DEPUTY COMMISSIONER OF INCOME TAX Vs. BEARDSELL LIMITED

JUDGEMENT

(1.) THIS appeal is filed against the order of the Income-tax Appellate Tribunal, Madras "A" Bench, in I. T. A. No. 2225/Mds. of 1991, in connection with the assessment year 1989-90.

(2.) BEARDSELL Limited, Chennai, the respondent in this reference, is a public limited company. The said company filed its return of income with the Deputy Commissioner of Income-tax, Special Range-1, Chennai, showing a total income of Rs. 53,49,950, computing as per the provisions of Section 115J of the Income-tax Act, 1961 (hereinafter referred to as "the Act"). In the said return, a sum of Rs. 46,64,750 was shown as "provision for doubtful debts" and the same was claimed to be exempted from including in the taxable profit. The Deputy Commissioner referred to above disallowed the provision created by the assessee for bad and doubtful debt of Rs. 46,64,750 on the ground that the provision made is not for ascertained liabilities as mentioned in Section 115J(1)(c) of the Act and, accordingly, included in the net profit in the profit and loss account for the relevant previous year. The respondent-company filed a petition under Section 154 of the Act for rectification of the order passed by the Deputy Commissioner of Income-tax referred to above, on the ground that the authority concerned cannot reassess except as mentioned in the return under Section 143(1)(a) of the Act. The Deputy Commissioner of Income-tax referred to above refused to comply with the request made by the respondent-company on the ground that the provisions of Section 115J do not permit creation of a provision for "doubtful debt" which is an unascertained liability and accordingly confirmed the earlier order of assessment and intimated the same under Section 143(1)(a) of the Act.

(3.) LEARNED counsel for the appellant relied on a decision CIT v. Jyoti Ltd., 1996 219 ITR 388 , to substantiate the claim of the appellant. It has been held by the apex court in the case above that (headnote) "an amount set aside out of profits and other surpluses, not designed to meet a liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance-sheet is a reserve but an amount set aside out of profits and other surpluses to provide for any known liability of which the amount cannot be determined with substantial accuracy is a provision". It has also been held that (headnote) "where the liability has actually arisen or been anticipated legitimately by the assessee though the quantum of the liability has not been determined, a fund to meet such present liability cannot be treated as a 'reserve'. A fund, however, created for payment of a liability which had not already arisen or fallen due but is only a provision with regard to the sum that might become liable to be paid is 'other reserves' within the meaning of Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, and should be taken into account in computing the capital of the company for the purpose of the Act."