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Issues: Whether the amount standing to the credit of the debenture redemption sinking fund was a reserve or a provision for the purpose of computing capital base under the Companies (Profits) Surtax Act, 1964.
Analysis: The decisive test was whether the amount had been earmarked to meet a known liability in a manner that took it outside the category of reserve, or whether it remained available for the company's business use until redemption. The fund was created out of profits, credited in the profit and loss appropriation account, not shown as an earmarked investment, and the company was able to use the amounts and transfer balances to general reserve when debentures were purchased and cancelled. On that footing, the amount did not answer the character of a provision for a known liability. The Court applied the distinction between reserve and provision and followed the principle that a fund available for business use till the redemption date remains a reserve.
Conclusion: The debenture redemption sinking fund was a reserve and not a provision, and it was includible in the capital base for surtax; the question was answered in favour of the assessee and against the Department.
Ratio Decidendi: An amount appropriated out of profits which remains available for the company's business use until redemption is a reserve, not a provision for a known liability, for surtax capital computation.
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