Reserve versus provision test governs bond redemption fund treatment under surtax capital computation.

A bond redemption fund set aside from profits was not automatically a reserve for surtax capital computation; the decisive test was whether it was created to meet a known liability arising from borrowing. A sum appropriated to repay an existing obligation is a provision, not a reserve, even if sourced from surplus profits. The Tribunal had focused only on the origin of the amount and had not applied the correct commercial-accounting test distinguished by the Supreme Court. The issue was answered against the assessee and in favour of the Revenue, and the matter was remitted to the Tribunal for fresh decision under the governing ruling.

---

---

Issues: Whether the bond redemption fund was a reserve includible in the capital base under the Second Schedule to the Companies (Profits) Surtax Act, 1964, or a provision created to meet a known liability.

Analysis: The fund had to be tested on the settled distinction between reserve and provision. A sum set apart to meet an existing or known liability arising from borrowing cannot be treated as a reserve merely because it is appropriated from profits. The Tribunal had proceeded on the footing that the amount came out of surplus profits, without applying the correct test whether it was meant to meet a liability to repay the borrowing. The proper approach was that laid down in the Supreme Court decision governing the distinction between reserve and provision in commercial accounts.

Conclusion: The bond redemption fund was not finally held to be a reserve; the question was answered against the assessee and in favour of the Revenue, but the matter was remitted to the Tribunal for fresh decision in the light of the Supreme Court ruling.

---