Reserve for bad and doubtful debts and reserve for gratuity are not to be included in the computation of capital under the provisions of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

SABYASACHI MUKHARJI, J.

( 1 ) IN this reference under Section 256 (1) of the I. T. Act, 1961, the following question has been referred to this court:"whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the reserve for bad and doubtful debts and reserve for gratuity were to be included in the computation of capital under the provisions of the Second Schedule to the Companies (Profits) Surtax Act, 1964?"

( 2 ) THE assessee is a private limited company. The relevant assessment year is 1966-67, in respect of which the corresponding previous year ended on December 31, 1965. It has been publishing a Bengali daily in the name and style of "jugantar". In the computation of capital for the purpose of surtax assessment under the provisions of the Companies (Profits) Surtax Act, 1964, the assessee-company included reserves for bad and doubtful debts and for gratuity. In his computation, according to the Second Schedule to the said Act, the ITO refused to treat the said reserves as reserves forming part of the assessee's capital base.

( 3 ) THE assessee being aggrieved went up in appeal before the AAC. The AAC perused the balance-sheet and he found amounts of Rs. 9,08,633 and Rs. 5,47,160 as outstanding from the debtors which were respectively earmarked as good debts and doubtful debts. These figures were found to be appearing in the balance-sheet as on the first day of the accounting year and therein on the same day, a sum of Rs. 3,38,000 was figuring as reserves for bad and doubtful debts. According to the AAC, such reserves, viz. , reserves for bad and doubtful debts, by the very nomenclature, would imply specific and ascertained liability and, therefore, he treated the same to be provision. Similarly, in respect of Rs. 4,24,371 as reserve for gratuity appearing on the first day of the relevant accounting year, the AAC found that the assessee had credited out of the transfer of certain amounts to the reserve account as and when an employee retired and the gratuity was payable to the said employee. It was noticed that the payment was made out of these reserves. According to the AAC, this was not contrary to the position which would imply if the employee was paid directly by charging to the profit and loss account. In these circumstances, the AAC held that the reserve for gratuity being in the nature of a provision for payments to retiring employees could not be a free reserve for inclusion in the capital base. He, accordingly, upheld the order of the ITO.

( 4 ) THE assessee went up in appeal before the Tribunal. The Tribunal, after considering the relevant provisions and the relevant case law, was of the view that the assessee's contentions were right and directed the ITO to recompute the capital base and to include the two amounts in question for bad and doubtful debt reserve and the reserve for gratuity In the capital computation in order to ascertain the quantum of statutory deduction in accordance with Section 2 (8) of the Surtax Act, 1964.

( 5 ) IN the circumstances as aforesaid, the question indicated above has been referred to this court.

( 6 ) SO far as the bad and doubtful debts are concerned, in view of the facts as appearing from the orders of the AAC and in view of the ratio of the decision of this court in the case of CIT v. Eyre Smelting P. Ltd. [1979] 118 ITR 857, it appears to us that the Tribunal was in error in holding that the bad and doubtful debts could form part of the reserve. The provision in the instant case from the facts found appears to have been made for an anticipated contingency and was intended to meet the anticipated diminution in the value of the assets of the assessee, resulting from unrealised debts. This contingency was known and anticipated, as appears from the facts found, at the date of the balance-sheet-and the amounts set apart for the item, though not determined with accuracy, was estimated. Therefore, the same could not be treated as a re

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