Surtax capital computation: reserves counted as capital, dividend declarations related back, and Chapter VI-A relief did not reduce capital.

For surtax capital computation, reserves for bad and doubtful debts and the balance in Pakistan were treated as part of capital because they retained the character of reserves rather than loan liabilities. Dividends declared after the opening day of the accounting period were deducted from the general reserve, as dividend approval was treated as relating back to the first day of the accounting year. Relief allowed under Chapter VI-A did not, by itself, require a proportionate reduction of capital under rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

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Issues: (i) Whether the reserve for bad and doubtful debts and the reserve for balance in Pakistan were to be treated as capital for levy of surtax. (ii) Whether dividends declared after the first day of the accounting period were to be deducted from the general reserve while computing capital for levy of surtax. (iii) Whether the capital was to be proportionately reduced under rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, because of deductions allowed under Chapter VI-A of the Income-tax Act, 1961.

Issue (i): Whether the reserve for bad and doubtful debts and the reserve for balance in Pakistan were to be treated as capital for levy of surtax.

Analysis: The reserve for bad and doubtful debts was covered by the principle that such reserve forms part of capital for surtax computation. As to the balance in Pakistan, the reserve was treated as a reserve and not as a loan liability, and therefore it was includible in the capital base. The conclusion was supported by the settled approach that reserves of this nature are taken into account for surtax purposes.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Issue (ii): Whether dividends declared after the first day of the accounting period were to be deducted from the general reserve while computing capital for levy of surtax.

Analysis: Approval of the dividend by the general body related back to the first day of the accounting year. On that basis, dividends declared subsequent to the opening day were to be deducted from the general reserve for computing capital.

Conclusion: The issue was decided in favour of the Revenue and against the assessee.

Issue (iii): Whether the capital was to be proportionately reduced under rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, because of deductions allowed under Chapter VI-A of the Income-tax Act, 1961.

Analysis: Relief allowed under Chapter VI-A was not treated as income, profits and gains not includible in the total income for the purpose of rule 4 of the Second Schedule. Such relief did not diminish the capital to be computed under the surtax provisions.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Final Conclusion: The reference was answered partly for the Revenue and partly for the assessee, with the surtax capital computation upheld on the disputed reserve issues and the dividend adjustment issue answered against the assessee.

Ratio Decidendi: For surtax computation, reserves of the relevant nature remain part of capital, dividend approval may relate back to the first day of the accounting year, and Chapter VI-A relief does not by itself require a proportionate reduction of capital under rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

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