NATIONAL RAYON CORPORATION LTD. versus THE COMMISSIONER OF INCOME TAX, MADRAS

Citation: [1997] SUPP. 3 S.C.R. 140 · Decided: 29-07-1997 · Supreme Court of India · Bench: S.C. SEN · Disposal: Dismissed

Judgment (excerpt)

• 
A 
NATIONAL RAYON CORPORATION LTD. 
v. 
THE COMMISSIONER OF INCOME TAX, MADRAS 
JULY 29, 1997 
B 
(SUHAS C. SEN AND K.T. THOMAS, JJ.) 
Companies (Profits) Surtax Act 1964: Section 2(8)-Computation of 
capital of a company for the purpose of surtax assessment-The amount set 
apa1t for redemption of Debentures-To be treated as provision-Not to be 
C included in capital. 
D 
Schedule 11 Rule 1 Explanation-'Sinking fund'-Created for redemp-
tion of liabilities-Jn the nature of allocation Qf profits-Shown as 'rese1ve' in 
the prescribed balance sheet of the company-Not to be treated as rese1Ve for 
computation of capital. 
Companies Act 1956 : Part 111 Schedule VI Clauses 7(1) & 
(2}-'provision' and 'rese1Ve' defined-Issue of debentures-Not redeemable 
in the year of account-Nevertheless obligation to pay held to be present 
liability--Debitum in praesenti, solvendum in futuro-Amount set apart for 
redemption of debentures-Known liability to be treated as provision and not 
E rese1Ve for surtax assessment. 
Amount appropriated for payment of gratuity to be treated as provision 
and not rese/Ve. 
Maxim : 'Debitum in Praesenti, solvendum in futuro'-Ap-
F plied-Obligation or liability to repay loan is a present one-Arises the 
moment the money is borrowed regardless of whether repayment deferred by 
agreement. 
The question was whether for assessment year 1967-68, the sum of 
G Rs. 79 lakhs set apart by the assessee company for redemption of deben· 
tures was to be included in the capital of the company for the purpose of 
surtax assessment. 
The contention of the assessee was that the amount set apart for 
meeting current known liability will be 'provision' whereas the amount 
H retained for future use is to be treated as 'reserve' and not as 'provision'; 
140 
NATIONAL RAYON CORPORATION LTD. v. C.l.T., MADRAS 
141 
that there was no existing liability for redeeming the debentures in the A 
relevant accounting year and the same would arise only when the amount 
falls due for payment, and thus the amount ~d apart for dedenture 
redemption is to be treated as reserve and is includible in the computation 
of capital of the company for surtax assessment purposes. 
The High Court was of the view that the amount set apart to redeem B 
debentures was less than the company's liability on that account and is to 
be treated as provision and is not includible in the capital of.the company. 
In the present case there is no provision in excess of the liability which 
only is required by law to be treated as reserve and not provision. 
Dismissing the appeals, this Court 
HELD : 1 The High Court has come to a correct conclusion. An 
amount set apart to meet a known liability cannot be regarded as 'Reserve' 
and is to be treated as 'Provision'. [143-E) 
1.1. The amount representing Debenture Redemption Reserve is an 
amount set apart to meet a known liability and is to be treated as 
'provision' and not 'reserve' in terms of the definitions provided in clause 
7 of Part III Schedule VI of the Companies Act 1956. (145-F) 
c 
D 
1.2. Even though the debentures may not be redeemable in the year E 
of account, the obligation to pay is a present obligation and the debentures 
have to be shown as liability in the balance sheet of the company. The 
amount set apart to redeem the debentures cannot be treated as a reserve 
and is not to be included in the capital of the company for surtax purposes. 
Only that amount, if any, which in the opinion of the Directors of the 
company, is in excess of the liability, can be treated as 'reserve'. [146-A; G) 
F 
2. In terms of the explanation to rule 1 of the second schedule of the 
Companies (Profits) Surtax Act 1964, even a 'sinking fund' created for 
redemption of loans and shown as Reserve in the Balance Sheet is not to 
be treated as reserve but as provision. (149-E) 
G 
2.1. Even though the amounts kept in the Sinking fund or in the 
debenture redemption reserve, are merely appropriation of profit, and not 
in the nature of charge against profit, and are available for utilisation as 
working capital of the company or may be invested for enabling the 
company to pay off its debts., the same are to be treated as provision and H 
142 
SUPREME COURT REPORTS (1997] SUPP. 3 S.C.R. 
A not reserve. {149-C] 
2.2. The surplus in profit and loss account is also excluded from 
'reserves' for computation of capital of a company for surtax purposes. 
Therefore the availability of the amount as working capital of 

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