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Issues Involved:
1. Whether the amounts shown as reserves for repayment of loans in the balance-sheet should be treated as reserves created by the company for computing the capital for super profits tax and surtax purposes for the assessment years 1963-64, 1966-67, and 1970-71. Issue-wise Detailed Analysis: Assessment Year 1963-64: Issue: Whether the amounts shown as reserves for repayment of loans should be treated as reserves created by the company for computing the capital for the purpose of super profits tax. Analysis: The company appropriated profits to a reserve named "Reserve for IFC loan repayment" before obtaining the loan. The ITO considered these amounts as provisions, not reserves, and excluded them from capital computation for super profits tax. The AAC disagreed, treating these amounts as reserves, qualifying them as part of the capital for standard deduction purposes. The Appellate Tribunal upheld the AAC's view, determining the amounts as reserves, thus includable in the capital computation. Assessment Year 1966-67: Issue: Whether the amounts shown as reserves for repayment of loans should be treated as reserves created by the company for computing the capital for the purpose of surtax. Analysis: Similar to the 1963-64 assessment, the ITO excluded the reserves from capital computation, treating them as provisions. The AAC, however, considered these amounts as reserves, thus includable in the capital for surtax computation. The Appellate Tribunal agreed, treating the amounts as reserves created out of taxed profits, thereby qualifying them as part of the capital for standard deduction. Assessment Year 1970-71: Issue: Whether the amounts shown as reserves for repayment of loans should be treated as reserves created by the company for computing the capital for the purpose of surtax. Analysis: Unlike the previous years, the AAC considered the reserves as current liabilities, excluding them from capital computation. However, the Appellate Tribunal reversed this view, treating the amounts as reserves, thus includable in the capital for surtax computation. The Tribunal noted that the reserves were created out of taxed profits and used for other purposes, such as issuing bonus shares, indicating they were not merely provisions. Common Legal Analysis: The core issue across all years was whether the amounts appropriated as "Reserve for IFC loan repayment" were reserves or provisions. The relevant statutory provisions include Section 2(5), Section 2(8), and the Second Schedule of the Companies (Profits) Surtax Act, 1964. According to Rule 1(iii) of the Second Schedule, reserves include amounts not allowed as deductions in computing the company's income. The Appellate Tribunal concluded that the reserves were created out of taxed profits and were not used for loan repayment, thus qualifying as reserves under the Act. Conclusion: The High Court affirmed the Appellate Tribunal's decision, holding that the amounts appropriated to the "Reserve for IFC loan repayment" were indeed reserves and should be included in the capital computation for super profits tax and surtax purposes. The questions referred were answered in the affirmative, favoring the assessee-company and against the Revenue.
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