Capital redemption reserve and section 80G donations affect surtax capital base and exclusions under the statutory schedules.

Capital redemption reserve is treated as a reserve and is includible in the capital base for surtax computation, because the exclusion in the Second Schedule explanation covers only specified reserve-and-surplus items and does not remove this reserve from the computation. The article also explains that, for clause (vii) of rule 1 of the First Schedule, the exclusion is calculated as 50% of the actual donations made for section 80G purposes, since the statutory ceiling under section 80G limits only the deduction admissible and does not change the amount with reference to which deduction is allowable.

---

---

Issues: (i) Whether amounts standing to the credit of capital redemption reserve are includible in computing the capital base under the Companies (Profits) Surtax Act, 1964; (ii) Whether, for the purpose of clause (vii) of rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, the amount to be excluded is 50% of the actual donations made under section 80G of the Income-tax Act, 1961, or only 50% of the amount actually allowed as deduction under that provision.

Issue (i): Whether amounts standing to the credit of capital redemption reserve are includible in computing the capital base under the Companies (Profits) Surtax Act, 1964.

Analysis: Capital redemption reserve was treated as a reserve within the balance-sheet classification under the Companies Act. The exclusion in the Explanation to rule 1 of the Second Schedule was directed only to certain specified items under the heading of reserves and surplus, which by implication left capital redemption reserve within the category of reserves to be counted for capital base purposes. Section 80 of the Companies Act also indicated that such reserve partakes of the character of share capital and is created in connection with redemption of preference shares.

Conclusion: The amount standing to the credit of capital redemption reserve is includible in the capital base and the issue is answered in favour of the assessee.

Issue (ii): Whether, for the purpose of clause (vii) of rule 1 of the First Schedule to the Companies (Profits) Surtax Act, 1964, the amount to be excluded is 50% of the actual donations made under section 80G of the Income-tax Act, 1961, or only 50% of the amount actually allowed as deduction under that provision.

Analysis: Section 80G grants deduction with reference to the aggregate amount donated for the recognised purposes, while the ceiling in sub-section (4) merely limits the deduction admissible under that section. Clause (vii) of rule 1 uses the expression "fifty per cent. of the sum with reference to which a deduction is allowable", which points to the donated aggregate itself and not to the reduced amount after the statutory ceiling is applied. The provision was therefore construed to give effect to 50% of the actual donations, subject only to the ceiling mechanism under section 80G.

Conclusion: The amount to be excluded is 50% of the actual donations made under section 80G, and the issue is answered in favour of the assessee.

Final Conclusion: The reference is answered wholly in favour of the assessee, with the capital redemption reserve held includible in the capital base and the exclusion under the First Schedule held to be based on half of the actual donations, not merely half of the amount finally allowed under section 80G.

Ratio Decidendi: For surtax computation, capital redemption reserve is a reserve includible in capital base, and the exclusion linked to section 80G donations is computed as 50% of the aggregate donations actually made for the qualifying purposes, because the statutory ceiling limits only the deduction admissible under section 80G and does not redefine the amount with reference to which deduction is allowable.

---