Law:

Section:

Schedule II to the Companies (Profits) Surtax tax Act, 1964 - Computation of Capital - Assessment years 1964-65 to 1966-67 - Whether where reserve was created for depreciation on investments but there was no evidence of depreciation in value of or of any liability on account of depreciation in value of investment and it was based on hypothetical evaluation said depreciation reserve should be considered as reserve within meaning of rule 1 AO schedule II and thus be included in capital computation for purpose of Act - Held, yes - Whether reserve created for bad and doubtful debts in excess of amount towards bad and doubtful debts which had been provided in balance-sheet, should be treated as resolve within meaning of rule 1 and thus be includible in capital computation - Held, yes FACTS The assessee claimed that its reserves for depreciation on investments should be included in its capital computation. The assessee had also created reserve for bad and doubtful debts on ad hoc basis year after year. The assessee claimed that difference between the reserve and provision debtfull debt represented the excess of the reserves over the provision and since the reserves were created on an ad hoc basis, that excess partook of the nature of the reserves should be included in the capital computation. The ITO did not accept the assessee's claim. The AAC, however, allowed the assessee's claim. The Tribunal held that the reserve for depreciation on investments and the reserve for doubtful debts were reserve within the meaning the rule 1 of the Second Schedule and were, therefore, includible in the computation of capital for purpose of the Act. The Tribunal, dismissed the revenue's appeal accordingly. On reference: HELD In the instant case, there was not any evidence of any depreciation in the value or of any liability on account of depreciation in the value of the investment. It was merely based on a hypothetical evaluation. Therefore, in the light of commercial accountancy, as understood in theMetal Box's Co. of India Ltd. v. Thein workmen case [1969] 73 ITR 53 (SC) or in the light of the Explanation to rule 1 of Schedule II or in the light of ordinary sense, this provision…

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