- (1.) 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 questions that arose for consideration of the High Court were : "(a) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the loan redemption reserve amount to Rs. 1 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 in view of the Supreme Court decision in the case of Vazir Sultan Tobacco Co. Ltd. (1981) 132 ITR 559 : (AIR 1981 SC 2105 : 1981 Tax LR 1780), the Appellate Tribunal is right in holding so -
(2.) By the impugned judgment the High Court answered the questions in the affirmative, that is, in favour of the respondent-assessee and against the revenue.
(3.) The respondent had obtained Rs. 491 lakhs as loan from Government of Kerala from 1968 to 1983 for the expansion of the Titanium Dioxide Plant. It could repay up to March, 1987 only a sum of Rs. 115.50 lakhs. The balance of the loan outstanding as on 31st March, 1987 was Rs. 377.50 lakhs which included a sum of Rs. 245 lakhs being overdue instalment of principal from 1983 onwards. Out of the sum of Rs. 245 lakhs outstanding, two instalments totalling Rs. 102 lakhs were repaid to the Government during June 1987 and the arrears due to the Government towards principal of the loan amount as on the date of the presentation of the annual report of the company for the financial year 1986-87 was Rs. 143 lakhs. The assessing authority disallowed the sum of Rs. 1 crore standing in the credit side under the head 'loan redemption reserve' holding that even if it is conceded that it is an appropriation from profit by way of a fund even then it partakes the nature of the 'sinking fund' only which can be only for clearing of an ascertained liability. It further held that the fact that a 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 31st January, 1990 and the assessment order was upheld by the Commissioner of Income-tax (Appeals). The Income-tax Appellate Tribunal, however, by order dated 25th September, 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 amount to Rs. 100 lakhs remained undisturbed till the year 1987 and in the year 1988 the same was transferred to the general reserve and that the amount appropriated was not against the profits but was from out of the profit and the loan redemption reserve did not bring into existence any fresh liability because the liability was already in existence. These are the circumstances under which the two questions noticed above were answered by the High Court in favour of the respondent-assessee.;