TMI Blog2000 (12) TMI 97X X X X Extracts X X X X X X X X Extracts X X X X ..... r Sultan's case [1981] 132 ITR 559 (SC), the true nature and character of an appropriation has to be determined with reference to the substance of the matter, one must have regard to the intention with which and the purpose for which the appropriation has been made, such intention and purpose being gathered from the surrounding circumstances. Vazir Sultan's case [1981 (9) TMI 105 - SUPREME Court) also holds that if any retention or appropriation of a sum falls within the definition of "provision" it can never be a reserve but it does not follow that if the retention or appropriation is not a "provision" it is automatically a reserve. The fact that the amount has been set apart for redeeming liabilities makes it obvious that the intention is for clearing liabilities and not acquiring an asset. Bearing in mind these aspects, it is clear that the amount in question cannot be regarded as a "reserve". It has to be regarded as a "provision". Clearly the amount was set apart to meet a loan liability. It may also be noticed that the amount set apart is less than the respondent's liabilities. It cannot be regarded as an asset. The decision in Vazir- Sultan's case was not correctly appreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it is an appropriation from profit by way of a fund even then it partakes of the nature of a "sinking fund" only which can be only for clearing of an ascertained liability. It further held that the fact that, I sum has been set apart for redeeming liabilities makes it obvious that the intention is for clearing a liability and not acquiring an asset. The assessing authority held the amount was a "provision" and not a "reserve". The appeal preferred by the respondent was dismissed on January 31, 1990, and the assessment order was upheld by the Commissioner of Income-tax (Appeals). The Income-tax Appellate Tribunal, however, by order dated September 25, 1991, allowed the appeal of the assessee and directed the Assessing Officer to include the sum of Rs. 1 crore in the capital of the company for the purpose of surtax. The Tribunal held that there was no stipulation by the Government for the creation of loan redemption reserve ; on its own volition the assessee had been creating a loan redemption reserve by making an appropriation of profit of Rs. 10 lakhs each year beginning from 1970 ; the total reserve amounting to Rs. 100 lakhs remained undisturbed till the year 1987 and in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Act, 1956, it is incumbent upon the board of directors of every company to lay before the annual general meeting of its shareholders, (a) the annual balance-sheet, and (b) the profit and loss account pertaining to the previous financial year. Section 211(1) provides that every balance-sheet of a company shall give a true and fail view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section be in the form set out in Part I of Schedule VI, or as near thereto as circumstances admit or in such other form as may be approved by the Central Government either generally or in any particular case, while section 211(2) provides that every profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year and shall, subject as aforesaid, comply with the requirements of Part II of Schedule VI, so far as they are applicable thereto, In other words, the preparation of balance sheet as well as profit and loss account in the prescribed forms and laying the same before the shareholders at the annual general meeting are statutory requirements which the company has t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of a sum falls within the definition of 'provision' it can never be 'a reserve but it does not follow that if the retention or appropriation is not a provision it is automatically a reserve and the question will have to be decided having regard to the true nature and character of the sum so retained or appropriated depending on several factors including the intention with which and the purpose for which such retention or appropriation has been made because the substance of the matter is to be regarded and in this context the primary dictionary meaning of the term 'reserve' may have to be availed of. But it is clear beyond doubt that 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. We are emphasising this aspect of the matter because during the hearing almost all counsel for the assessees strenuously contended before us that once it was shown or became clear that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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