A provision for bad and doubtful debts is a provision and not a reserve, and therefore should not be included in the computation of capital for the purpose of super profits tax.

( 1 ) THIS reference under Section 256 (1) of the I. T. Act, 1961, at the instance of the Commissioner of I. T. and S. P. T. , West Bengal-III, arises out of the assessment of Messrs. Eyre Smelting Private Ltd. , Calcutta, the assessee, to super profits tax in the assessment year 1963-64, the relevant accounting period being the calendar year ended on the 31st December, 1962.

( 2 ) THE facts found and/or admitted are, inter alia, that in the relevant period the assessee made a provision in its accounts for bad and doubtful debts aggregating to Rs. 1,02,239, respectively, under two separate heads, namely, "debts outstanding for a period exceeding six months, and considered doubtful" under which a sum of Rs. 39,416. 19 was provided and also "advances recoverable in cash or in kind or value to be received unsecured and considered doubtful" the amount provided hereunder being Rs. 62,721 as on the 1st January, 1962, In its assessment to super profits tax the assessee claimed that the said sum of Rs. 1,02,239 should, be considered as "reserve" and included in the computation of its capital under the Second Schedule to the S. P. T. Act, 1963. The ITO did not accept the assessee's contention and did not include the said amount in the computation of capital.

( 3 ) ON appeal, the AAC applied what he understood to be the principle laid down in a decision of this court in the case of Indian Steel and Wife Products Ltd. v. CIT [1958] 33 ITR 579 (Cal) and held that a technical meaning should be given to the word "reserve" which in the case before him applied to the fund in question.

( 4 ) THERE was a further appeal by the revenue to the Income-tax Appellate Tribunal where it was contended that this provision was not a reserve but was strictly a provision made for an ascertained and anticipated liability and, therefore, should not be included in the computation of capital of the assessee. It was further contended that this provision was made by way of a deduction and came within the definition of "provisions" in item 7 of Schedule VI of the Companies Act, 1956.

( 5 ) THE Tribunal considered the decision of the Supreme Court in the case of Metal Box Company of India Ltd, v. Their Workmen [1969] 73 ITR 53 : 39 Comp Cas 410, where the Supreme Court distinguished the concept of a "provision" and "reserve" in accordance with the principles of commercial accountancy. Following the principles laid down by the Supreme Court, the Tribunal held that the provision made for bad and doubtful debts in the instant case was a provision for some future loss that may or may not arise and the liability therefor was neither known nor could be determined with any substantial accuracy on the relevant date. As such, this item came within the category of a "reserve" and not that of a "provision". From this order of the Tribunal, the following question has been referred ;"whether, on the facts and in the circumstances of the case, the amount of Rs. 1,02,239 should be treated as a 'reserve' for the purpose of computation of capital under the provisions of the Super Profits Tax Act, 1963 ?"

( 6 ) MR. Ajit Sengupta, learned counsel for the revenue, has contended at the hearing that the Tribunal erred in both appreciating and applying the principles laid down by the Supreme Court in the case of Metal Box Company of India Ltd. [1969] 73 ITR 53 ; 39 Comp Cas 410. He submitted that it was categorically laid down in that case that an amount set aside out of profits designed to meet a diminution in the value of assets known to exist at the date of the balance-sheet was a "provision". In further support of his contentions he cited several authoritative text books on accountancy which are considered hereafter. (a) Accountancy by William Pickles, 3rd Edn. , was cited for the following statement at pp. 184 and 187. "provisions,--Amounts set aside out of profits and other surpluses provided for. . . . . . diminution in value of assets, or (b) any known liability of w