IMPORTANT POINT
An amount representing Debenture Redemption Reserve, has to be treated as provision and not as reserve for the purpose of Companies (Profits) Surtax Act, 1964.

JUDGMENT

Sen. J.-The point that falls for determination in this case is whether a sum of Rs. 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 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 Rs. 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 Rs. 1,12,00,000. A perusal of the balance-sheet further shows that the assessee company had floated and actually issued 6½ per 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 appear 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 became 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 certain to come into existence, as in this case, must be regarded as a provision and not as a reserve."

3. We are of the view that the High Court has come to a correct conclusion. The basic principle is that an amount set apart to meet a known liability cannot be regarded as Reserve . Provision and Reserve have been defined in Part III, Schedule VI of the Companies Act itself:

"7. (1) For the purposes of Parts I and II of this Schedule, unless the context otherwise requires,-

(a) the expression "provision" shall, subject to sub-clause (2) of this Clause, mean any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy;

(b) the expression "reserve" shall not, subject as aforesaid, include any amount written off or retained by way of providing for depreciation, renewals, or diminution in value of assets or retained by way of providing for any known liability;

(c) the expression "capital reserve" shall not include any amount regarded as free for distribution through the profit and loss account; and the expression revenue reserve shall mean any reserve other than a capital reserve;

and in this sub-clause the expression "liability" shall include all liabilities in respect of expenditure contracted for and all disputed or contingent liabilities.

(2) Where-

(a) any amount written off of retained by way of providing for depreciation, renewals or diminution in value of assets, not being an amount written off in relation to fixed assets before the commencement 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.

4. The definition clearly indicates that if an amount is retained by