Judgment :- K. A. Thanikkachalam J.- At the instance of the Department, the Tribunal referred the following question for the opinion of this court under section 256(2) of the Income tax Act, 1961, read with section 18 of the Companies (Profits) Surtax Act, 1964 : "Whether, on the facts and in the circumstances of the case and having regard to the Explanation under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the Tribunal was right in holding that the amount standing to the credit of the debenture redemption sinking fund should be treated as 'reserve' only and not as 'provision' and hence should be taken as capital for levy of surtax ?" * For the two assessment years 1974-75 and 1976-77, the assessee's relevant previous years are the periods from July 1, 1972 to June 30, 1973, and July 1, 1974, to June 30, 1975, respectively. For the assessment year 1974-75, in computing the capital base as on July 1, 1972, the first day of the previous year under the Second Schedule to the Surtax Act, the Income tax Officer excluded the debenture redemption sinking fund of Rs. 2, 93, 556 and for the second year, a similar figure of Rs. 1, 75, 000 on the ground that under the Explanation below rule 1 of the Second Schedule, the sinking fund could not be taken as a "reserve". On the assessee's appeal, the Commissioner of Income tax (Appeals), referring to a passage occurring in Pickles on Accountancy under the caption, "Payment of Debentures at Maturity" came to the conclusion that the amounts set apart were not "reserves" but "provision" retained by way of providing for a known liability, namely, "the repayment of the debts owing by the company to the debenture holders". The Commissioner of Income tax (Appeals) also referred to Vazir Sultan Tobacco Co. Ltd.'s case 1981 AIR(SC) 2105, 1981 (132) ITR 559, 1981 (3) Scale 1483 , 1981 (4) SCC 435 , 1982 (1) SCR 789 , 1981 TaxLR 1780, 1981 SCC(Tax) 342, 1981 (25) CTR 186, 1981 (25) CTR(SC) 186 and concluded that the intention of the company was to set apart certain amounts from year to year so as to enable it to repay the debenture holders and hence the appropriation was a provision to meet the known liability. In this view of the matter, the Commissioner of Income tax (Appeals) upheld the order passed by the Income tax Officer for both the years under consideration. The assessee appealed to the Tribunal. The relevant facts were that the assessee company issued 61/2 per cent. debentures for Rs. 30, 00, 000 in 1960 and Rs. 15, 00, 000 in 1965 (trust deeds dated January 6, 1960, and January 7, 1965). Under the terms of the debenture trust deed, the assessee had to establish a sinking fund for the redemption of the debentures and with a view thereto, open an account in its books of account called "Debenture Redemption Sinking Fund" and appropriate in every year during the continuance of this security from the net profits of the company before recommending the declaration of any dividend to its shareholders a sum of not less than one lakh of rupees for the year ending on June 30, 1960, and not less than two lakhs of rupees for every financial year thereafter, credit the same to the said fund and invest from time to time with the previous written consent of the trustees the funds standing to the credit of such fund in such securities, as are authorised by section 20 of the Indian Trusts Act, 1882, or in the purchase of the assessee's floated debentures at or below par and credit to such fund all income that may accrue from time to time from such securities (clause 33(11) of the trust deed dated January 6, 1960). The practice of the company was stated to be to adopt the latter method, namely, to repurchase its debentures every year so that as on June 30, 1973, the total debenture amount outstanding was only Rs. 10, 50, 667 against the debenture amount issued to the tune of Rs. 45, 00, 000. The assessee had transferred from the debenture redemption sinking fund to the general reserve fund the value of the debentures purchased and cancelled. The debenture redemption sinking fund is shown as under : Debentures Transfer from Balance purchased P & L Account (Rs.) (Rs.) (Rs.) 30-6-1968 Opening balance 3, 00, 000 2, 83, 976 Tr. 100 5, 84, 076 Purchases 3, 16, 500 30-6-1969 Tr. 3, 00, 000 Profit 580 5, 68, 156 Purchases 2, 72, 800 2, 95, 356 Debenture 30-6-1970 Tr. The debenture redemption sinking fund is shown as under : Debentures Transfer from Balance purchased P & L Account (Rs.) (Rs.) (Rs.) 30-6-1968 Opening balance 3, 00, 000 2, 83, 976 Tr. 100 5, 84, 076 Purchases 3, 16, 500 30-6-1969 Tr. 3, 00, 000 Profit 580 5, 68, 156 Purchases 2, 72, 800 2, 95, 356 Debenture 30-6-1970 Tr. 3, 00, 000 Profit 63 5, 95, 419 Purchases 3, 04, 500 2, 90, 919 30-6-1971 Tr. 3, 00, 000 Profit 75 5, 90, 994 30-6-1972 Tr. 3, 00, 000 Profit 562 5, 72, 056 Purchases TR to GR 2, 78, 500 2, 93, 556 30-6-1973 Tr. 3, 00, 000 Profit 83 5, 93, 639 Purchases TR to GR 3, 77, 500 2, 16, 139 30-6-1974 Tr. 3, 00, 411 Profit 450 5, 17, 000 Purchases TR to GR 3, 42, 000 1, 75, 000 Before the Tribunal, the assessee contended on the above facts that the amount set apart for the debenture