TMI Blog1984 (8) TMI 73X X X X Extracts X X X X X X X X Extracts X X X X ..... inution of the standard deduction calculated on a fixed percentage of capital and a consequent increase in the chargeable profit. On an appeal from the said assessment, the AAC found that a capital redemption reserve was normally created to meet an existing liability, viz., redemption of debentures, and that it was not possible to ascertain whether the amount in dispute was maintained only as a reserve. He held that the said reserve was created obviously for the redemption of debentures and confirmed the assessment. On a further appeal before the Income-tax Appellate Tribunal, the assessee contended that in the parlance of accountancy as also in law, capital redemption reserve was a part of the reserves of a company. Relying on the Expl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Whether, on the facts and in the circumstances of the case, provision for taxation constituted a fund within the meaning of sub-rule (ii) of rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 ? " Question No. 2 appears to be settled by two decisions of this court, viz., Duncan Brothers and Co. Ltd. v. CIT [1978] 111 ITR 885 and Duncan Brothers Co. Ltd. v. CIT [1981] 128 ITR 302. Following the said decisions, we answer the question in the affirmative and in favour of the assessee. On question No. 1, learned advocate for the Revenue contended before us that a capital redemption reserve was in effect a provision inasmuch as the amount set apart was intended to meet a known liability, i.e., the redemption of redeema ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d " provision ", in the context of the said Act, the Supreme Court observed as follows (p. 568): " According to the dictionaries (both Oxford and Webster), the applicable primary meaning of the word 'reserve' is: 'to keep for future use or enjoyment; to set apart for some purpose or end in view ; to keep in store for future or special use : 'to keep in reserve', while 'provision' according to Webster means : 'something provided for future'. In other words, according to the dictionary meanings, both the words are more or less synonymous and connote the same idea. Since the rules for computation of capital contained in the Second Schedule to the Act proceed on the basis of the formula of capital plus reserves a formula well known in commerc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serve but it does not follow that if the retention or appropriation is not a provision it is automatically a reserve and the question will have to be decided having regard to the true nature and character of the sum so retained or appropriated depending on several factors including the intention with which and the purpose for which such retention or appropriation has been made because the substance of the matter is to be regarded and in this context the primary dictionary meaning of the term 'reserve' may have to be availed of. But it is clear beyond doubt that if any retention or appropriation of a sum is not a provision, that is to say, if it is not designated to meet depreciation, renewals or diminution in value of assets or any known li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares shall be redeemed except out of profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of the redemption .......... (d) where any such shares are redeemed otherwise than out of the proceeds of a fresh issue there shall, out of profits which would have been available for dividend, be transferred to a reserve fund, to be called the capital redemption reserve account, a sum equal to the nominal amount of the shares redeemed ; and the provisions of this Act relating to the reduction of the share capital of a company shall, except as provided in this section, apply as if the capital redemption reserve account were paid-up share capital of the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd as such it fulfills the tests of a reserve. In addition, we note that capital redemption reserve has been particularly included under the heading " reserve " in the form of balance-sheet as provided for in Schedule VI of the Companies Act. Taking into account all the relevant factors including the dictionary meaning of the expression " reserve " and the intention for making such a reserve, in our view, the item " capital redemption reserve " is a reserve and not a provision within the meaning of the said Act as also the Companies Act and must be included in the capital in an assessment under the said Act. For the above reasons we answer question No. 1 also in the affirmative and in favour of the assessee. There will be no order as to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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