1999 (10) TMI 46 - HC - Income Tax

Capital redemption reserve included in capital for surtax computation

The court held that the capital redemption reserve should be considered part of the capital for surtax computation, aligning with the nature of share ... Company, Surtax, Computation Of Capital Issues involved:1. Whether the capital redemption reserve forms part of the capital for the purpose of surtaxRs.Detailed Analysis:The judgment pertains to a reference made by the Income-tax Appellate Tribunal regarding the inclusion of a capital redemption reserve in the capital for surtax computation. The factual background reveals that the assessee, a public limited company, included a sum of Rs. 3 lakhs as 'capital redemption reserve' while computing the statutory deduction of capital. The Assessing Officer excluded this amount, but the Commissioner of Income-tax (Appeals) allowed the deduction. The Tribunal, based on an earlier order, accepted the assessee's stand that a general reserve forms part of the capital for surtax purposes. The key issue revolves around the distinction between a reserve and a provision in commercial accountancy.The court delved into the conceptual difference between a 'reserve' and a 'provision.' It highlighted that a reserve is created out of profits to meet unknown contingencies, whereas a provision is made to meet known liabilities or contingencies. The judgment extensively quoted definitions from accountancy literature and the Companies Act, emphasizing that reserves are appropriations of profits retained as part of the capital, while provisions are charges against profits. The court emphasized that the meanings attached to these terms in the Companies Act would govern their interpretation for taxing enactments applicable to companies.Furthermore, the judgment referred to a case law to illustrate that the capital redemption reserve should be considered part of the capital base of a company, as indicated in the Companies Act. The court reasoned that the nature of the capital redemption reserve aligns with share capital based on provisions in the Companies Act. Consequently, the court concluded that the decision in a previous case regarding debenture redemption reserves was not applicable to the case at hand, affirming the Tribunal's conclusion. The judgment ultimately favored the assessee, answering the referred question in the affirmative, in favor of the assessee and against the Revenue.In summary, the judgment extensively analyzed the distinction between reserves and provisions in commercial accountancy, emphasizing the interpretation based on the Companies Act provisions. It concluded that the capital redemption reserve should be considered part of the capital for surtax computation, aligning with the nature of share capital as per the Companies Act.