COMMISSIONER OF INCOME TAX Vs. PLACID LIMITED

JUDGEMENT

(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.

(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 :