DIPAK KUMAR SEN,J. - (1.) M /s Placid Limited was assessed to the Companies (Profits) Surtax Act, 1964 (hereafter referred to as " the said Act") in the asst. yr. 1975-76. The assessee had included in its capital a sum of Rs. 4,41,900 shown in its balance sheet as its capital redemption reserve. The ITO excluded this amount in the computation of capital on the ground that it was in the nature of a provision. This exclusion resulted in diminution of the standard deduction calculated on a fixed percentage of capital and a consequent increase in the chargeable profit. On an appeal from the said assessment, the AAC found that a capital redemption reserve was normally created to meet an existing liability, viz., redemption of debentures, and that it was not possible to ascertain whether the amount in dispute was maintained only as a reserve. He held that the said reserve was created obviously for the redemption of debentures and confirmed the assessment.
(2.) ON a further appeal before the Tribunal, the assessee contended that in the parlance of accountancy as also in law, capital redemption reserve was a part of the reserves of a company. Relying on the Explanation to rule I of the Second Schedule to the said Act and the form of the balance sheet in Schedule VI of the Companies Act, 1956, where the item was specifically shown in the column for reserves, the assessee contended that the same should be treated as a reserve. The Tribunal accepted the contentions of the assessee. An additional ground was raised by the assessee before the Tribunal in respect of Rs. 7,45,000 shown in the balance sheet of the assessee as a provision for taxation. It was contended that the same should also be treated as a reserve and in the alternative should be treated as a fund within the meaning of sub-r. (ii) of r. 2 in the Second Schedule to the said Act. The Tribunal allowed the assessee to raise the additional ground and following Duncan Brothers and Co. Ltd. vs. CIT (1978) 111 ITR 885 (Cal), held that the same should be treated as a fund as claimed. The ITO was directed to recompute the capital of the assessee on the basis of the aforesaid.
(3.) IN this reference under s. 256(1) of the IT Act, 1961, as applied to the Companies (Profits) Surtax Act, 1964, at the instance of the Revenue, the following questions have been referred by the Tribunal as questions of law arising out of the order : "1. Whether, on the facts and in the circumstances of the case, the capital redemption reserve is a reserve within the meaning of r. 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, so as to be included as capital employed ? 2. Whether, on the facts and in the circumstances of the case, provision for taxation constituted a fund within the meaning of sub-r. (ii) of r. 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ?" Question No. 2 appears to be settled by two decisions of this Court, viz., Duncan Brothers and Co. Ltd. vs. CIT (supra) and Duncan Brothers & Co. Ltd. vs. CIT (1981) 128 ITR 302. Following the said decisions, we answer the question in the affirmative and in favour of the assessee.;