Law:

Section:

Second Schedule to the Companies (Profits) Surtax Act, 1964 - Capital - Computation of - Whether investment reserve, rehabilitation reserve, capital reserve and depreciation reserve are entitled to be treated as reserve and included in capital base but forfeited dividend reserve is not entitled to be so included - Held, yes Facts For the purposes of assessment under the provisions of Companies (Profits) Surtax Act, 1964, the assessee-company claimed that investment reserves, rehabilitation reserve and forfeited dividend reserves should be treated as reserves for the purposes of computation of its capital. In another case, apart from these reserves, capital reserve and depreciation reserve were also claimed as includible. The ITO, however, rejected the assessee's claim, On appeal, the Tribunal, however, accepted the assessee's claim. On reference, the High Court also upheld the Tribunal's order. On appeal: Held From a number of decisions it appears that to constitute a reserve, the following features must be satisfied : (i) it must be an appropriation of profits, current or accumulated, and, not a charge against the profits for year, (ii) the conduct of the parties must bear out that intention, and (iii) it must not be set apart to meet any known liability - a liability known to exist on the date of the balance sheet. Keeping the said principles in mind, in the present case, the investment reserve and rehabilitation reserve were reserves and were entitled to be treated so under the said Act. Similarly, capital reserve and depreciation reserve were to be treated as reserves and included in the capital base. But so far as forfeited dividend reserve was concerned the same could not be treated as reserve for that purpose and the High Court was not justified in holding otherwise in this respect. Cases referred to CIT v. Elgin Mills Co. Ltd. [IT Reference No. 196 of 1971, dated 19-7-1973], Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559(SC), CIT v. British India Corpn. (P.) Ltd. [1973] 92 ITR 38 (All.), CIT v. Saran Engg. Co. Ltd. [IT Reference No. 200 of 1971, dated 19-7-1973], Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC), CIT v. Eyre…

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