Capital computation under surtax law excludes share cost even without actual dividend income, based on asset category

For computing capital under rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the cost of shares is to be excluded where the shares fall within the category of assets whose income is of the kind excluded under rule 1 of the First Schedule. Actual receipt of dividend or other excluded income during the accounting period is not a for exclusion; the statutory inquiry is whether the asset is capable of yielding the relevant excluded income. Applying a literal construction of the computation provisions, the court held that the cost of the shares was rightly excluded from the assessee's capital and answered the issue in favour of the Revenue.

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Issues: Whether, for computing capital under rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the cost of shares must be excluded even when no dividend income was actually derived from those shares during the relevant accounting period.

Analysis: The charging and computation scheme of the Companies (Profits) Surtax Act, 1964 links chargeable profits to exclusions under the First Schedule and capital adjustments under the Second Schedule. Rule 2 of the Second Schedule operates on the description of assets whose income is of the kind excluded under rule 1 of the First Schedule. The Court held that the rule does not make actual receipt of income a condition for exclusion of the asset cost from capital. A taxing statute must receive its literal meaning, and the relevant inquiry is whether the asset is of a category capable of generating the excluded kind of income, not whether income was in fact earned in the accounting year.

Conclusion: The cost of the shares was rightly excluded from the assessee's capital, and the question was answered in favour of the Revenue and against the assessee.

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