AJIT K. SENGUPTA, J. ( 1 ) IN this reference under Section 256 (2) of the Income-tax Act, 1961, for the assessment year 1972-73, the following question of law has been referred to this court :"whether, on the facts and in the circumstances of the case, the Tribunal was right in holding the the debenture redemption reserve of Rs. 11,00,000 should be taken into account for the purpose of computation of capital according to the Second Schedule to the Companies (Profits) Surtax Act, 1964, for the assessment year 1972-73 ?" ( 2 ) THE facts found by the Tribunal are that the assessee-company issued 1,500 debentures of Rs. 1,000 each in the previous year ending December 31, 1961 (the company was then observing the calendar year as its accounting year ). For the security of these debentures, a trust deed dated July 26, 1951, was executed in favour of the trustees by the assessee-company. Clause 13 of the conditions of the said trust deed mentions as under :"13. The company shall open a debenture redemption account in accordance with the following provisions, namely : (a) During the year ending December 31, 1953, and, during every succeeding year ending December 31, whilst any debenture remains outstanding, the company shall credit to the debenture redemption account the sum of Rs. 60,000. (b) The company may, in any year, credit to the debenture redemption account a sum in excess of the requirements specified in the last paragraph hereof and such excess may be treated as satisfaction pro tanto of the obligations for any later year or years. (c) The company shall, not later than December 15, 1953, and not later than December 15, in each succeeding year cause a drawing to be made in the manner hereinafter provided for redemption of not more than sixty debentures at par and any balance standing to the debenture redemption account then remaining shall be carried forward and added to and dealt with as forming part of the debenture redemption account for the next succeeding year. Any interest accrued on debentures so drawn shall be payable by the company otherwise than out of the debenture redemption account. " ( 3 ) AS on March 31, 1972, there was a balance of Rs. 11 lakhs lying in the "debenture redemption reserve account". Any interest accrued on debentures so drawn shall be payable by the company otherwise than out of the debenture redemption account. " ( 3 ) AS on March 31, 1972, there was a balance of Rs. 11 lakhs lying in the "debenture redemption reserve account". The Assessing Officer for the purposes of computing capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964, took the above amount as "provision" and not as reserve. ( 4 ) THE assessee challenged the above order in appeal before the Appellate Assistant Commissioner but remained unsuccessful. On further appeal, the Income-tax Appellate Tribunal in its order dated May 30, 1975, held that the above amount be taken as reserve as the amount was charged to the profit and loss account and was created to preserve the working capital of the company. ( 5 ) THE Revenue sought a reference from the aforesaid order and this court remanded the matter to the Tribunal with the observations that "no facts could be ascertained from the order of the Income-tax Officer or the Appellate Assistant Commissioner". ( 6 ) THE Tribunal once again took up the matter as per directions of the High Court and called for a report from the Assessing Officer. The report dated January 29, 1988, was submitted to the Tribunal. The Tribunal once again heard the parties in the light of the above report. It was explained by counsel for the assessee that, as per the terms and conditions of the debentures, the company was required to redeem 60 debentures of the total value of Rs. 60,000 every year. The amount paid to debenture-holders on redemption was debited to the debenture account and interest accrued on those debentures was paid by the company otherwise than out of the debenture redemption account. The debenture redemption account was created out of the profits of the company. It was, accordingly, contended for the assessee that debenture redemption was nothing but a capital reserve so that, after redemption of all the debentures, the company might not be short of funds. It was further stated that the Revenue cannot dispute the report submitted by the Income-tax Officer, The Departmental Representative, on the other hand, contended before the Tribunal that the debenture redemption reserve account was only a provision. It was further stated that the Revenue cannot dispute the report submitted by the Income-tax Officer, The Departmental Representative, on the other hand, contended before the Tribunal that the debenture redemption reserve account was only a provision. ( 7 ) THE Tribunal accepted the contention of the assessee with the following remarks :"we entirely agree with the report of the Income-tax Officer and the arguments of learned counsel for the assessee. It is to be seen that the debenture redemption reserve was created out of the profits of the company and payment to the debenture-holders on account of principal