1962 to which it related and as on 1st January, 1963, the sum of Rs. 76,00,000 was a provision and only Rs. 14,00,000 could be treated as a reserve in the computation of capital for the purpose of surtax. Inasmuch as the order passed by the Tribunal is not in accordance with the decision of the Supreme Court, cited above, we answer the question referred to us in the negative and in favour of the assessee.
4. In so far as question No. 2 referred to at the instance of the assessee is concerned, it related to provision for bad and doubtful debts amounting to Rs. 4,09,474 in computing the assessee’s capital as on the 1st day of the previous year viz. 1st April, 1974. In the second Schedule of the Sur-tax Act, the ITO did not include in the capital base a sum of Rs. 4,09,474 being the provision for bad and doubtful debts. Before the CIT(A) the assessee contended that this provision was created by making a charge on the P&L a/c for several years and that the amounts provided were not allowed as deduction in making the relevant income-tax assessment and hence the assessee should got the benefit of its being treated as a reserve for surtax purposes. The CIT(A) however held that the aforesaid provision was not a reserve, following the decision of the Calcutta High Court in Eyre Smelting (P) Ltd. vs. CIT . The Tribunal referred to the genesis of this account and found that the provision made by the assessee doubtful debts represented specific items of doubt, e.g., during the year ended 31st March, 1974, the provision made by the assessee to this account was Rs. 2,18,235. One item in this provision was relays amounting to Rs. 17,502 comprising the various items. The Tribunal held that the facts narrated would indicate that the provision made by the assessee cannot be treated as a mere ad hoc appropriation, but the provision was made for an anticipated contingency and was intended to meet an anticipated diminution of the value of the assets of the assessee resulting from unrealised debts. The contingency was known and anticipated at the date of the balance sheet and the estimated amounts being the aggregate of individual items were set apart constituting the provision, though not determined with accuracy. The Tribunal, therefore, was of the view that the provision for the bad debts in question can be treated only as a provision and not a reserve. Accordingly, the Tribunal confirmed the order passed by the CIT(A) and dismissed the appeal filed by the assessee.
5. Before us, the learned counsel appearing for the assessee submitted that the provision for doubtful debt was made in respect of debts which were roughly over 1-1/2 years old and which were disputed by the parties. As against the provision for doubtful debts made by the assessee ranging from Rs. 40,331 for the year ended 30th September, 1968, to Rs. 2,18,235.74 for the year ended 31st March, 1974, the provisions were also written back for these years, e.g., Rs. 2,13,172 for the year ended 31st March, 1974, being the debts realising during the year ended 31st March, 1974.
6. On the other hand, learned standing counsel appearing for the Department, submitted that the sum of Rs. 4,09,474 provided in the P&L a/c is only a provision made for an anticipated contingency and was intended to meet the anticipated diminution of the value of the assets of the assessee resulting from unrealised debts. It was also pointed out by the Revenue that the Tribunal has noted that the actual bad debts were not debited to the P&L a/c but to the provision account. According to the learned counsel, the contingency was known and anticipated on the date of the balance sheet and the estimated amounts being the aggregate of individual items were set apart constituting the provision, though not determined with accuracy. According to the learned standing counsel, the reserve for doubtful debt was not meant to be utilised for writing off bad or doubtful debt but such debts were invariably attracted to the P&L a/c, and not to the reserve account. It was, therefore, submitted that the Tribunal was correct in treating the said amount as provision and not reserve.
7. We have heard the rival submissions.
8. According to the assessee the bad debts are within the recoverable period i.e., the recovery is not barred by limitation. As and when the amounts are realised they are posted in the P&L a/c. Such amounts are available for utilising the same in the assessee’s business. Therefore, the above said sum is only a reserve and not a provision made for an anticipated contingency liability.
9. In CIT vs. Lakshmi Mills Co. Ltd. (1996) 221 ITR 753 (Mad), this Court held as under :
“The distinction between a provision and a reserve is in commercial accountancy fairly well-known. Provisions made against anticipated losses and contingencies are charges against profits and therefore, to be taken into account against gross receipts in the P&L a/c and the balance sheet. On the other hand, reserves are appropriations “of profits the assets by which they are represented being retained to form part of the capital employed in the business.”
According to the learned counsel for the assessee, when the realised debts were posted in the P&L a/c, it would mean that such deposits are available for using the same in the business. When an amount was set apart to provide for a known liability businessmen would ordinarily plough it back to use for purpose of business. If the right to plough back is there, then it ceases to be a provision to meet a known liability.
10. But it remains to be seen that in the order of the Tribunal in the present case, there is no finding as to the availability of the bad debts collected to be used for the purpose of the business. Without this finding, it is not possible for us to decide in this case whether a sum of Rs. 4,09,474 is a reserve or provision. Under such circumstances, we remit back this matter to the Tribunal and direct the Tribunal to find out whether the above said sum is a reserve or provision in the light of the decision of this Court reported in 221 ITR 753 (cited supra) and in the light of the judgment of the Supreme Court, reported in CIT vs. Jyoti Ltd. and State Bank of Patiala vs. CIT . In that view of the matter, we return back question No. 2, referred to at the instance of the assessee unanswered.
11. Accordingly the question referred to at the instance of the Department is answered in the affirmative and in favour of the Department. Insofar as question No. 1, referred to at the instance of the assessee is concerned, the same is answered in the negative and in favour of the assessee and insofar as question No. 2 referred to at the instance of the assessee is concerned, the same is returned unanswered. No costs.