Law: Income Tax Act, 1922

Section:

Income-tax-----Company---Surtax---Chargeable profits---Computation of capital--¬Difference between "reserves" and "provisions" ---Banking company--¬Amounts provided for bad and doubtful debts in balance-sheet---No appropriation for bad debts---Amounts remaining in account by way of capital and treated as "reserve" ---Constitute reserves for purposes of R.l (xi)(b) of First Sched. and R. 1(iii) of Second Sched.---Companies (Profits) Surtax Act, 1964, Scheds. I & 11---[CIT v. State Bank of Patiala (1993) 203 ITR 150 reversed]. The Companies (Profits) Surtax Act, 1964, levies a charge on every company for every assessment year a tax called surtax in respect of so much of its chargeable profits of the previous year as exceeds the statutory deduction at the rates specified in the Third Schedule. Rule 1 of the Second Schedule to the Companies (Profits) Surtax At, 1964, 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 1(iii) of the Second Schedule. If the sums set apart in the balance-sheets are only "provisions" the assessee will not be entitled to the relief claimed by it. If, on the other hand, the sums set apart are "reserves" within the meaning of the Act, the assessee will be entitled to appropriate relief. The distinction between a provision and a reserve is, in commercial accountancy fairly well-known. Provisions made against anticipated losses and contingencies are charges against profits and, therefore, to be taken into account against gross receipts in the profits and loss account and the balance sheet. On the other hand, reserves are appropriations of profits, the assets by which they are represented being retained to form part of the capital employed in the business. Provisions are usually shown in the balance-sheet by way of deductions from the assets in respect of which they are made whereas general reserves and reserve funds are shown as part of the proprietor's interest. An amount set aside out of profits and other surpluses, not designed to meet a liability, contingency, commitment or diminution in the value of assets known to exist at the date of the…

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