Debenture redemption reserve treated as reserve, not provision, and included in capital computation under surtax law.

Debenture redemption reserve created out of profits and kept apart for future redemption obligations, without being treated as a charge on revenue, was characterised as a reserve and not a provision. Because the redemption payments were met from funds other than the reserve and the amount was maintained to conserve working capital and prevent reduction of capital, it qualified for inclusion in capital computation under the Second Schedule to the Companies (Profits) Surtax Act, 1964. The legal effect was that the reserve was includible in the capital base, and the issue was answered in the affirmative.

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Issues: Whether the debenture redemption reserve of Rs. 11,00,000 was a reserve or a provision for inclusion in the computation of capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The amount was created out of profits and was kept apart to meet future redemption obligations without being treated as a charge on revenue. The redemption payments were made from funds other than the reserve, and the reserve was maintained to conserve working capital and prevent reduction of capital. On the facts found, the reserve satisfied the character of a reserve and not a provision.

Conclusion: The debenture redemption reserve was includible in the capital computation under the Second Schedule to the Companies (Profits) Surtax Act, 1964, and the question was answered in the affirmative.

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