Surtax capital computation turns on reserve classification and whether a scientific research reserve was actually allowed as a deduction.

For surtax capital computation, unappropriated profits shown in the United Kingdom profit and loss account were treated as part of reserves on the relevant balance-sheet date, supported by the accounting treatment and absence of a board resolution, and were therefore excluded from the capital computation. By contrast, a reserve relating to capital expenditure on scientific research was not treated as an amount actually allowed as a deduction in computing income, because a separate book entry and correspondence with expenditure did not by themselves satisfy the statutory exclusion. The first issue favoured the assessee, while the second favoured the Revenue.

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Issues: (i) Whether unappropriated profits shown in the United Kingdom profit and loss account could be excluded from the capital computed for surtax purposes; (ii) Whether the reserve relating to capital expenditure on scientific research could be treated as an amount allowed as deduction and therefore excluded from capital.

Issue (i): Whether unappropriated profits shown in the United Kingdom profit and loss account could be excluded from the capital computed for surtax purposes.

Analysis: The computation of capital under the Second Schedule turns on whether the amount in question is a reserve within the statutory scheme. The balance-sheet treatment, the absence of a board resolution, and the accepted accounting practice showing the amount under reserves and surplus were treated as relevant facts. The Explanation to the Second Schedule excludes only specified items from being regarded as reserves, but the material before the Court supported the conclusion that the unappropriated profits formed part of other reserves for the relevant date.

Conclusion: The issue was answered in favour of the assessee.

Issue (ii): Whether the reserve relating to capital expenditure on scientific research could be treated as an amount allowed as deduction and therefore excluded from capital.

Analysis: The statutory exclusion applies only where the credited amount has been allowed as a deduction in computing income for income-tax purposes. The Court found that the reserve entry was a separate book entry and did not represent an amount actually allowed as deduction merely because it corresponded to the same expenditure. In the absence of a sufficient foundation for characterising it as an allowable deduction, the amount could not be brought within the exclusion from capital.

Conclusion: The issue was answered in favour of the Revenue.

Final Conclusion: The reference was disposed of by upholding the assessee's case on the first question and the Revenue's case on the second question, resulting in a partial success for both sides.

Ratio Decidendi: For surtax computation, only amounts that statutorily qualify as reserves may be included in capital, and an amount is excluded only if it is shown to have been actually allowed as a deduction in computing income under the income-tax law.

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