Known liabilities as provisions, not reserves, exclude debenture redemption and gratuity amounts from surtax capital computation.

Amounts set aside to meet known liabilities are treated as provisions, not reserves, for capital computation under the surtax regime. Applying the Companies Act distinction between provisions and reserves, the Supreme Court commentary explains that a liability to redeem debentures arises when the borrowing is incurred, so a debenture redemption reserve earmarked for that liability cannot be counted as reserve capital. The same principle applies to gratuity: amounts appropriated for an ascertained gratuity obligation remain provisions even if payment falls due later. The governing rule is that sums retained for existing liabilities are excluded from reserves for surtax capital purposes.

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Issues: (i) Whether the debenture redemption reserve constituted a provision, and not a reserve, for inclusion in the capital computation under the Companies (Profits) Surtax Act, 1964. (ii) Whether the gratuity reserve constituted a provision, and not a reserve, for the purpose of capital computation under the Super Profits Tax Act, 1963.

Issue (i): Whether the debenture redemption reserve constituted a provision, and not a reserve, for inclusion in the capital computation under the Companies (Profits) Surtax Act, 1964.

Analysis: The expression "provision" in Part III, Schedule VI to the Companies Act, 1956 covers amounts retained for known liabilities, while "reserve" excludes such amounts unless the excess over what is reasonably necessary is retained. The liability to redeem debentures arises when the borrowing is made, even if repayment is deferred. Amounts set apart for redemption are therefore earmarked for a known liability. The Explanation to rule 1 of the Second Schedule to the Surtax Act also excludes amounts shown under current liabilities and provisions, and even sinking funds created for redemption of liabilities are not to be treated as reserves for capital computation.

Conclusion: The debenture redemption reserve was a provision and could not be included as reserve in the capital of the company. The conclusion is against the assessee.

Issue (ii): Whether the gratuity reserve constituted a provision, and not a reserve, for the purpose of capital computation under the Super Profits Tax Act, 1963.

Analysis: The amount appropriated to gratuity was held to fall within the settled meaning of provision rather than reserve, applying the same distinction drawn in the Companies Act between sums set apart for known liabilities and sums available as true reserves. The liability for gratuity is an ascertained business liability, and an amount earmarked for it does not acquire the character of reserve merely because payment may arise in future.

Conclusion: The gratuity amount was a provision and not a reserve. The conclusion is against the assessee.

Final Conclusion: The judgment affirms that sums appropriated to meet known liabilities, including debenture redemption and gratuity obligations, are not reserves for capital computation under the relevant surtax regime.

Ratio Decidendi: Amounts retained to meet a known liability are provisions and not reserves, and they cannot be included in capital computation merely because the liability is payable at a future date.

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