redemption sinking fund was an amount to be utilised for redemption of debentures appropriated out of profits. The assessee did not invest the amounts from the sinking fund in any securities and there was no sinking fund investment on the assets side of the balance sheet. Thus, considering the submissions made by both the parties and after noting down the difference between "reserve" and "provision", in the light of the decision of the Supreme Court in the case of Challapalli Sugars Ltd. v. CIT 1975 AIR(SC) 97, 1975 (98) ITR 167, 1975 (3) SCC 572 , 1975 (2) SCR 538 , 1975 TaxLR 40, 1974 CTR(SC) 309 and in view of the following facts, the Tribunal held that in the present case, the debenture redemption sinking fund can be treated only as a "reserve": (i) Creation of the debenture redemption sinking fund and the appropriation thereto had been recommended by the directors in their report. (This account is described as "debenture redemption sinking fund" in the balance sheet as on June 30, 1973, and as debenture redemption reserve in the subsequent years, no longer being described as (sinking fund). Debentures Transfer from Balance purchased P & L Account (Rs.) (Rs.) (Rs.) (ii) The "reserve" has been created out of the surplus profit of the assessee. (This account is described as "debenture redemption sinking fund" in the balance sheet as on June 30, 1973, and as debenture redemption reserve in the subsequent years, no longer being described as (sinking fund). Debentures Transfer from Balance purchased P & L Account (Rs.) (Rs.) (Rs.) (ii) The "reserve" has been created out of the surplus profit of the assessee. (iii) The "reserve" has been created in the profit and loss appropriation account and has not been created in the profit and loss account. (iv) The "reserve" so created by the assessee has not diminished the assets of the assessee. (v) The "reserve" created by the assessee is appearing as "reserve" under the head "Reserve and surplus" in the balance sheet of the assessee. (vi) The "reserve" has been created by carving out a part of the surplus fund of the assessee. (vii) The debenture redemption reserve would be reduced as and when the payment is made and ultimately the balance, if any, would form part of the general reserve. (viii) It has not created any charge on the profit and the "reserve" created by the assessee was not an allowable deduction. In view of the foregoing reasons, relying upon the decision of the Karnataka High Court in the case of Addl. CIT v. Bharat Fritz Werner (P.) Ltd. 1979 (118) ITR 25, 1979 (10) CTR 48 the Tribunal allowed the appeals filed by the assessee for both the assessment years under consideration. Learned senior standing counsel appearing for the Department submitted that under the Explanation below rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, sinking fund could not be taken as a "reserve". The Explanation specifically prohibits inclusion as a "reserve" of any amount standing to the credit of any account in the books of a company as on the first day of the previous year relevant to the assessment year, which is of the nature of item (5) or item (6) or item (7) under the heading "Reserves and surplus" in the form of balance sheet given in Part I of Schedule VI to the Companies Act, 1956 According to the assessee, the redemption reserve sinking fund is actually a "reserve". This is evident from the fact that transfers are made from this account to "general reserve" every year. This is evident from the fact that transfers are made from this account to "general reserve" every year. In other words, from the fact that such transfers are made, the real nature of this account as a "reserve" is abundantly clear. Further, the amount in question is not represented by any specific or earmarked investment. Therefore, according to the assessee, the amount set apart for the debenture redemption sinking fund is an amount to be utilised for redemption of debentures. It is an amount appropriated from profits to prevent the amounts set apart from profits being distributed as dividend until the debentures are repaid. The debentures themselves are shown as liabilities. Hence, any amount set apart from the profit to the sinking fund has to be treated as a "free reserve" includible in the capital base. This question was considered by the Supreme Court in CIT v. Mysore Electrical Industries Ltd. 1971 (80) ITR 566, 1971 (S) SCR 521, 1971 AIR(SC) 1361, 1971 (2) SCC 243 , 1971 (41) CC 617 wherein it was held that plant modernisation and rehabilitation reserves and loan redemption reserve would constitute capital for the purposes of the Act. Only sinking funds, which are created for writing off assets by debiting the profit and loss account should be excluded from the capital base for surtax purposes and not funds created by appropriation from profits. The company had not invested these monies in any securities, in which case it may be said that since securities are treated as assets, the contra account, namely, the fund account should be excluded. Before the authorities below, reliance was also placed upon the passage occurring in Accountancy by