Surtax capital computation: later authoritative reserve treatment controls, while gratuity provision requires fresh reconsideration.

For computation of capital under rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, dividend proposed out of general reserve must be deducted from general reserve, and the later authoritative Full Bench view prevails over an earlier contrary decision. The Tribunal was therefore wrong in following the earlier case on that issue. On the treatment of provision for gratuity, the record was insufficient for a final determination, so the matter had to be reconsidered by the Tribunal in the light of the governing Supreme Court ruling on whether an amount set apart for gratuity can be treated as a reserve.

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Issues: Whether dividend proposed out of general reserve is to be deducted from general reserve while computing capital under rule 2(ii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964; and whether the provision for gratuity should be treated as a reserve included in capital for surtax computation.

Analysis: On the first question, the earlier view relied on by the Tribunal was held to be incorrect in light of the later Full Bench decision, and the Tribunal was found to have erred in following the earlier case. The question had to be answered by applying the later authoritative view on computation of capital under the Second Schedule. On the second question, the record was insufficient for a final determination, and the matter required reconsideration by the Tribunal in the light of the Supreme Court ruling on whether an amount set apart for gratuity can be treated as a reserve.

Conclusion: The first question was answered against the assessee and in favour of the Revenue. The second issue was remitted to the Tribunal for fresh consideration.

Final Conclusion: The reference was answered partly in favour of the Revenue, and the matter was sent back to the Tribunal for reconsideration of the gratuity-reserve issue.

Ratio Decidendi: For surtax capital computation, the controlling later authoritative view on the treatment of reserves must be followed, and where the factual basis is insufficient on a gratuity-related reserve question, the Tribunal must reconsider the issue in accordance with the governing Supreme Court ruling.

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