Reserve and provision, the expression 'reserve' has not been defined in the Act and therefore one would be inclined to resort to its ordinary natural meaning as given in the dictionary but it seems to us that the dictionary meaning, though useful in itself, may not be sufficient, for, the dictionaries do not make any distinction between the two concepts 'reserve' and 'provision' which giving their primary meanings, whereas in the context of the legislation with which we are concerned in the case a clear distinction between the two is implied. According to the dictionaries (both Oxford and Webster) the applicable primary meaning of the word 'reserve' is: 'to keep for future use or enjoyment; to set apart for some propose or end in view; to keep in store for future or special use; to keep in reserve', while 'provision' according to Webster means: 'something provided for future'. In other words according to the dictionary meanings both the words are more or less synonymous and connote the same idea. Since the rules for computation of capital contained in the Second Schedule to the Act proceed on the basis of the formula of capital plus reserves - a formula well-known in commercial accountancy, it becomes essential to know the exact connotation of the two concepts 'reserve' and 'provision' and the distinction between the two as known in commercial accountancy. Besides, though the expression 'reserve' is not defined in the Act, it cannot be forgotten that it occurs in a taxing statute which is applicable to companies only and to no other assessable entities and as such the expression will have to be understood in its ordinary popular sense, that is to say, the sense or meaning that is attributed to it by men of business, trade and commerce and by persons interested in or dealing with companies. Therefore, the meanings attached to these two words in the provisions of the Companies Act, 1956 dealing with preparation of balance sheet and profit and loss account would govern their construction for the purposes of the two taxing enactments, Vazir Sultan Tobacco Co. Ltd. v. Commissioner of Income Tax, AIR 1981 SC 2105: (1981) 4 SCC 435: (1982) 1 SCR 789.
A 'provision' is a charge against the profits, being made against anticipated losses and contingencies. A 'reserve', on the contrary, is an appropriation of profits; the assets by which it is represented being retained to form part of the capital employed in the business. Unlike a 'provision' which is a present charge against the profits, the assessee continues to enjoy a proprietor's interest in the 'reserve', Commissioner of Income Tax v. Laxmi Sugar and Oil Mills Ltd., AIR 1986 SC 1746: (1986) 3 SCC 528: (1986) 3 SCR 214.