JUDGMENT

Y.K. Sabharwal, J.-This appeal has been filed by the revenue to challenge the correctness of the judgment and order of the High Court of Kerala dated 18th August, 1998. The case relates to assessment year 1985-86. On reference under Section 256(1) of the Income Tax Act, 1961 as applied to surtax by Section 18 of the Companies (Profits) Surtax Act, 1964 the questions that arose for consideration of the High Court were :

"(a) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the loan redemption reserve amount to Rs.1 crore is a reserve and not a provision and is to be included in the computation of capital for the purpose of surtax?

(b) Whether, on the facts and in the circumstances of the case and in view of the Supreme Court decision in the case of Vazir Sultan Tobacco Co. Ltd. (132 ITR 559), the Appellate Tribunal is right in holding so?"

2. By the impugned judgment the High Court answered the questions in the affirmative, that is, in favour of the respondent-assessee and against the revenue.

3. The respondent had obtained Rs. 491 lakhs as loan from Government of Kerala from 196