Loan redemption amount treated as provision, not reserve, for surtax capital computation under the substance-over-label principle.

An amount set apart to meet an existing loan repayment liability is a provision, not a reserve, for surtax capital computation under the Companies (Profits) Surtax Act, 1964. The label used in the accounts is not decisive; the true character depends on substance, purpose, and surrounding circumstances. Here, funds earmarked for loan redemption were directed to discharge a liability rather than create capital available as a reserve, so they were not includible in capital. The assessee therefore failed on the classification issue, and the amount was treated as a provision.

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Issues: Whether the amount credited as loan redemption reserve of Rs. 1 crore was a reserve or a provision for the purpose of computation of capital under the Companies (Profits) Surtax Act, 1964.

Analysis: The governing distinction is that a provision is a charge against profits made for a known liability or other specified diminution, whereas a reserve is an appropriation of profits retained as part of the capital employed. The label given in the accounts is not decisive. The true nature of the appropriation must be determined from its substance, purpose, and surrounding circumstances. Amounts set apart to meet loan repayment liabilities are directed towards clearing an existing liability and not towards creating capital available as a reserve. On the facts, the amount was earmarked for repayment of loan liability and could not be treated as an asset or reserve merely because it had been described as a loan redemption reserve.

Conclusion: The amount was a provision and not a reserve, and it was not includible in the capital computation.

Final Conclusion: The appeal succeeded, the High Court's answer was set aside, and the questions were answered against the assessee and in favour of the revenue.

Ratio Decidendi: For surtax computation, an appropriation made to meet an existing loan liability is a provision if its substance shows it is earmarked to discharge that liability, and it cannot be treated as a reserve merely because it is described as such in the accounts.

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