9911796707
TMI Blog1996 (11) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... year 1974-75, in computing the capital base as on July 1, 1972, the first day of the previous year under the Second Schedule to the Surtax Act, the Income-tax Officer excluded the debenture redemption sinking fund of Rs. 2,93,556 and for the second year, a similar figure of Rs. 1,75,000 on the ground that under the Explanation below rule 1 of the Second Schedule, the sinking fund could not be taken as a "reserve". On the assessee's appeal, the Commissioner of Income-tax (Appeals), referring to a passage occurring in Pickles on Accountancy under the caption, "Payment of Debentures at Maturity" came to the conclusion that the amounts set apart were not "reserves" but "provision" retained by way of providing for a known liability, namely, "the repayment of the debts owing by the company to the debenture holders". The Commissioner of Income-tax (Appeals) also referred to Vazir Sultan Tobacco Co. Ltd.'s case [1981] 132 ITR 559, and concluded that the intention of the company was to set apart certain amounts from year to year so as to enable it to repay the debenture-holders and hence the appropriation was a provision to meet the known liability. In this view of the matter, the Commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,72,800 2,95,356 30-6-1970 Tr. 3,00,000 Profit 63 5,95,419 Purchases 3,04,500 2,90,919 30-6-1971 Tr. 3,00,000 Profit 75 5,90,994 30-6-1972 Tr. 3,00,000 Profit 562 5,72,056 Purchases TR to GR 2,78,500 2,93,556 30-6-1973 Tr. 3,00,000 Profit 83 5,93,639 Purchases TR to GR 3,77,500 2,16,139 30-6-1974 Tr. 3,00,411 Profit 450 5,17,000 Purchases TR to GR 3,42,000 1,75,000 --------------------------------------------------------------------------------------------------------------------------------------------------- Before the Tribunal, the assessee contended on the above facts that the amount set apart for the debenture redemption sinking fund was an amount to be utilised for redemption of debentures appropriated out of profits. The assessee did not invest the amounts from the sinking fund in any securities and there was no sinking fund investment on the assets side of the balance-sheet. Thus, considering the submissions made by both the parties and after noting down the difference between "reserve" and "provision", in the light of the decision of the Supreme Court in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, and in view of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of proposed additions to "reserve" and item (7) "sinking fund". Since the debenture redemption sinking fund is covered by item (7) and, therefore, is specifically prohibited from being included in the capital base, the said amount cannot be included. The amount also could be regarded as "provision" as defined in clause (7) of Part III of Schedule VI to the Companies Act, 1956, since the amount actually represented provisions for a known liability, namely, the necessity to redeem the debentures within a particular date. According to the assessee, the redemption reserve sinking fund is actually a "reserve". This is evident from the fact that transfers are made from this account to "general reserve" every year. In other words, from the fact that such transfers are made, the real nature of this account as a "reserve" is abundantly clear. Further, the amount in question is not represented by any specific or earmarked investment. Therefore, according to the assessee, the amount set apart for the debenture redemption sinking fund is an amount to be utilised for redemption of debentures. It is an amount appropriated from profits to prevent the amounts set apart from profits being distri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned interest, which was also credited to this account. The company had resorted to purchase of its own debentures at par or below par with the result, there were profits on repurchase of the debentures, in some of the years, which were also credited to this account. As and when debentures are purchased and cancelled, the value of the debentures were transferred by the company from the debenture redemption sinking fund account to the general reserve account. Now, as on July 1, 1972, the company's accounting year is the year ending June 30, there was a balance of Rs. 2,93,556 in the debenture redemption sinking fund account. Similarly, as on July 1, 1974, there was a balance of Rs. 1,75,000 in this account. The company included Rs. 2,93,556 in the capital base, as an item of reserve in respect of its assessment for the year 1974-75. Similarly, it included the sum of Rs. 1,75,000 in its capital base in the assessment for the year 1976-77. According to the Department, under the Explanation below rule I of the Second Schedule to the Companies (Profits) Surtax Act, 1964, a sinking fund could not be taken as a "reserve". The Explanation specifically prohibits the inclusion as a "reserv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or deciding the issue arising in this case, whether the debenture redemption sinking fund is a "reserve" or "provision". A perusal of the facts would go to show that the amounts transferred to the sinking fund had earned interest, which is also credited to this account. The company had resorted to purchase of its own debentures at par or below par, with the result that there were profits on the repurchases of the debenture in some of the years, which were also credited to this account. As and when debentures are purchased and cancelled, the value of the debentures cancelled were transferred by the company from the debenture redemption sinking fund account to the general reserve account. As on July 1, 1972, the company's accounting year is the year ending June 30, there was a balance of Rs. 2,93,556 in the debenture redemption sinking fund account. Similarly, as on July 1, 1974, there was a balance of Rs. 1,75,000 in this account. The company included Rs. 2,93,556 in the capital base as an item of "reserve" in respect of its assessment for the year 1974-75. Similarly, it included a sum of Rs. 1,75,000 in the capital base in the assessment year 1976-77. Therefore, it remains to be se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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