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Interpretation of provisions under the Companies (Profits) Surtax Act, 1964 regarding inclusion of preference share capital redemption reserve in the capital base for surtax calculation. Analysis: The judgment pertains to two cases concerning the inclusion of preference share capital redemption reserve in the capital base under the Companies (Profits) Surtax Act, 1964. The primary issue revolved around whether the amounts transferred to the redemption reserve account should be considered as part of the capital base for surtax calculation. The company had transferred Rs. 1,50,000 and Rs. 6,00,000 to the redemption reserve account in different accounting periods. The Income Tax Officer (ITO) initially rejected the claim, arguing that the transfers were made after the commencement of the accounting year. However, the Appellate Assistant Commissioner (AAC) allowed the appeals based on the decision in CIT v. Mysore Electrical Industries Ltd., stating that appropriations for reserves approved after the start of the accounting year should be deemed effective from the beginning of the year. The department contended that the amounts were provisions, not reserves, citing the provisions of the Companies Act. They argued that only reserves, not provisions intended to meet known liabilities, should be included in the capital base for surtax calculation. The Tribunal rejected this argument, emphasizing that the nature of the reserve created by the company to meet its liability for redeemable preference shares qualified as a reserve under the Companies Act. The Tribunal referred to the Second Schedule of the Act, which outlines the constituent elements of the capital base for surtax calculation. The Tribunal concluded that the amounts transferred to the redemption reserve account should indeed be included in the capital base, as they met the criteria of being reserves, not provisions. The judgment highlighted the importance of interpreting the term "reserve" in line with common parlance and company law principles. The Explanation to the Second Schedule of the Act clarified that amounts standing to the credit of accounts categorized as reserves and surplus in the balance sheet should be treated as reserves for capital computation purposes. The judgment affirmed that the amounts transferred to the redemption reserve account were indeed reserves, as they aligned with the definition and purpose of reserves under the Companies Act. Therefore, the Tribunal's decision to include the sums of Rs. 1,50,000 and Rs. 6,00,000 in the capital base for surtax calculation was upheld. In conclusion, the court answered the questions in favor of the assessee, directing the department to bear the costs. The judgment emphasized the correct interpretation of reserves under the Companies Act and their inclusion in the capital base for surtax calculation under the Companies (Profits) Surtax Act, 1964.
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