Provision versus reserve under surtax law: loan redemption reserve treated as a provision and excluded from capital computation.

The distinction between a provision and a reserve under the surtax law depends on substance, purpose, and surrounding circumstances, not merely on how the amount is appropriated in the accounts. A provision is a charge against profits made to meet a known liability or diminution in asset value, while a reserve is an appropriation of profits retained as part of capital employed. Amounts set aside to meet a loan liability, rather than to acquire an asset or strengthen capital, are treated as provisions. On that basis, the amount in the loan redemption reserve was held to be a provision and not a reserve, so it could not be included in capital for surtax computation.

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Issues: Whether the amount standing in the loan redemption reserve was a reserve or a provision for the purpose of computing capital under the surtax law.

Analysis: The applicable distinction between a provision and a reserve was drawn from the statutory accountancy framework in the Companies Act, 1956 and the principles stated in earlier precedent. A provision is a charge against profits made to meet a known liability or diminution in value of assets, while a reserve is an appropriation of profits retained as part of capital employed. The fact that an amount is appropriated out of profits or set apart by the assessee's own volition does not by itself make it a reserve. The true nature of the amount must be determined from its substance, purpose, and surrounding circumstances. Since the amount was set apart to meet loan liability and not to acquire an asset, it answered the character of a provision.

Conclusion: The amount was a provision and not a reserve, and it was not includible in the capital computation for surtax purposes; the finding was against the assessee and in favour of the Revenue.

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