STATE BANK OF PATIALA, PATIALA versus THE COMMISSIONER OF INCOME-TAX, PATIALA

Citation: [1996] 3 S.C.R. 359 · Decided: 13-03-1996 · Supreme Court of India · Bench: B.P. JEEVAN REDDY · Disposal: Appeal(s) allowed

Judgment (excerpt)

~·, 
• 
STATE BANK OF PATIALA, PATIALA 
A 
v. 
THE COMMISSIONER OF INCOME-TAX, PATIALA · 
MARCH 13, 1996 
[B.P. JEEVAN REDDY AND K.S. PARIPOORNAN, JJ.] 
B 
Companies (Profits) Surtax Act, 1964: 
Sections 2(5)(8) and (9) and 4-First Schedule-Rule l(xi)(b)-
Second Schedule-Rule I (iii). 
C 
Banking Company-Reserve-Setting apart amounts for 'bad and 
doubtful debts'-No amount of bad debt actually w1itte11 off of adjusted 
against Uie amount claimed as reserves-No claim for deduction made dwing 
. the relevant assessment year;--Amount remained in the account books of 
assessee as capital-Assessee treating the amount as 'rese1ve' and not as D 
'provisions'-Held amount set apart are 'reserves' qualifying for relief under 
Rule J(xi)(b) of First Schedule and Rule l(iii) of Second Schedule. 
The question in these appeals is whether the amounts set apart by 
the assessee for "bad and donbtful debts" in the balance sheets of the 
relevant period constitute "reserve" as contemplated by Rule l(xi) (b) of E 
the First Schedule and Rule l(iii) of the Second Schedule to the Companies 
(Profits) Snrtax Act, 1964? The appellant-assessee set apart amounts as 
"reserve" for "bad and doubtful debts" for the assessment years 1971-72, 
1972-73, 1973-74, 1975-76 and 1985-86. Its claim that such sums qnalified 
as reserves for the purpose of Rule 1 (xi)(b) of the First Schedule and Rule F 
l(iii) of the Second Schedule of the Act and such sums, representing 
reserves, should be included in the capital of the appellant for appropriate 
relief was rejected by the Income Tax Ollicer. On appeal the Income Tax 
Appellate Tribunal upheld the plea of the assessee and held that the 
amounts set apart as reserves are entitled for appropriate relief under 
Rule l(xi)(b) of the First Schedule and Rule l(iii) of the Second Schedule G 
of the Act. At the instance of Revenue a reference was made to the High 
Court which held that on the facts and circumstances of the case, sums of 
money set apart by the assessee as reserves are really 
11provisions
11 and not 
"reserves" and so such sums are not entitled to the relief granted by the 
Appellate Tribunal. Against the decision of the High Court, assessee H 
359 
360 
SUPREME COURT REPORTS 
[1996] 3 S.C.R. 
A preferred appeals before this Court. 
AJl01>fog the appeals, this Court 
HELD : 1. The amounts set apart towards bad and doubtful debts 
in these cases are "reserves" qualifying for appropriate relief under rule 
B l(xi)(b) of the First Schedule and rule l(iii) of the Second Schedule to the 
Companies (Profits) Surtax Act, 1964. (374-D] 
2. The Act has levied a charge on every company for every assessment 
year - a tax called sur-tax - in respect of so much of its chargeable profits 
of the previous years as exceed the statutory deduction at the rates 
C specified in the Third Schedule. In determining the chargeable profits, 
Rule l(xi)(b) of the First Schedule mandates that in the case of a banking 
company any sum transferred by it during the previous year to any 
reserves in India including the reserves not shown as such in its published 
balance sheets in so Car as the sums transferred to such reserves are 
D attributable to income chargeable to tax under the Income-tax Act and 
have not been allowed as a deduction in compnting its total income under 
the Act, shall be exclnded. The tax is levied, on the chargeable profits, 
which excluded the statutory deduction at the rates specified in the Third 
Schedule. As per section 2(8) or the Act statutory deduction is defined to 
E mean an amount equal to ten per cent of the capital of the company as 
computed in accordance with the provisions of the second Schedule. Rule 
1 of the second Schedule mandates that the capital of the company shall 
be the aggregate of the amounts taking within its fold its other reserves as 
specified in Rule l(iii) or the Second Schedule. (367-B-E] 
F 
3. If the sums set apart in the balance sheets are only "provisions" 
the assessee will not be entitled to the relief claimed by it. Ir, on the other 
hand, the sums set apart are "reserves" within the meaning or the Act, the 
assessee will be entitled to appropriate relier. [367-F) 
4. If the transfer of amount is made ad hoc, when there is no known 
G or anticipated liability, such fund will only be treated as 'reserve'. In this 
case, substantial amounts were set apart as reserves. No amount of bad 
debt was actually written off or adjusted against the amount claimed as 
r

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