COMMISSIONER OF INCOME TAX, GUJARAT versus JYOTI LTD.

Citation: [1996] 2 S.C.R. 713 · Decided: 15-02-1996 · Supreme Court of India · Bench: B.P. JEEVAN REDDY · Disposal: Case Partly allowed

Judgment (excerpt)

I 
~t 
COMMISSIONER OF INCOME TAX, GUJARAT 
v. 
JYOTI LTD. 
FEBRUARY 15, 1996 
(B.P. JEEVAN REDDY AND S.B. MAJMUDAR, JJ.] 
Income Tax 1961. 
Companies (Profits) Surtax Act 1964-Section 256(1)/18-Surtax 
liability-Computation of Capital-Statutory deductions-Rese1ves for bad 
and doubtful debts and gratuity-Held-Reserves for bad and doubtful debts 
are pan of capital because such liability cannot be ascertained-Gratuity 
reserves should be based upon actuarial valuation to f onn a pmt of capi-
tal-R.emanded to the Surtax officer through the Tribunal for reconsideration. 
The respondent assessee is a company carrying on business at 
Baroda. The respondent was governed by the provisions of the Surtax Act. 
The respondent claimed that in computing its capital base for the assess-
ment years 1967-68 and 1968-69 gratuity reserve of Rs. 5,60,000 and reserve 
for doubtful debts of Rs. 85,000 should be taken into consideration. The 
Surtax Officer rejected the claim. Appeal before the Appellate Assistant 
Commissioner of Surtax was allowed. Following the decision of the 
Tribunal in S.T.A. Nos. 7 and 8 of 1971-72 out of the assessee's surtax 
assessments for the assessment years 1965-66 and 1966-67, it was held that 
A 
B 
c 
D 
E 
the aforesaid reserves should be considered as part of the capital while 
computing the capital base for calculation of statutory deduction. Upon 
F 
an appeal by the Appellant the Tribunal although confirmed the view taken 
by the Commissioner, referred to the High Court for its opinion the 
question 'Whether on the facts and in the circumstances of the case, the 
Tribunal was correct in law in holding that reserve for doubtful debts and 
gratuity reserve created by the assessee were includible in computing the G 
capital for the purpose of computing statutory deduction ?" The High 
Court reframed the question by· the consent of both the parties as to 
''Whether on the facts and in the circumstances of case, the Tribunal was 
correct in law holding that rehabilitation reserve, reserve for doubtful 
debts and gratuity reserve created by the assessee were includible in · 
computing the capital for the purpose of computing statutory deduction?" H 
713 
714 
·SUPREME COURT REPORTS 
r1996] 2 S.C.R. 
A The reframed question was answered against the appellant and in favour 
of the' re~pondent. Hence these appeals. 
B 
Before this court, the appellants. contended that so for as gratuity 
reserve is concerned it was assumed that merely because the respondent 
had not thought it fit too resort to any actuarial valuation and had styled 
the amount as forming part of a reserve, almost automatically, the Surtax 
Officer had to treat the said amount as set apart by way of a reserve and 
not a provision, which amounts to giving complete latitude to the respon-
dent. If the respondent resorts to any actuarial valuation of liability to pay 
gratuity to its employees then it would be a provision but if the respondent 
C does not choose to do so, by its very inaction, it could insist that the 
provision made for discharging the liability to pay gratuity should be 
treated as a reserve. Such an absolute discretion given to the respondent 
would denude the Surtax Officer of his statutory power and obligation to 
compute the correct capital base of the respondent company for the 
D purpose of assessing the Surtax liability to the concerned company. 
E 
F 
Partly allowing the appeals, this court 
HELD: 1. As a clear finding of fact was reached by the Tribunal that 
bad debt reserve· was created out of Profit and Loss Account without 
reference to the out-standing sundry debtors and was not created with a 
view to meet any anticipated liability it had to be held that the said amount 
which was set apart for meeting bad and doubtful debts was by way of 
reserve and not a provision. It was also not the Revenue's case that the · 
amount s'et apart for bad and doubtful debts reserve was less than or equal 
to the amount necessary to be provided for meeting ascertain~d liability. 
On the other hand the amount appeared to be more than\ what was 
reasonably necessary to be provided for in respect of the bad and doubtful 
debts as the amount of bad and doubtful debts itself was not as ascertained 
amount. Consequently no fault can be found with the decision rendered by 
the authorities below and the High court that the provision of Rs. 85,000 
G for doubtful debts had to be treated as reserve which could be legitimately 
included

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