Pickles. We have heard learned senior standing counsel appearing for the Department and perused the records carefully. The assessee, Kasturi and Sons Ltd., are the publishers of "The Hindu". The tax cases relate to surtax assessments made under section 6(2) of the Companies (Profits) Surtax Act, 1964 In the present case, the assessee did not invest the funds standing to the credit of the debenture redemption sinking fund in any securities but merely utilised the funds to the credit of the sinking fund from time to time in the purchase of the debentures. Thus, in the balance sheet, the debenture redemption sinking fund, though described as fund, would, in fact, not be a fund, since it did not represent any earmarked investment. Thus, in the balance sheet, the debenture redemption sinking fund, though described as fund, would, in fact, not be a fund, since it did not represent any earmarked investment. According to the Tribunal, the result would be, that it will not amount to a "provision" but could be regarded only as a "reserve" according to the Companies Act. In order to come to this conclusion, reliance was placed upon the judgment of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT 1981 AIR(SC) 2105, 1981 (132) ITR 559, 1981 (3) Scale 1483 , 1981 (4) SCC 435 , 1982 (1) SCR 789 , 1981 TaxLR 1780, 1981 SCC(Tax) 342, 1981 (25) CTR 186, 1981 (25) CTR(SC) 186. A similar question came up for consideration before this court in the case of CIT v. Lakshmi Mills Co. Ltd. 1996 (221) ITR 753, 1996 (88) TAXMAN 547 , 1996 (2) TLR 587 wherein while considering the provisions of rule 1 of Schedule II to the Companies (Profits) Surtax Act, 1964, this court held that " the fact that the company could use the debenture redemption reserve fund till the redemption date was a vital fact. The right of user made all the difference and when the right of the assessee to use it for business purposes was assured and protected, it was not possible to say that it had been set apart to provide for a known liability. Hence, the debenture redemption reserve was only a "reserve" and should be included in the capital for purpose of surtax. A perusal of the order passed by the Tribunal would go to show that it did not consider whether the redemption reserve sinking fund is also available to the assessee for utilising the same for business purposes, until the redemption date, which is a vital factor for deciding the issue arising in this case, whether the debenture redemption sinking fund is a "reserve" or "provision". A perusal of the facts would go to show that the amounts transferred to the sinking fund had earned interest, which is also credited to this account. The company had resorted to purchase of its own debentures at par or below par, with the result that there were profits on the repurchases of the debenture in some of the years, which were also credited to this account. The company had resorted to purchase of its own debentures at par or below par, with the result that there were profits on the repurchases of the debenture in some of the years, which were also credited to this account. As and when debentures are purchased and cancelled, the value of the debentures cancelled were transferred by the company from the debenture redemption sinking fund account to the general reserve account. As on July 1, 1972, the company's accounting year is the year ending June 30, there was a balance of Rs. 2, 93, 556 in the debenture redemption sinking fund account. Similarly, as on July 1, 1974, there was a balance of Rs. 1, 75, 000 in this account. The company included Rs. 2, 93, 556 in the capital base as an item of "reserve" in respect of its assessment for the year 1974-75. Similarly, it included a sum of Rs. 1, 75, 000 in the capital base in the assessment year 1976-77. Therefore, it remains to be seen that on the repayment debt, the assessee is utilising the amounts from the debenture redemption sinking fund for other business purposes by offering the same as "general reserve fund". This would go to show that the debenture reserve sinking fund was available to the assessee for the use of its business purposes until the debentures are redeemed. In such a case, the debenture redemption sinking fund was not earmarked for a particular purpose, namely, redemption of debentures. Only in such a case, the debenture redemption sinking fund would be called a "provision". If, on the other hand, the amounts from the debenture redemption sinking fund are available for the use of the assessee company for its own business purposes, then it would be merely a "reserve" and it cannot be called a "provision". This is to satisfy the test as laid down by the decision of this court rendered in CIT v. Lakshmi Mills Co. Ltd. 1996 (221) ITR 753, 1996 (88) TAXMAN 547 , 1996 (2) TLR 587. For the foregoing reasons, we hold that there is no infirmity in the order passed by the Tribunal in holding that the debenture redemption sinking fund is a "reserve" and not a "provision". Accordingly, we answer the question referred to us in the affirmative and against the Department in both the assessment years under consideration. No costs.