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Issues:
Whether the amount representing 'preference share redemption reserve' at the beginning of the accounting period should be included as part of the capital base under the Second Schedule to the Companies (Profits) Surtax Act, 1964. Analysis: The case involved a public limited company for the assessment year 1979-80. The Surtax Officer reduced the capital employed by Rs. 10 lakhs, representing the "preference share redemption reserve," stating it was earmarked for a known liability of redeeming preference shares and should be excluded from capital computation as a provision. The Commissioner of Income-tax (Appeals), citing a Karnataka High Court decision, disagreed and upheld the objection to the exclusion of the reserve amount from the capital base calculation. On appeal by the Revenue, the Appellate Tribunal affirmed the Commissioner's decision. The Department then sought a reference to the High Court on whether the redemption reserve should be part of the capital base. The Department argued that the reserve, designated for redeeming preference shares, should be treated as a provision and excluded from capital computation. Citing the Karnataka High Court case, the High Court found that the reserve, even if named differently, was akin to a capital redemption reserve under the Companies Act, and thus should be included in the capital base for Surtax Act purposes. Additionally, the judgment referenced a similar decision by the Andhra Pradesh High Court, which emphasized that a capital redemption reserve is a type of reserve to be considered for computing the capital base. The Andhra Pradesh High Court highlighted that the Companies Act and the Companies (Profits) Surtax Act provisions support the inclusion of capital redemption reserves in the capital base calculation. Relying on these precedents, the High Court concluded that the preference share redemption reserve should indeed be included in the capital base under the Companies (Profits) Surtax Act, 1964. Therefore, the High Court upheld the Tribunal's decision, ruling that the amount representing the preference share redemption reserve at the beginning of the accounting period should be considered part of the capital base under the Second Schedule to the Companies (Profits) Surtax Act, 1964. The court answered the referred question in the affirmative, favoring the assessee and rejecting the Department's argument. No costs were awarded in the matter.
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