Capital redemption reserve and tax provision were both includible in surtax capital computation under the Second Schedule.

Capital redemption reserve was treated as a reserve, not a provision, because it was earmarked for future specified use and not set apart to meet a known liability; it was therefore includible in capital employed under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. Provision for taxation was also treated as a fund within rule 2(ii) of the Second Schedule, following settled binding authority on the point. The result was that both amounts were included in the capital computation under the surtax regime in favour of the assessee.

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Issues: (i) Whether capital redemption reserve is a reserve within rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 so as to be included in capital employed; (ii) Whether provision for taxation constitutes a fund within rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Issue (i): Whether capital redemption reserve is a reserve within rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 so as to be included in capital employed.

Analysis: The classification turned on the distinction between "reserve" and "provision" in commercial and statutory accounting. The relevant principles required the court to examine the true nature and character of the amount, the purpose for which it was set apart, and whether it was earmarked to meet a known liability. Section 80 of the Companies Act, 1956 treated the capital redemption reserve account as a reserve fund and the balance-sheet form in Schedule VI also placed it under reserves. On that basis, the amount was not a provision for a known liability but a reserve available for future specified use.

Conclusion: Capital redemption reserve is a reserve and not a provision, and it is includible in capital employed under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Issue (ii): Whether provision for taxation constitutes a fund within rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The point was governed by earlier binding decisions which had already treated such a provision as falling within the expression "fund" for the purposes of the Second Schedule. No fresh distinction was accepted to depart from that settled position.

Conclusion: Provision for taxation constitutes a fund within rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Final Conclusion: Both referred questions were answered in favour of the assessee, with the result that the disputed amounts were to be treated as part of the capital computation under the surtax regime.

Ratio Decidendi: For the purposes of capital computation under the Companies (Profits) Surtax Act, an amount is a reserve when it is earmarked for a future specific use and is not set apart to meet a known liability, and the statutory treatment of capital redemption reserve under the Companies Act supports that classification.

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