and interest was made out of the funds other than the debenture redemption reserve. It is a principle of accountancy that an amount equal to the cash applied in redeeming debentures should be transferred from the profit and loss account to the capital redemption reserve fund in order to conserve working capital : in other words, the purpose of transferring profits to the capital redemption reserve fund is to prevent reduction of capital. The assessee has followed the same method. The debenture redemption reserve is necessarily a reserve and in no sense a provision since, in redeeming, cash was applied from the funds other than the debenture redemption reserve. It is, therefore, held that the reserve for debenture redemption of Rs. 11,00,000 should be taken into account for the purpose of computation of capital according to the Second Schedule to the Companies (Profits) Surtax Act, 1964. " ( 8 ) MR. Sunil Mitra, learned counsel appearing for the Revenue, has drawn our attention to the decision of the Madras High Court in CIT v. Gordon Woodroffe and Co. (Madras) Ltd. [1990] 183 ITR 465. In that case, in the course of the assessment for the assessment years 1971-72 and 1972-73, the assessee's claim for treating the reserves for asset replacement, debenture redemption fund and staff retirement gratuity as reserves in the computation of capital for the purposes of surtax was negatived by the Income-tax Officer but accepted by the Appellate Assistant Commissioner and the Tribunal. On a reference, it was held by the High Court that the asset replacement reserve could not be included in the computation of capital for the purpose of surtax. Similarly, the debenture redemption fund was not also includible in the capital of the company for purposes of surtax. On a reference, it was held by the High Court that the asset replacement reserve could not be included in the computation of capital for the purpose of surtax. Similarly, the debenture redemption fund was not also includible in the capital of the company for purposes of surtax. As far as the reserve for retirement gratuity was concerned, any amount in excess of the actual liability for gratuity would alone be includible as part of the capital. ( 9 ) OUR attention has also been drawn to a decision of this court in the case of CIT v. Peico Electronics and Electricals [1987] 166 ITR 299. In that case, for the assessment year 1974-75, in computing the capital of a company for the purpose of surtax, the Income-tax Officer excluded the debenture redemption reserve. The Tribunal held that the said reserve could not be considered as a sinking fund and, therefore, it could not be excluded from the capital base of the assessee by reason of the Explanation to Rule 1 of the Second Schedule to the Surtax Act. There, this court held that the debenture redemption reserve in that case fulfilled the test of a reserve because (a) the reserve had been created out of appropriation from profits and not by way of a charge on the revenue ; (b) the fund had been retained to form part of the capital employed in the business, i. e. , it had not been invested in securities or otherwise so as to take it out of the business ; (c) none of the debentures became redeemable during the accounting period. The liability to redeem the debentures was a future liability ; and (d) the debentures had been separately shown in the balance-sheet as a liability. It was also found that the debenture redemption reserve had not been converted into a sinking fund by investment. Therefore, the Tribunal was right in holding that the debenture redemption fund could not be excluded in computing the capital of the assessee for the purpose of surtax. ( 10 ) WE are of the view that this decision squarely applies to the facts of this case. Therefore, the Tribunal was right in holding that the debenture redemption fund could not be excluded in computing the capital of the assessee for the purpose of surtax. ( 10 ) WE are of the view that this decision squarely applies to the facts of this case. It has been found in this case that the amount which was paid to the debenture-holders on redemption was debited to the debenture account and the interest accrued on those debentures was paid by the company otherwise than out of the debenture redemption reserve account. It was found by the Tribunal that the debenture redemption reserve was created out of the profits of the company and the payment to the debenture-holders on account of principal and interest was made out of funds other than the debenture redemption reserve. It also appears that an amount equal to the cash applied in redeeming debentures was transferred from the profit and loss account to the capital redemption reserve fund in order to conserve working capital. In other words, the purpose of transferring profits to the capital redemption reserve fund is to prevent reduction of capital. On these facts, we are of the view that the Tribunal came to a correct conclusion. We, therefore, answer the question in this reference in the affirmative and in favour of the assessee. There will be no order as to costs.