TaxTMI 
TaxTMI 
1997 (7) TMI 113
X X X X Extracts X X X X
X X X X Extracts X X X X
....ne up to Rs. 1,12,00,000. A perusal of the balance-sheet further shows that the assessee-company had floated and actually issued 6 1/2 per cent. secured redeemable mortgage debentures, as pointed out earlier, against the security of land, buildings and machinery of the company and a floating charge on the undertaking. None of these debentures appear to have been redeemed during the relevant previous years. There is no dispute regarding any of these facts. In these circumstances, it clearly appears to us that the debenture redemption reserve must be regarded as a provision made by the assessee-company to enable it to redeem the said debentures when they became due for redemption. Since the aggregate amount of such debentures is much larger than the amount of the debenture redemption reserve, we fail to see how it can be said that there was any excess as such in this appropriation which could be taken as reserve. It is true that all the debentures had not become redeemable during the relevant previous years, but that does not make any difference because an amount set aside to meet a future liability, which was certain to come into existence, as in this case, must be regarded as a pro....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... accountant or an auditor or a lawyer is quite immaterial for this purpose. The finding of fact in this case is that the amount set apart for redemption of debentures is less than the company's liability on this account. Therefore, the answer to the question raised must be that the amount of Rs. 79 lakhs representing debenture redemption reserve cannot be included in the capital of the company for the purpose of surtax assessment. The facts stated in the judgment of the High Court go to show that the amount was not larger than the amount which had to be paid for redemption of the debentures. Therefore, there is no question of any excess provision of this case. In the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 (SC), it was held that " provision " and " reserve " had not been defined under the Companies (Profits) Surtax Act, 1964. Therefore, the two concepts " reserve " and " provision " which are fairly well known in commercial accountancy and which are used under the Companies Act dealing with preparation of balance-sheets and profit and loss accounts, will have to be gathered from the meaning attached to them by the Companies Act itself. Moreover, in Vaz....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he obligation is a present obligation; debitum in praesenti, solvendum in futuro. This aspect of the matter was explained in the judgment of this court in Kesoram Industries and Cotton Mills Ltd. v. CWT [1966] 59 ITR 767. By issuing the debentures, the company had taken a loan against the security of its assets. This loan may not be repayable in the year of account. But the obligation to pay the loan is a present obligation. Any money set apart in the accounts of the company to redeem the debentures must be treated as moneys set apart to meet a known liability. The debentures will have to be shown in the company's balance-sheet of the year as " liability ". In the case of CIT v. Peico Electronics and Electricals [1987] 166 ITR 299, the Calcutta High Court held that the debenture redemption reserve will have to be treated as a " reserve " and not " provision " because, none of the debentures became redeemable during the accounting period. The liability to redeem the debentures was a future liability. The debentures had been separately shown in the balance-sheet as a liability. The reserve had been created by appropriation of profits and not by way of a charge on the revenue. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s, (5) Surplus, i.e., balance in profit and loss account. (6) Proposed additions to reserves, (7) Sinking funds. However, for the purpose of computation of capital of a company under the Companies (Profits) Surtax Act, 1964, items Nos. (5), (6) and (7) will not be treated as reserves. The Second Schedule to the Surtax Act lays down the rules for computation of the capital. Rule 1 contains an Explanation to the following effect : " Explanation.---For the removal of doubts it is hereby declared that any amount standing to the credit of any account in the books of a company as on the first day of the previous year relevant to the assessment year which is of the nature of item (5) or item (6) or item (7) under the heading 'Reserves and surplus' or of any item under the heading 'current liabilities and provisions' in the column relating to 'liabilities' in the 'form of balance-sheet' given in Part I of Schedule VI to the Companies Act, 1956 (1 of 1956), shall not be regarded as a reserve for the purposes of computation of the capital of a company under the provisions of this Schedule. " In Batliboi's Advanced Accountancy, 27th edition, page 678, the nature of a sinking....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion of capital of the company for surtax purposes. A construction which leads to absurdity should be avoided. The basic principle is that any amount retained by way of providing for a known liability will not be " reserve ". Explanation to rule 1 of the Second Schedule to the Surtax Act takes this principle to its logical conclusion by providing that even a sinking fund, which has to be shown as a reserve in the prescribed form of balance-sheet, will not be treated as " reserve " for the purpose of computation of capital. It is further to be noted that the surplus and unallocated balance in the profit and loss account has been specifically excluded from " reserves " for computation of capital under the Surtax Act. Therefore, availability of the amount for utilisation as working capital of the company or for distribution of dividend cannot be a criterion for deciding whether a particular amount retained from the profits of the company will be treated as its reserve or not. In the premises, we are of the view that the judgment under appeal was rightly decided. We are unable to uphold the contrary decisions in the cases of Peico Electronics and Electricals [1987] 166 ITR 299 ....