COMMISSIONER OF INCOME TAX Vs. JUGANTAR P LTD

JUDGEMENT

(1.) In this reference under Section 256(1) of the I.T. Act, 1961, the following question has been referred to this court:

(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.