TMI Blog1997 (7) TMI 531X X X X Extracts X X X X X X X X Extracts X X X X ..... - - - Dated:- 29-7-1997 - SUHASC. SEN AND K.T. THOMAS, JJ. T.A. Ramachandran and Ms. A.K. Verma for the Appellant. J. Ramamurthy and B.S. Ahuja for the Respondent. JUDGMENT Sen, J. - The point that falls for determination in this case is whether a sum of ₹ 79 lakhs representing debenture redemption reserve was includible in computing the capital of the assessee-company for the purpose of Companies (Profits) Surtax Act, 1964 ('the Act.'). 2. The High Court took the view that the amount set apart to redeem the debentures has to be treated as 'provision' and not as 'reserve'. The facts stated by the High Court in this regard are as follows : From the balance-sheets for the said periods, we find that in the calendar year 1965, the development rebate reserve was ₹ 79,00,000. However, in the next calendar year 1966, which is relevant to the assessment year 1967-68, the figure of debenture redemption reserve has gone up to ₹ 1,12,00,000. A perusal of the balance-sheet further shows that the assessee-company had floated and actually issued 6 per cent secured redeemable mortgage debentures, as pointed out earli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure contracted for and all disputed or contingent liabilities. (2) Where ( a )any amount written off or retained by way of providing for depre- ciation, renewals or diminution in value of assets, not being an amount written off in relation to fixed assets before the commence- ment of this Act; or ( b )any amount retained by way of providing for any known liability; is in excess of the amount which in the opinion of the directors is reasonably necessary for the purpose, the excess shall be treated for the purposes of this Schedule as a reserve and not as a provision. [Emphasis supplied.] 4. The definition clearly indicates that if an amount is retained by way of providing for any known liability, that amount shall not be treated as reserve. Clause 7(2)(b) makes it clear that only an amount which is in excess of what is reasonably necessary for meeting a known liability shall be treated as reserve and not as provision. The directors 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for future use will not be 'provision'. This argument is without any merit. It goes against the very definition of 'provision' and 'reserve' provided by the Companies Act. In the form of balance sheet in Schedule VI the provisions have to be made, inter alia, for contingencies, Provident Fund Scheme, Insurance, Pension and Staff Benefit Schemes. Amounts set apart for the aforesaid purposes will mostly be for future use. Question of payment of pension or provident fund can only arise when an employee retires. 8. Mr. Ramachandran advanced another argument that there was no present liability to pay any amount to the debenture-holders. That liability will arise only when the amount falls due for payment. Therefore, there was no existing liability for redeeming the debentures in the relevant year of account. 9. We are unable to uphold this argument. The liability to repay arises the moment the money is borrowed. The amount borrowed may be repayable immediately 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; Deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n liability. 13. The Delhi High Court in the case of CIT v. Modi Industries Ltd. (No. 2) [1992] 197 ITR 655 also took the view that the amount set apart out of profits to redeem the debentures had to be treated as reserves because, there was no liability in the current year to redeem the debentures. 14. We are unable to agree with this view for the reasons given earlier in the judgment. 15. Apart from this, the argument that found favour with the Courts in the cases of Peico Electronics Electricals ( supra ) and Modi Industries Ltd. (supra) that if the retention or appropriation of a sum out of profits and surpluses was for an unknown liability or for a liability which did not exist on the relevant date it must be regarded as a 'reserve', was specifically rejected by this Court in Vazir Sultan Tobacco Co. Ltd.'s case ( supra ) . This argument of the assessee was held to be fallacious (page 571 of the report). 16. There is another aspect of this case. In the prescribed form of balance sheet, under the heading 'RESERVES AND SURPLUSES' seven types of reserves have to be shown : (1)Capital reserves, (2)Capital Redemption Res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amounts set apart for redemption of debentures are not in the nature of a charge against profits but merely appropriation of profit. In Peico Electronics Electricals 'case ( supra ), one of the grounds which weighed with the Court was the argument that the sinking fund has to be utilised by making investments and did not form part of the working capital of the company but the amount lying to the credit of debenture redemption reserve was available to the company to be used as working capital. 20. We fail to comprehend this distinction. What has to be computed under Rule 1 of the Second Schedule is the capital of the company and not its working capital. The amount shown as sinking fund may be invested in a fruitful way so that the principal and gains from the investments taken together will enable the company to pay off its debts. Investment of monies standing to the credit of the Sinking Fund is nothing but utilisation of the company's assets for the discharge of its liabilities. There is no rational explanation why a sinking fund for redemption of debentures will not be a reserve but a debenture redemp- tion reserve created with the same purpose will be treate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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