Law:

Section:

Schedule II of the Super Profits Tax Act, 1963 - Capital - Computation of - Assessment year 1963-64 - Assessee company made provision in its profit and loss account for bad and doubtful debts - Said provision was intended to meet anticipated diminution of value of assets of assessee, resulting from unrealised debts - Said contingency was known and anticipated at date of balance-sheet and amount set apart for this item, though not determined with accuracy, was estimated - Whether amount in question appropriated in profit and loss account could not be said to form part of capital employed in business - Held, yes FACTS During the relevant accounting period, the assessee company made a provision in its accounts for bad doubtful debts, under two separate heads, namely, 'Debts outstanding for a period exceeding six months and considered doubtful' and also 'Advances recoverable in cash or in kind or value to be received unsecured and considered doubtful'. The assessee claimed that the aforesaid provision should be considered as 'reserve' and included in the computation of its capital under the Second Schedule. The ITO did not accept the assessee's contention and did not include the said amount in the computation of capital. However, the AAC allowed the assessee's claim. On further appeal by the revenue, the Tribunal held that the provision made for bad and doubtful debts in the instant case was a provision for some future loss that may or may not arise and the liability therefore was neither known nor could be determined with any substantial accuracy on the relevant date, as such, this item came within the category of a 'reserve' and not that of a 'provision'. On reference: HELD From the decision of the Supreme Court in the case of Metal Box Company of India Ltd v. Their Workmen [1969] 73 ITR 53, it appeared that the relevant charactertics of a provision are: (a) provisions are made against anticipated losses and contingencies. (b) Provisions are charges against profits. (c) Provisions are taken into account in the profit and loss account against gross receipts. (d) An amount set aside out of profits designed to meet a liability or contingency or commitment or…

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