Capital redemption reserve treated as reserve and included in the surtax capital base, not excluded as a provision.

A capital redemption reserve created for redemption of preference shares was treated as a reserve, not a provision, under the Second Schedule to the Companies (Profits) Surtax Act, 1964. The expression "reserve" was read in its ordinary company-law sense, and the Explanation to rule 1 excluded only items falling within current liabilities and provisions. A reserve shown under Reserves and Surplus under the Companies Act remained part of the capital base, and later appropriation during the accounting year did not change its character. The amount was therefore includible in the capital base for surtax computation, and the reference was answered in favour of the assessee.

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Issues: Whether the amount standing to the credit of the preference share capital redemption reserve as at the beginning of the relevant accounting period was includible in the capital base under the Second Schedule to the Companies (Profits) Surtax Act, 1964, or whether it was a provision excluded from capital computation.

Analysis: The expression "reserve" in the Act was not specially defined and was therefore to be understood in its ordinary sense and as used in company law. A reserve created to meet liability to redeem preference shares was treated as capital redemption reserve under section 80 of the Companies Act, 1956 and was shown in Part I of Schedule VI under "Reserves and Surplus". The Explanation to rule 1 of the Second Schedule excluded only items specifically falling under current liabilities and provisions, and not such reserves. The fact that the reserve had been appropriated at a meeting held after the commencement of the accounting year did not alter its character for the relevant year.

Conclusion: The amount credited as preference share capital redemption reserve was a reserve and not a provision, and it was rightly included in the capital base for computing the statutory deduction. The answer was in the affirmative and in favour of the assessee.

Final Conclusion: The references were answered by holding that capital redemption reserve forms part of the company's capital base under the surtax computation scheme.

Ratio Decidendi: A capital redemption reserve created for redemption of preference shares is a reserve within the meaning of the Second Schedule to the Companies (Profits) Surtax Act, 1964 and is includible in the capital base, since it is not a current liability or provision.

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