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Schedule II, Rule 1, of Companies (Profits) Surtax Act, 1964 – Surtax – Computation of Capital – Assessment year 1964-65 – Assessee's claim for treating (a) replanting, building and machinery reserve, (b) tax contingency reserve and (c) pension reserve, as reserves and hence part of capital, was rejected by assessing authority – AAC held that these constituted free reserves and were includible in capital computation – Tribunal upheld AAC's order – Whether replanting, building and machinery reserve was a reserve includible in computation of capital – Held, yes – Whether tax contingency reserve not having been created for purpose of meeting any tax liability as such, it would be in category of a free reserve so as to qualify for inclusion in computation of capital - Held, yes – Whether as regards pension reserve, in view of fact that there had been no debit to pension reserve from beginning and it was ultimately transferred to general reserve account and used for declaration of dividends, it was not for purpose of meeting any liability as such, and hence, it was also includible in capital computation – Held, yes FACTS The assessee, a non-resident foreign company engaged in the manufacture of tea from the estates owned in India, claimed that (a) replanting, building and machinery reserve, (b) tax contingency reserve and (c) pension reserve should be treated as part of its capital under rule 1 of Schedule II. The Assessing Officer rejected the assessee's claim. On appeal, the AAC, held that the reserves constituted free reserves and were includible in the capital computation. On revenue's appeal, the Tribunal upheld the AAC's order. On reference : HELD Following the decision in assessee's own case in an earlier year, the replanting, building and machinery reserve was rightly treated as a reserve by the Tribunal. The tax contingency reserve, according to the AAC, was not created for the purpose of meeting any tax liability as such, and, therefore, it would be in the category of a free reserve so as to qualify for inclusion in the computation of capital. In the case of the pension reserve, there had been no debit to this reserve account from the very inception and it…

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