The capital should not be proportionately reduced in terms of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, consequent to the deductions allowed under Chapter VI-A of the Income-tax Act, 1961. The reserve for bad and doubtful debts can be included as a part of the capital in certain contingencies, such as when the liability has actually arisen or is anticipated legitimately by the assessee, though the quantum of the liability has not been determined. Dividends declared subsequent to the first day of the accounting period should be deducted from the general reserve while computing the capital for levy of surtax.

N. V. BALASUBRAMANIAN J.

At the instance of the Revenue, the Tribunal referred the following three questions of law for our consideration under section 256(1) of the Income-tax Act, 1961, read with section 18 of the Companies (Profits) Surtax Act, 1964, for the assessment years 1969-70, 1972-73 and 1973-74:

"1. Whether the Appellate Tribunal was right in holding that the capital should not be proportionately reduced in terms of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, consequent to the deductions allowed under Chapter VI-A of the Income-tax Act, 1961, for the assessment years 1969-70, 1972-73 and 1973-74 ?

2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the reserve for bad and doubtful debts should be taken as capital for the levy of surtax for the assessment year 1969-70 ?.

3. Whether, the Appellate Tribunal was right in holding that the dividends declared subsequent to the first day of the accounting period should not be deducted from the general reserve while computing the capital for levy of surtax ?"

Mr. P. P. S. Janarthana Raja, learned counsel, undertakes to file vakalat for the respondent.

In so far as the first question of law is concerned, Mr. C. V. Rajan, learned counsel for the Revenue, fairly submitted that the issue raised in the question is covered against the Department by the decision of the Supreme Court in the case of Second ITO v. Stumpp Schuele and Somappa P. Ltd.

Following the decision of the Supreme Court we are of the view that there is no infirmity in the order of the Appellate Tribunal holding that the capital should not be proportionately reduced in terms of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, consequent to the deductions allowed under Chapter VIA of the Income-tax Act, 1961Before considering the second question, we will take up the third question for consideration. It is fairly submitted by learned counsel for the parties that the issue raised in the question is covered against the assessee by the decision of the Supreme Court in Indian Tube Co. Pvt. Ltd. v. CIT, wherein the Supreme Court held that though the general body of the shareholders resolved and appropriated a particular sum of money towards the dividend, the resolution for the appropriation would relate back to the current year to which it related and the provision for dividend cannot be included as a part of the reserve of the company.

Following the decision of the Supreme Court, we hold that the Tribunal was not correct in holding that a sum of Rs. 1, 49, 999 should not be reduced from a general reserve though the dividend was declared subsequent to the end of the year. Accordingly, the third question is liable to be answered in favour of the Revenue.

So far as the second question is concerned, we have gone through the order of the Surtax Officer. The order passed by the Surtax Officer for the various assessment years do not disclose how the Surtax Officer came to the conclusion that the reserve for bad and doubtful debts cannot be taken as capital for the levy of surtax. We have also gone through the orders of the Commissioner of Income-tax (Appeals). The orders passed by the Commissioner of Income-tax (Appeals) do not disclose the details and he has also not given any reason as to how the reserve for bad and doubtful debts should be taken as capital for levy of surtax. When the matter came up before the Appellate Tribunal, the Appellate Tribunal followed its earlier order in STA Nos. 21 and 22 (Mds) of 1973 and held that the reserve for bad debts should be included in the capital baseWe are not able to find any reason from any of the orders either for the inclusion or for the exclusion that the reserve for bad and doubtful debts as part of the capital under the provisions of the Companies (Profits) Surtax Act, 1964. The Supreme Court has recently clarified the law on this topic, fortunately for us