Law:

Section:

Second Schedule to the Companies (Profits) Surtax Act, 1964 - Capital - Computation of - Whether 'machinery replacement reserve' and 'dividend equalisation reserve' are 'reserves' within meaning of rule 1(iii) of Second Schedule and, therefore, includible in computing capital - Held, yes - Whether 'contingency reserve' is in nature of a general reserve and same should also be taken into consideration in computation of capital base - Held, yes FACTS The Tribunal held that the amounts set apart as, (i) machinery replacement reserve; (ii) contingency reserve; and (iii) dividend equalisation reserve were really 'reserve' within the meaning of rule 1(iii) of the Second Schedule of the Act, and, hence, they should be taken into consideration in the computation of the capital base. On reference: HELD The machinery replacement reserve in view of the decisions in CIT v. Craigmore Land & Produce Co. Ltd. [1977] 110 ITR 730 (Mad.) and Addl. CIT. v. Craigmoer Land & Produce Co. Ltd. [1979] 116 ITR 889 (Mad.) and the dividend equalisation reserve in view of the decision in Addl. CIT v. Adoni Spg. & Weg. Co. Ltd. [1977] 108 ITR 236 (Mad.) are reserves within meaning of rule 1(iii ) and thus includible in computing the capital. As regards the contingency reserve, the same was only in the nature of a general reserve. Therefore, no question of law could be said to arise. Note : The decision is against the revenue. CASES REFERRED TO CIT v. Craigmore Land and Produce Co. Ltd. [1977] 110 ITR 730 (Mad), Addl. CIT v. Craigmore Land and Produce Co. Ltd. [1979]116 ITR 889 (Mad) and Addl. CIT v. Adoni Spinning and Weaving Co. Ltd. [1977] 108 ITR 236 (Mad.). JUDGMENT Sethuraman, J.-The Commissioner of Income-tax has applied for reference of the following two questions: "(1)Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the rectification of mistakes involved an arguable and debatable question of law and, therefore, the revision of assessment under section 13 of the Companies…

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