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Issues:
1. Interpretation of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 regarding reduction in capital due to relief under sections 80-1 and 80M. 2. Determination of whether bonus reserve falls under rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964 for computation of capital. Analysis: 1. The first issue pertains to the interpretation of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 in relation to the reduction in capital due to relief under sections 80-1 and 80M. The court referred to a previous decision and concluded that the reduction in capital on account of such relief does not come within the scope of rule 4. Therefore, the answer to question No. (1) was given in favor of the assessee based on this precedent. 2. Moving on to the second issue, the court analyzed whether the bonus reserve should be considered as a reserve in the computation of capital for the assessee-company. The Income-tax Officer initially excluded the bonus reserve amounts from the computation of capital. However, the Appellate Assistant Commissioner reversed this decision, which was further upheld by the Tribunal. The Tribunal found that the bonus reserve was not utilized for payment of bonuses, as the bonus payments were separately debited to the profit and loss account. The court agreed with the Tribunal's findings, stating that the bonus reserve had no correlation to actual bonus payments and was not utilized for such payments. Therefore, the bonus reserve could not be excluded from the computation of capital, and the decision in favor of the assessee was upheld. In conclusion, both issues were decided in favor of the assessee. The judgment provided a detailed analysis of the facts and legal principles involved in determining the treatment of reduction in capital and bonus reserve for the computation of capital under the Companies (Profits) Surtax Act, 1964. The parties were directed to bear their own costs of the reference.
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