Surtax capital computation turns on actual reserve transfers and early redemption rights in debenture terms.

For capital computation under the Companies (Profits) Surtax Act, 1964, a general reserve is reduced only to the extent of the amount actually transferred from current profits in the relevant year, not by a larger amount later proposed for distribution as dividend; that principle was applied against the assessee. Debentures were also held includable in capital because the exclusion under Rule 1(iv) of the Second Schedule applies only where the terms do not permit redemption before seven years, and an express contractual right of redemption on three months' notice meant the debentures were redeemable within that period. Both questions were answered in favour of the Revenue.

---

---

Issues: (i) Whether, for capital computation under the Companies (Profits) Surtax Act, 1964, the amount transferred from current profits to general reserve in the relevant year alone was liable to be reduced from the reserve, or the larger amount proposed to be distributed as dividend out of the reserve. (ii) Whether debentures issued with a term allowing redemption at the option of the company on three months' notice were includable in the capital computation under Rule 1(iv) of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Issue (i): Whether, for capital computation under the Companies (Profits) Surtax Act, 1964, the amount transferred from current profits to general reserve in the relevant year alone was liable to be reduced from the reserve, or the larger amount proposed to be distributed as dividend out of the reserve.

Analysis: The relevant principle applied was that the reserve is to be adjusted only to the extent of the amount brought into it from profits in the relevant year, and not by the entire sum later proposed for distribution. The earlier binding decision on capital computation in relation to general reserve controlled the issue.

Conclusion: The issue was answered in favour of the Revenue and against the assessee.

Issue (ii): Whether debentures issued with a term allowing redemption at the option of the company on three months' notice were includable in the capital computation under Rule 1(iv) of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The proviso excludes only those debentures which, according to their terms and conditions, are not redeemable before the expiry of seven years from the date of issue. Since the debenture terms themselves conferred an immediate option on the company to redeem on three months' notice, the debentures were redeemable before seven years. The alternative argument based on the actual exercise of the redemption power did not control the proviso, which turns on the existence of the power itself.

Conclusion: The debentures were held includable in the capital computation, and the issue was decided in favour of the Revenue and against the assessee.

Final Conclusion: Both referred questions were answered against the assessee, and the reference was disposed of accordingly.

Ratio Decidendi: For surtax capital computation, a reserve is adjusted only to the extent required by the amount actually transferred from profits, and debentures are excluded only if their terms do not permit redemption before seven years; an immediate contractual power of early redemption makes them includable.

---