Law:

Section:

Schedule II to the companies (Profits) Surtax Act 1964 - Capital - Computation of - Assessment years 1966-67 and 1967-68 - Whether amounts representing 'preference share capital redemption reserve' at beginning of relevant accounting period should be included as part of capital base - Held, yes FACTS The assessee company had issued redeemable cumulative preference shares which were redeemable on 31-12-1970 or earlier at the option of the assessee. During the accounting years ending 31-7-1965 and 31-7-1966, the assessee transferred certain amounts from the profits and loss appropriation account to the preference share capital redemption reserve account. In the course of the assessment proceedings under the Act, the assessee, therefore, claimed that the said amounts should be taken into consideration while determining the capital base. The ITO rejected the claim made by the assessee on the ground that the appropriation of the amounts in question as reserves had been made by the company at the meetings held subsequent to the first day of the relevant accounting year. The assessee questioned the correctness of the orders of the ITO before the AAC. The appeals were allowed and the orders of the ITO disallowing the claim made by the assessee were reversed. On appeal, the Tribunal upheld the findings of the AAC. On reference: HELD The expression 'reserve' has not been defined in the Act. The Court has, therefore, to proceed on the basis that the said expression carries the same meaning which it has in ordinary common parlance, and as understood in company law and this view is reinforced by the Explanation to rule 1 of the second schedule to the Act. The reserve in question is the one created by the assessee as provided by section 80 of the Companies Act, 1956 in order to meet its liability to repay the capital covered by the redeemable preference shares. Part I of schedule VI of the 1956 Act gives the form of the balance-sheet which a company governed by 1956 Act should prepare annually. In that form, capital redemption reserve is shown as item (2) under the head 'Reserves and Surplus'. Any reserve that is created under section 80 of the 1956 Act, is called capital…

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