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Issues:
1. Whether the bond redemption fund should be treated as a "reserve" or a "provision" for the purpose of computing capital under the Companies (Profits) Surtax Act, 1964. Detailed Analysis: The judgment delivered by the High Court of Madras involved a case where the assessee, a company promoted by the Government of Tamil Nadu, claimed that an amount representing the bond redemption fund should be considered as part of the paid-up capital for computing the capital under the Companies (Profits) Surtax Act, 1964. The Surtax Officer, however, viewed this fund as a provision created to meet a known liability since the loan became due for payment in 1983. The Commissioner of Income-tax (Appeals) upheld this view, stating that the fund could not be treated as a "reserve" under the Companies Act. The Appellate Tribunal, considering a Government order and a Supreme Court decision, concluded that the fund was created out of surplus profit and should be treated as a "reserve" and included in the capital base for the Surtax Act. The main question raised was whether the bond redemption fund constituted a provision or a reserve. The High Court, after considering the relevant provisions and the Supreme Court decision in National Rayon Corporation Ltd. v. CIT [1997] 227 ITR 764, emphasized the distinction between a provision and a reserve in commercial accountancy as per the Companies Act. The court highlighted that when money is borrowed, a liability to repay arises, and any money set aside to meet this known liability should be considered a provision, not a reserve. The High Court criticized the Tribunal for not applying this test correctly and for erroneously treating the fund as a reserve based on surplus profit without considering the existence of a known liability. Consequently, the High Court held that the Tribunal had erred in law by categorizing the bond redemption fund as a reserve and directed the Tribunal to reconsider the matter in line with the Supreme Court's decision in National Rayon Corporation Ltd. v. CIT [1997] 227 ITR 764. The court answered the question in the negative, favoring the Revenue, and instructed the Tribunal to reassess the classification of the fund when the case is brought before it again.
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