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TMI Blog1997 (7) TMI 531X X X X Extracts X X X X X X X X Extracts X X X X ..... essment year 1967-68, the figure of debenture redemption reserve has gone up to Rs. 1,12,00,000. A perusal of the balance-sheet further shows that the assessee-company had floated and actually issued 6½per 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 appears 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 become 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors will have to form an opinion as to what is reasonably necessary for meeting the known liability of a company. The opinion of an accountant or an auditor or a lawyer is quite immaterial for this purpose. 5. 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 in this case. 6. 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 Act. 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diately or in future. The date of repayment of loan may be deferred by agreement but the obligation or the liability to repay will not cease on that account. The obligation is a present obligation; Debitum in Praesentisolvendum in futuro. This aspect of the matter was explained in the judgment of this Court in Kesoram Industries & Cotton Mills Ltd. v. CWT AIR 1966 SC 1370. 10. 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 deben- tures must bfe 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'. 11. In the case of CIT v. Peico Electronics & Electricals [1987] 166 ITR 299/33 Taxman 551, 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 debenture was a future l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the heading 'RESERVES AND SURPLUSES' seven types of reserves have to be shown : (1)Capital reserves, (2)Capital Redemption Reserve, (3)Share premium account, (4)Other reserves, (5)Surplus, i.e., balance in profit and loss account, (6)Proposed additions to reserves, (7)Sinking funds. 17. However, for the purpose of computation of capital of a company under the Act, items 5, 6 and 7 will not be treated as reserves. The Second Schedule of the 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 1st 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 computat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be a reserve but a debenture redemp- tion reserve created with the same purpose will be treated as reserve and included in computation of capital of the company for surtax purposes. A construction which leads to absurdity should be avoided. 21. 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 takes this principle to its logical conclusion by provid- ing 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. 22. 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 Act. Therefore, availability of the amount for utilisation as working capital of the company or for distribu- tion 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. 23. In the premises, we are of the view that the judgment under appeal w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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