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Issues:
1. Whether gratuity reserves and dollar revaluation reserves in the balance sheet of the assessee constitute reserves under the Companies (Profits) Surtax Act, 1964? Analysis: The first issue pertains to the classification of gratuity reserves in the balance sheet of the assessee as reserves under the Companies (Profits) Surtax Act, 1964. The Tribunal is directed to determine the portion of the gratuity reserve that is a provision towards an existing liability based on the judgment in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559. Moving on to the second issue, it involves the dollar revaluation reserves appearing in the balance sheet of the assessee company. The assessee credited a sum to a reserve titled "Dollar revaluation reserve" after the Indian rupee devaluation in 1966. The contention was whether this sum should be included in the capital base for computing surtax under the Companies (Profits) Surtax Act, 1964. The Income-tax Officer initially rejected the claim, but the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal ruled in favor of the assessee. The relevant legal framework under the Companies (Profits) Surtax Act, 1964, defines the capital of a company for surtax computation purposes. The Second Schedule outlines the rules for computing the capital, emphasizing the inclusion of paid-up share capital. The dispute centered on whether the dollar revaluation reserves were book assets under the Explanation to rule 2, which would exclude them from the capital base calculation. The court analyzed the situation where the assessee's share capital included an amount in dollars paid by a foreign entity, which increased in rupee value post-devaluation. The court held that this increase in rupee value constituted an increase in paid-up share capital and should be included in the capital base calculation. The decision was supported by a similar ruling in CIT v. Warner Hindustan Ltd. [1986] 158 ITR 51, where a comparable scenario was resolved in favor of the assessee. In conclusion, the court answered the second question affirmatively in favor of the assessee, emphasizing that the increased rupee value of the dollar reserves should be considered part of the capital base for surtax computation purposes. No costs were awarded in this matter.
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