Amalgamation reserve treatment: book-value shortfall from acquired assets was excluded from capital for surtax computation.

For surtax computation, a shortfall arising on amalgamation between the book value of net assets acquired and the consideration paid was not treated as a capital reserve includible in capital under rule 1(iii) of the Second Schedule. The analysis turned on Explanation 1 to rule 2, which excludes reserves brought into existence by creating or increasing a book asset through valuation or similar accounting treatment. On the facts, the shortfall resulted from the higher historic book value at which the acquired assets were carried, so it was treated as a reserve created by the assessee's accounting treatment rather than a statutory capital component.

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Issues: Whether the difference between the book value of the net assets acquired and the consideration paid on amalgamation constituted a capital reserve includible in the company's capital for surtax computation under rule 1(iii) of the Second Schedule read with Explanation 1 to rule 2.

Analysis: The capital computation under the Second Schedule is subject to its other provisions. Although rule 1(iii) refers to other reserves, Explanation 1 to rule 2 excludes reserves brought into existence by creating or increasing, by valuation or otherwise, any book asset from being treated as capital. On the facts, the assessee acquired the assets and liabilities of the amalgamating companies and the shortfall between the book value of the assets and the consideration paid arose because the assets were carried in the books at the higher historic value. That shortfall represented a reserve created by the assessee through the accounting treatment of the acquired assets and not a capital component eligible for statutory deduction.

Conclusion: The amount of Rs. 1,43,89,055 was not includible in the assessee's capital for surtax purposes; the finding in favour of the Revenue was affirmed.

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