1997 (7) TMI 531 - SC - Companies Law

Supreme Court: Debenture Redemption Reserves as Provisions, Not Reserves

National Rayon Corpn. Ltd. Versus Commissioner of Income-tax

The Supreme Court held that debenture redemption reserves should be treated as provisions, not reserves, for surtax assessment purposes under the ... Whether a sum of ₹ 79 lakhs representing debenture redemption reserve was includible in computing the capital of the assessee-company for the purpose of Companies (Profits) Surtax Act, 1964? Whether the sums of ₹ 6,66,159 constituted reserve and was required to be taken into account in the computation of the capital under the Super Profits Tax Act, 1963 ? Held that:- Appeal dismissed. The surplus and unallocated balance in the profit and loss account has been specifically excluded from 'reserves' for computation of capital under the Act. Therefore, availability of the amount for utilisation as working capital of the company or for distribution of dividend cannot be a criterion for deciding whether a particular amount retained from the profits of the company will be treated as its reserve or not. The amount of ₹ 6,66,159 will have to be treated as provision and not reserve. Issues Involved:1. Inclusion of debenture redemption reserve in computing the capital of the assessee-company under the Companies (Profits) Surtax Act, 1964.2. Classification of debenture redemption reserve as 'provision' or 'reserve'.3. Treatment of gratuity reserve for the purpose of computation of capital under the Super Profits Tax Act, 1963.Issue-wise Detailed Analysis:1. Inclusion of Debenture Redemption Reserve in Computing Capital:The Supreme Court examined whether a sum of Rs. 79 lakhs representing debenture redemption reserve should be included in the capital of the assessee-company for surtax assessment purposes under the Companies (Profits) Surtax Act, 1964. The High Court had determined that this amount should be treated as a 'provision' and not a 'reserve'. The Supreme Court upheld this view, stating that an amount set apart to meet a known liability cannot be regarded as 'reserve'. The Court emphasized that only an amount in excess of what is reasonably necessary for meeting a known liability shall be treated as a reserve and not as a provision.2. Classification of Debenture Redemption Reserve as 'Provision' or 'Reserve':The Court referred to the definitions provided in Part III, Schedule VI of the Companies Act, 1956, which clearly differentiate between 'provision' and 'reserve'. It was noted that a provision is any amount written off or retained to meet a known liability, whereas a reserve is an amount set aside for future use without any specific known liability. The Court rejected the argument that amounts set apart for future use should be considered as reserves, reiterating that the liability to repay debentures arises the moment the money is borrowed, making it a present obligation. Consequently, the debenture redemption reserve must be treated as a provision.3. Treatment of Gratuity Reserve for the Purpose of Computation of Capital:In a separate appeal, the Court addressed whether the sums of Rs. 38,98,970 and Rs. 6,66,159 appropriated to gratuity reserve should be treated as reserves for the purpose of computation of capital under the Super Profits Tax Act, 1963. The Court focused on the amount of Rs. 6,66,159 and concluded that it should be treated as a provision, not a reserve, following the precedent set in Vazir Sultan Tobacco Co. Ltd.'s case. The Court set aside the High Court's order to the extent that it had treated the amount as a reserve.Separate Judgments:The Supreme Court delivered a unified judgment without separate opinions from the judges. The judgment was comprehensive and addressed all relevant issues, affirming the High Court's decision and clarifying the legal distinction between 'provision' and 'reserve'.Conclusion:The Supreme Court dismissed the appeals, affirming that debenture redemption reserves should be treated as provisions and not included in the computation of capital for surtax purposes. The Court also clarified the treatment of gratuity reserves, reiterating that amounts set aside for known liabilities must be treated as provisions. The appeals were dismissed with no order as to costs.