COMMISSIONER OF INCOME TAX, TRIVANDRUM versus M/S TRANVANCORE TITANIUM PRODUCTS LTD.

Citation: [2000] SUPP. 5 S.C.R. 461 · Decided: 07-12-2000 · Supreme Court of India · Bench: S.P. BHARUCHA · Disposal: Appeal(s) allowed
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Judgment (excerpt)

COMMISSIONER OF INCOME TAX, TRIV ANDRUM 
v. 
M/S TRANVANCORE TITANIUM PRODUCTS LTD. 
Surtax : 
DECEMBER 7, 2000 
[S.P. BHARUCHA. D.P. MOHAPATRA AND 
Y.K. SABHARWAL. JJ.) 
A 
B 
Companies (Profits) Surtax Act, 1964-Section 18-Capital·- C 
Computation of. -Amount lying in loan Redemption Reserve Account-Reserve 
or Provision- -Held, the amount has been set aside to clear a known liability--
Hence it is a provision and not a reserve-Thus it could not be excluded from 
capital. 
Respondent-assessee obtained loan of Rs. 491 lakhs from State 
Government over a period from 1968 to 1983 for expansion of its plant. Amount 
outstanding towards principal to the State Government was Rs. 143 lakhs for 
the financial year 1986-87. An amount of Rs. I Crore was lying in 'Loan 
Redemption Reserve' account. In computing the capital for the purposes of 
D 
the Act, the Revenue treated the amount as a provision and not a reserve and E 
therefore excluded from capital. Commissioner (Appeals) dismissed the appeal 
of the assessee. Tribunal allowed the appeal of the assessee directing the 
Revenue to include the amount Rs. I crore in the capital for computation of 
surtax. On reference by the Revenue, High Court answered the question in 
favour of the assessee. Hence the appeal by the Revenue. 
In appeal to this Court, Revenue contended that the amount is in nature 
of sinking fund for clearing an ascertained liability; that the amount was not 
set aside for acquiring an asset; and that the amount was a provision and not 
a reserve. 
Allowing the appeal, the Court 
HELD: I.I. 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 
461 
F 
G 
462 
SUPREME COURT REPORTS [2000) SUPP. 5 S.C.R. 
A surrounding circumstances. 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 
B liabilities and not acquiring an asset. In the instant case, the Tribunal is wrong 
in treating the amount as 'reserve'. 1467-E, F, GI 
1.2. The amount of Rs. l crore lying in 'Loan Redemption Reserve' 
cannot be regarded as a 'reserve' It has to be regarded as a 'provision'. The 
amount was set apart to meet a loan liability. The amount set apart is less 
C than the assessee's liabilities. It cannot be regarded as an asset. [464-B, DJ 
Vazir Sultan Tobacco Co. Ltd v. Commissioner of Income Tax, A.P., 
(1981) 132 lTR 559, relied on. 
National Rayon Corporation ltd. v. Commissioner uf Income-tax, (1997) 
D 227 lTR 764; C.l. T v. Century Spinning & Manufacturing Co. Ltd., (1953) 
24 ITR 499 and Metal Box Company oflndia Ltd. v. Their Workmen, (1969) 
73 ITR 53, referred to. 
E 
C.l.T. v. Pieco Electronics & Electricals, (1987) 166 ITR 299 Cal, 
referred to. 
CIVIL APPELLATE JURISDICTION.: Civil Appeal No. 3825 of 1999. 
From the Judgment and Order dated 18.8.98 of the Kerala High Court 
in l.T.R. No. 89of1993. 
F 
Harish N. Salve, Solicitor General, Ranbir Chandra, S.W.A. Quadri and 
G 
Ms. Sushma Suri for the Appellant. 
C.S. Vaidyanathan and E.M.S. Anam for the Respondents. 
The Judgment of the Court was delivered by 
Y.K. SABHARWAL, J. This appeal has been filed by the Revenue to 
challenge the correctness of the judgment and order of the High Court of 
Kerala dated 18th August, 1998. The case relates to assessment year 1985-
86. On reference under Section 256(1) of the Income Tax Act, 1961 as applied 
to surtax by Section 18 of the Companies (Profits) Surtax Act, 1964 the 
H questions that arose for consideration Clf the High Court were: 
Cl.T '" TRANVANCORE TITANIUM PRODUCTS LTD !Y K. SABHARWAL, J] 463 
"(a) Whether, on the facts and in the circumstances of the case, the A 
Appellate Tribunal is right in law in holding that the loan 
redemption reserve amount to Rs. I crore is a reserve and not 
a provision and is to be included in the computation of capital 
for the purpose of surtax? 
(b) 
Whether, on the facts and in the circumstances of the case and B 
in view of the Supreme Court decision in the case of Vazir 
Sultan Tobacco Co. ltd. (I 32 /TR 55
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