Case: Commissioner of Income Tax Vs. Tranvancore Titanium Products Ltd

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 the way of providing for any known liability....and in this sub-clause the expression `liability shall include all liability in respect of expenditure contracted for an all disputed or contingent liabilities.(2) Where -(a) any amount written off or 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 or providing for any known liability; is in excess of the amount which in the opinion of the directions, is reasonably necessary for the purpose, the excess shall be treated for the purposes of this Schedule as a `reserve and not a `provision.On a plain reading of cl. 7(1)(a) and (b) and cl. 7(2) above it will appear clear that though the term "provision" is defined positively by specifying what it means the definition of "reserve" is negative in form and not exhaustive in the sense that it only specific certain amounts which are not to be included in the term "reserve". In other words the effect of reading the two definitions together is 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 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 substances of the mater 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 assesses 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 the relevant date it must be regarded as a reserve. The fallacy underlying the contention becomes apparent if the negative and non-exhaustive aspects of the definition of reserve are borne in mind. Having regard to the type of definitions of the two concepts which are to be found in cl. 7 of Pt. III the proper approach in our view would be first to ascertain whether the particular retention or appropriation of a sum falls within the expression "provision" and if it does then clearly the concerned sum will have to be excluded from the computation of capital, nut in case the retention or appropriation of the sum is not a provision as defined, the question will have to be decided by reference to the true nature and character of the sum so retained or appropriated having regard to several factors as mentioned above and if the concerned sum is in fact a reserve then it will be taken into account for the computation of capital."5. In view of the aforestated legal position, the aspects taken into consideration by the tribunal and affirmed by the High Court that there was no stipulation by the Government for creation of loan redemption reserve; that the assessee had not kept to the schedule for repayment; that the assessee, on its own violation, had created a loan redemption reserve by making appropriation of profit of Rs. 10 lakhs each year beginning from 1970; that the total reserve amounting to Rs. 100 lakhs remained undisturbed till the year 1987 and in the year 1988 the same was transferred to general reserve and that the balance sheet showed that the amounts credited to the `loan redemption reserve were not invested outside the company but remained internally invested, on the facts found, were to relevant for determining as to whether the amount was an asset or provision. As held in Vazir Sultan 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. The Vazir Sultans case (supra) 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 fallow that if the retention or appropriation is not a `provision it is automatically a reserve. The fact that amount has been set apart for redeeming liabilities makes it obvious that the intention is for clearing liabilities and to 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 that the respondents liabilities. It cannot be regarded as an asset. The decision in Vazir Sultans case (supra) was not correctly appreciated by the High Court. In this view, the questions deserve to be answered in the negative. 6. For the aforesaid reasons,

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]On a plain reading of cl. 7(1)(a) and (b) and cl. 7(2) above it will appear clear that though the term "provision" is defined positively by specifying what it means the definition of "reserve" is negative in form and not exhaustive in the sense that it only specific certain amounts which are not to be included in the term "reserve". In other words the effect of reading the two definitions together is 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 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 substances of the mater 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 assesses 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 the relevant date it must be regarded as a reserve. The fallacy underlying the contention becomes apparent if the negative and non-exhaustive aspects of the definition of reserve are borne in mind. Having regard to the type of definitions of the two concepts which are to be found in cl. 7 of Pt. III the proper approach in our view would be first to ascertain whether the particular retention or appropriation of a sum falls within the expression "provision" and if it does then clearly the concerned sum will have to be excluded from the computation of capital, nut in case the retention or appropriation of the sum is not a provision as defined, the question will have to be decided by reference to the true nature and character of the sum so retained or appropriated having regard to several factors as mentioned above and if the concerned sum is in fact a reserve then it will be taken into account for the computation of capital."5. In view of the aforestated legal position, the aspects taken into consideration by the tribunal and affirmed by the High Court that there was no stipulation by the Government for creation of loan redemption reserve; that the assessee had not kept to the schedule for repayment; that the assessee, on its own violation, had created a loan redemption reserve by making appropriation of profit of Rs. 10 lakhs each year beginning from 1970; that the total reserve amounting to Rs. 100 lakhs remained undisturbed till the year 1987 and in the year 1988 the same was transferred to general reserve and that the balance sheet showed that the amounts credited to the `loan redemption reserve were not invested outside the company but remained internally invested, on the facts found, were to relevant for determining as to whether the amount was an asset or provision. As held in Vazir Sultan 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. The Vazir Sultans case (supra) 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 fallow that if the retention or appropriation is not a `provision it is automatically a reserve. The fact that amount has been set apart for redeeming liabilities makes it obvious that the intention is for clearing liabilities and to 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 that the respondents liabilities. It cannot be regarded as an asset. The decision in Vazir Sultans case (supra) was not correctly appreciated by the High Court. In this view, the questions deserve to be answered in the negative.