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1996 Supreme(SC) 400
1996(2) Supreme 129
SUPREME COURT OF INDIA
B. P. Jeeuan Reddy & S. B. Majmudar, JJ.
Commissioner of Income-tax, Gujarat -Appellant
versus
Jyoti Ltd. -Respondent
Civil Appeal Nos. 471-72 (NT) of 1978
Decided on 15-2-1996
IMPORTANT POINT
So far as reserve for doubtful debts (and rehabilitation reserve) are concerned it is a reserve and not a provision for the Surtax Act. But High Court s answer on gratuity reserve is set aside and the issue is remanded for redetermination according to principles laid down.
Headnote:(i) The Companies (Profits) Sur-tax Act, 1964-Whether reserve for meeting doubtful debts by assessee was a reserve or a provision? (The former)
Held : As a clear finding of fact was reached by the Tribunal that bad debt reserve was created out of Profit & Loss Account without reference to the outstanding sundry debtors and was not created with a view of meeting any anticipated liability it had to be held that the said amount which was set apart for meeting bad and doubtful debts was by way of reserve and not a provision. Consequently no fault can be found with the decision rendered by the authorities below and the High Court that the provision of Rs. 85,000/- for doubtful debts had to be treated as reserve which could be legitimately included in computing the capital base of the respondent assessee company so far as the relevant assessment years were concerned. (Para 6)
(ii) The Companies (Profits) Surtax Act, 1964 -- Whether gratuity reserve created by the assessee was a reserve or a provision? - Principles stated -Remand ordered for reconsideration on said principles.
Held : The assessee-company had not resorted to any actuarial valuation while creating gratuity reserve of Rs.5,60,000/-. Consequently it was not possible to find out as to whether the amount set apart was required to meet the discounted value of estimated liability or was in excess thereof. It is obvious that if there was any excess amount set apart for the purpose it would be treated as a reserve which could be included in the capital base for the purpose of the Surtax Act. It is axiomatic that if discounted present value of gratuity liability on a scientific basis was arrived at by the assessee-company by resorting to actuarial valuation of such liability it would have supplied a basis for the Surtax Officer to compute the capital base by treating the said amount as a provision and that if it was further found that the amount "set apart for meeting such liability was in excess of such provision then the excess amount could have been determined for being included as a reserve in the capital base. But in the absence of assessee-company undertaking such an exercise, it was not as if the Surtax Officer was helpless or was necessarily required to accept as gospel truth what the assessee submitted for treating the entire amount set apart as a reserve. The Surtax Officer under such circumstances could have legitimately resorted to an estimate for ascertaining the extent of provision for such contingent liability for gratuity required to be met by the assessee-company in the concerned assessment years. It would have been equally open to the Surtax Officer to call upon the assessee-company to get actuarial valuation of such liability to enable the Surtax Officer to compute the correct capital base of the company in this connection. As no such exercise was done both by the assessee as well as by the Surtax Officer the issue in question will have to be remanded to the taxing authority through the Tribunal for disposal in the light of the well settled principles in this behalf as discussed earlier by us. The course adopted by this Court in Vazi Sultan Tobacco Co. s case (supra), in this connection, is therefore required to be adopted in the present case also. (Para 13)
JUDGMENT
S. B. Majmudar, J.-These appeals by certificate granted on 12th December 1977 by the Gujarat High Court arise out of its judgment and order dated 21st June 1977 in Income Tax Reference No. 6 of 1976. The Commissioner of Income Tax, Gujarat is the appellant while the assessee company is the respondent. The Income Tax Appellate Tribunal, Ahmedabad referred the following question for the opinion of the High Court of Gujarat under Section 18 of the Companies (Profits) Surtax Act, 1964 [hereinafter referred to as the Surtax Act ] read with Section 256(1) of the Income Tax Act, 1961:
"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that reserve for doubtful debts and gratuity reserve created by the assessee were includible in computing the capital for the purpose of computing statutory deduction ?"
However, the Division Bench of the High Court by consent of the parties retrained the question as under :
"Whether on the facts and in the" circumstances of the case, the Tribunal was correct in law in holding that rehabilitation reserve, - reserve - for doubtful debts and gratuity reserve created by the assessee were includible in computing the capital for the purpose of computing statutory deduction?"
The said reframed question was answered against the Revenue and in favour of the assessee and that is how at the instance of the Revenue the present proceedings have arisen on certificate granted by the High Court.
2. At the time of final hearing of these appeals the learned counsel for the appellant Commissioner of Income Tax placed for our consideration only the following aspects of the question :
1. Whether reserve for meeting doubtful debts was a reserve or a provision.
2. Whether gratuity reserve created by the assessee was a reserve or a provision.
So far as the aforesaid two aspects of the question are concerned we may at the outset note a few introductory facts leading to these proceedings.
Introductory Facts :
3. The concerned assessment years are 1967-68 and 1968-69, the previous years being calendar years1966 and 1967 respectively. The respondent-assessee is a company which at the relevant time was carrying on business at Baroda. The respondent was governed by the provisions of the Surtax Act. The respondent claimed that in computing its capital base for the relevant years gratuity reserve of Rs. 5,60,000/- and reserve for doubtful debts of Rs. 85,000/- should be taken into consideration. The Surtax Officer held that the said amounts cannot be considered for computation of capital. He accordingly excluded them from the capital computation in the assessment proceedings. Being aggrieved by the orders of the Surtax Officer the assessee carried the matter in appeal before the Appellate Assistant Commissioner of Surtax, B-range, Baroda. The Appellate Assistant Commissioner following the decision of the Tribunal in S.T.A. Nos. 7 and 8 (Ahd.) of 1971-72 decided on 19th August 1973 which arose out of the assessee s surtax assessments for the assessment years 1965-66 and 1966-67 held that the aforesaid reserves should be considered as part of the capital while computing the capital base for calculation of statutory deduction.
4. Being aggrieved by the order of the Appellate Assistant Commissioner the Revenue preferred appeals being S.T.A. Nos. 6 and 7( Ahd.) of 1973-74. The Tribunal relying on its decision in S.P.T.A. No. 5 (Ahd.) of 1971-72 and S.T.A. Nos. 7-10 (Ahd.) of 1971-72 decided on 19th August 1973 confirmed the view taken by the Appellate Assistant Commissioner. Thereafter at the instance of the Revenue the aforesaid question was referred to the High Court, which as stated earlier, was reframed by the High Court.
5. We shall first deal with the question regarding the inclusion of Rs. 85,000/- sought to be treated as reserve for meeting doubtful debts in the capital base of the respondent company. So far as this reserve is concerned, as no
