Law:

Section:

Rule 1 of second schedule to the Companies (Profits) Surtax Act, 1964-Capital-Computation of-Whether ad hoc transfers to bad and doubtful reserve account and retirement gratuity reserve qualify to be treated as reserves includible in computation of capital-Held, yes-Whether amounts representing specific doubtful debt duly taken into account by assessee to be treated as reserve-Held, no-Assessee showed a lower valuation of stock-in-trade-Amount corresponding to lower valuation of stock shown as "stock reserve"-Whether tribunal right in rejecting assessee's claim for treating said "stock reserve" as "reserve" for purposes of surtax without considering whether said "stock reserve" could be considered to be a "reserve" at all-Held, no [case remanded back on this point] Facts During the assessment years 1966-67 to 1970 -71, the assessee-company claimed the following to be treated as reserves for the purposes of computation of its capital under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act (i) the entire amount of reserve for bad and doubtful debts including the amounts representing specific doubtful debts already taken into account by the assessee as bad debt but not allowed as deduction under the Income-tax Act; (ii) certain amounts shown as reserve for retirement gratuity which had not been allowed as deduction in computing the income of the assessee for the purposes of income-tax ; and (iii) a certain sum shown as "stock reserve" under the "liabilities" side of the balance sheet. This last reserve styled as "stock reserve" represented the diminution of the value of stock-in-trade which should normally be valued at cost or market value, whichever is lower. This diminution had resulted because the assessee had valued its unsold stock remaining in hand for over a year at nil and the stock-in-hand for less than one year at cost. The stocks were thus shown at a lower valuation to the extent of the first category of stock being valued at nil.The amount corresponding to the aforesaid reduction in the value of the closing stock by reason of deductions from stock-in-trade was treated by the assessee as "stock reserve". The ITO and the AAC disallowed…

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