TMI Blog1999 (10) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... for purpose of surtax ?" The factual position is indicated in the statement of case is as follows : The assessee, a public limited company, admitted a chargeable profit of Rs. 8,22,586. While computing the statutory deduction of capital, a sum of Rs. 3 lakhs as "capital redemption reserve" was included. This was excluded by the Assessing Officer. The Commissioner of Income-tax (Appeals) (in short "the CIT (Appeals)") allowed the deduction. In appeal, the Tribunal, following its earlier order in the assessee's case in STA Nos. 9 and 10/Coch. of 1986, accepted the assessee's stand and held that a general reserve by definition is a reserve, unlike a provision and therefore it has to form part of the capital of the company for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reserve is a standby created out of profits of a business to meet contingencies which are unknown and which cannot be foretold on the basis of know]edge of current facts. It is created by way of appropriation of profits. It is not a charge against profits. Since it is an appropriation, it does not go out of the business, but is retained in the business as a part of the capital. But a provision is a charge against profits. It is created to meet liabilities, which are known and foreseeable but whose exact timing, and hence whose quantification alone, are uncertain, at the moment. As stated by William Pickles in the book Accountancy (third edition at page 184) : "A provision is an amount set aside out of profits and other surpluses provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tained by way of providing for any known liability, The characteristics of a "reserve" are : (a) reserves are appropriations of profits, the assets by which they are represented being retained to form part of the capital employed in the business ; (b) reserves are not designed to meet any liability, contingency, commitment or diminution in the value of assets known to exist at the date of the balance-sheet ; (c) reserves are something set apart for future use or enjoyment ; (d) general reserves and reserve funds are shown as part of the owners' interest. Besides, though the expression "reserve" is not defined in the Act, it cannot be forgotten that it occurs in a taxing statute which is applicable to companies only and to no other assessa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if any retention or appropriation of a sum is not a provision, that is to say, if it is not designated to meet depreciation, renewals or diminution in value of assets or any known liability, the same is not necessarily a reserve. The question whether the concerned amounts in fact constituted "reserves" or not will have to be decided by having regard to the true nature and character of the sums so appropriated depending on the surrounding circumstances particularly the intention with which and the purpose for which such appropriations had been made. In CIT v. Vazir Sultan Tobacco Co. Ltd. [1988] 173 ITR 567 (AP), the position was illuminatingly stated by the court as follows : "Schedule VI to the Companies Act prescribes the form in whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve been available for dividend, be transferred to a reserve fund, to be called the 'capital redeemption reserve account', a sum equal to the nominal amount of the shares redeemed ; and the provisions of the said Act relating to the reduction of share capital shall apply in that behalf. This provision also gives an indication that 'capital redemption reserve' partakes of the nature of share capital. For the above reasons, we agree with the Tribunal that the capital redemption reserve should be taken into account while determining the capital base of the company." In view of the aforesaid position, we are of the view that the decision in National Rayon's case [1997] 227 ITR 764 (SC), has no application to the facts of the case and the concl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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