TaxTMI 
TaxTMI 
2000 (12) TMI 920
X X X X Extracts X X X X
X X X X Extracts X X X X
....gh Court were: "(a) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the loan redemption reserve amount to Rs. 1 crore is a reserve and not a provision and is to be included in the computation of capital for the purpose of surtax? (b) Whether, on the facts and in the circumstances of the case and in view of the Supreme Court decision in the case of Vazir Sultan Tobacco Co.Ltd. (132 ITR 559), the Appellate Tribunal is right in holding so?" By the impugned judgment the High Court answered the questions in the affirmative, that is, in favour of the respondent-assessee and against the revenue. The respondent had obtained Rs. 491 lakhs as loan from Governme....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the assessee and directed the assessing officer to include the sum of Rs. 1 crore in the capital of the company for the purpose of surtax. The Tribunal held that there was no stipulation by the Government for the creation of loan redemption reserve; on its own volition the assessee had been creating a loan redemption reserve by making an appropriation of profit of Rs. 10 lakhs each year beginning from 1970; the total reserve amount to Rs. 100 lakhs remained undisturbed till the year 1987 and in the year 1988 the same was transferred to the general reserve and that the amount appropriated was not against the profits but was from out of the profit and the loan redemption reserve did not bring into existence any fresh liability because the li....
X X X X Extracts X X X X
X X X X Extracts X X X X
....9) and Metal Box Company of India Ltd. v. Their Workmen ([1969] 73 ITR 53) it was held in Vazir Sultan's case (supra): "In other words the broad distinction between the two is that whereas a provision is a charge against the profits to be taken into account against gross receipts in the p & l account, a reserve is an appropriation of profits, the asset or assets by which it is represented being retained to form part of the capital employed in the business. Bearing in mind the aforesaid broad distinction we will briefly indicate how the two concepts are defined and dealt with by the Companies Act, 1956. Under s.210 of the Companies Act, 1956, it is incumbent upon the board of directors of every company to law before the annual ge....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d II and the expressions "reserve", "provision" and "liability" have been defined in cl.7 thereof. Material portion of cl.7 of Pt.III runs as under: '(1) For the purposes of Parts I and II of this Schedule, unless the context otherwise requires,- (a) the expression 'provisions' shall, subject to sub-clause (2) of this clause, mean any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy; (b) the expression 'reserve' shall not, subject as aforesaid, include any amount written off or retained by way of providing for depreciation, renewal....
X X X X Extracts X X X X
X X X X Extracts X X X X
....character of the sum so retained or appropriated depending on several factors including the intention with which and the purpose for which such retention or appropriation has been made because the substance of the matter is to be regarded and in this context the primary dictionary meaning of the term "reserve" may have to be availed of. But it is clear beyond doubt that if any retention or appropriation of a sum is not a provision, that is to say, if it is not designated to meet depreciation, renewals or diminution in value of assets or any known liability the same is not necessarily a reserve. We are emphasising this aspect of the matter because during the hearing almost all counsel for the assesses strenuously contended before us that onc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ofit of Rs. 10 lakhs each year beginning from 1970; that the total reserve amounting to Rs. 100 lakhs remained undisturbed till the year 1987 and in the year 1988 the same was transferred to general reserve and that the balance sheet showed that the amounts credited to the 'loan redemption reserve' were not invested outside the company but remained internally invested, on the facts found, were not relevant for determining as to whether the amount was an asset or provision. As held in Vazir Sultan the true nature and character of an appropriation has to be determined with reference to the substance of the matter, one must have regard to the intention with which and the purpose for which the appropriation has been made, such intention and pur....