1992 (5) TMI 17 - HC - Income Tax

Summary

Issues Involved:
1. Whether the amount in the "Debenture Redemption Fund" could be included in the capital base for surtax purposes.
2. Distinction between "provision" and "reserve" under the Companies (Profits) Surtax Act, 1964.
3. Interpretation of relevant legal precedents and statutory provisions.

Issue-wise Detailed Analysis:

1. Whether the amount in the "Debenture Redemption Fund" could be included in the capital base for surtax purposes:
The Income-tax Appellate Tribunal referred the question to the High Court to determine if Rs. 40,50,000 in the "Debenture Redemption Fund" could be included in the capital base. The Tribunal found that the fund was created by appropriating profits and was utilized in the business, not distributed among shareholders. The Department conceded that these funds could not be regarded as sinking funds. Consequently, the Tribunal concluded that the fund amounted to a reserve.

2. Distinction between "provision" and "reserve" under the Companies (Profits) Surtax Act, 1964:
The court examined the definitions provided in Part III of Schedule VI to the Companies Act, which defines "provision" and "reserve." A provision is any amount retained for depreciation, renewals, diminution in value of assets, or any known liability, whereas a reserve is an appropriation of profits not meant for any known liability. The Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 clarified that a provision is a charge against profits, while a reserve is an appropriation of profits. The court emphasized that the liability must be of the year in question for it to be considered a provision.

3. Interpretation of relevant legal precedents and statutory provisions:
The court referred to various precedents, including decisions of the Supreme Court and High Courts, to interpret the terms "provision" and "reserve." In Vazir Sultan's case, the Supreme Court held that the substance of the matter must be regarded, and the intention and purpose of the appropriation are crucial. The court also referred to decisions like CIT v. Hindustan Lever Ltd. [1986] 160 ITR 700 (Bom) and CIT v. National Rayon Corporation Ltd. [1986] 160 ITR 716 (Bom), which dealt with similar issues. However, the court found that the liability must exist in the year in question for it to be considered a provision. The court also referred to cases like Addl. CIT v. Bharat Fritz Werner (P.) Ltd. [1979] 118 ITR 25 (Kar) and CIT v. Placid Ltd. [1984] 150 ITR 74 (Cal), which supported the view that amounts set apart for future liabilities are reserves.

Conclusion:
The High Court concluded that the "Debenture Redemption Fund" should be regarded as a reserve and not a provision. The court emphasized that the liability must be of the year in question for it to be considered a provision. Since the debenture redemption was a future liability, the amount set apart for it was a reserve. Therefore, the answer to the referred question was in the affirmative, in favor of the assessee, and there was no order as to costs.