Capital computation for surtax: share cost need not be excluded where surplus and reserves already cover the amount.

Rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 was construed as operating only where income from the relevant assets is excluded under rule 1 of the First Schedule, and the reduction from capital is limited to the extent contemplated by the schedule. Applying that approach, the cost of shares was not required to be excluded from capital because the assessee already had sufficient surplus and reserves, and the share cost did not exceed those amounts. The court relied on its earlier interpretation and found support in a Bombay High Court decision, with the issue answered in favour of the assessee.

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Issues: Whether, on the facts and in the circumstances of the case, the cost of shares was liable to be excluded from the computation of capital for levy of surtax by applying rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The reference turned on the construction of rule 2 of the Second Schedule in the light of rule 1 of the First Schedule. The Court followed its earlier interpretation that rule 2 operates only where the income from the relevant assets is excluded under rule 1, and that the reduction from capital is confined to the extent contemplated by the schedule. On the facts found by the Appellate Assistant Commissioner, the assessee had sufficient surplus and reserve amounts already available, and the cost of the shares did not exceed those amounts. In that situation, the cost of the shares was not liable to be excluded from the capital computation. The Court also found support for this view in the Bombay High Court decision relied upon by the assessee.

Conclusion: The issue was answered in favour of the assessee, and the cost of shares was not required to be excluded from the computation of capital for surtax purposes.

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