Capital base under surtax law includes transferred development rebate reserve; beneficial interpretation favours the assessee.

For capital base computation under rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, a development rebate reserve transferred to general reserve is not to be reduced from reserves merely because it originated from a tax-linked reserve. The text distinguishes development rebate under section 33 from the reserve condition in section 34(3)(a), noting that only amounts actually allowed as a deduction in computing income fall within the reduction rule. After the statutory period, the transferred amount continues to form part of reserves for capital base purposes. Where two interpretations are possible, the construction more beneficial to the assessee prevails.

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Issues: Whether the development rebate reserve written back to general reserve was liable to be reduced from the capital base under rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The capital base under the Second Schedule includes paid-up share capital and reserves, and rule 1(iii) permits reduction only of amounts credited to reserves that have been allowed as a deduction in computing income under the Income-tax Act. Development rebate is governed by section 33, while section 34(3)(a) requires only an amount equal to seventy-five per cent of the development rebate to be debited and carried to a reserve account for the specified period. The amount standing in the development rebate reserve is therefore not the same as the deduction allowed under the Income-tax Act. Once transferred to general reserve after the expiry of the statutory period, the amount continues to form part of reserves for capital base purposes. In any event, where two constructions are possible, the construction more beneficial to the assessee is preferred.

Conclusion: The amount transferred from development rebate reserve to general reserve was not required to be reduced from the capital base, and the question was answered in favour of the assessee.

Ratio Decidendi: For the purpose of rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, a reserve amount that originated as development rebate reserve and was later transferred to general reserve is not treated as an amount allowed as a deduction in computing income, and a beneficial construction will prevail where the wording permits more than one interpretation.

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