Surtax capital employed turns on the true character of reserves, provisions, and unclaimed dividends.

For surtax computation under the Second Schedule to the Companies (Profits) Surtax Act, the true commercial character of an item determines whether it is a reserve or a provision, and that distinction governs inclusion in capital employed. Amounts described in the balance sheet as reserves must be assessed by substance, not label, while known liabilities such as unclaimed dividends are not converted into reserves by a mere book entry without a clear act of appropriation. The discussion also notes that deductions under Sections 80G and 80M of the Income-tax Act do not, by themselves, alter the surtax computation of capital employed in the manner argued by revenue.

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Issues: (i) Whether reserves for house, doubtful debts and gratuity could be included in the computation of capital employed under the Second Schedule to the Companies (Profits) Surtax Act, 1964. (ii) Whether deductions allowed under Sections 80G and 80M of the Income-tax Act, 1961, were sums not includible in total income for the purpose of Rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. (iii) Whether unclaimed dividends of Rs. 17,545 were liable to be deducted while computing capital employed.

Issue (i): Whether reserves for house, doubtful debts and gratuity could be included in the computation of capital employed under the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The issue stood covered by earlier binding precedent holding that sums treated as reserves in the balance sheet and available for the computation of capital employed under the surtax scheme were to be considered according to their true commercial character. The court applied the settled distinction between reserves and provisions and followed the prior line of authority on the same statutory scheme.

Conclusion: In favour of the assessee. The question was answered in the negative.

Issue (ii): Whether deductions allowed under Sections 80G and 80M of the Income-tax Act, 1961, were sums not includible in total income for the purpose of Rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The issue was also covered by earlier precedent. The court held that the deductions under Chapter VI-A did not alter the computation of capital employed for surtax purposes in the manner contended for by the revenue, and the question was to be answered in line with the earlier decisions.

Conclusion: In favour of the assessee. The question was answered in the negative.

Issue (iii): Whether unclaimed dividends of Rs. 17,545 were liable to be deducted while computing capital employed.

Analysis: Applying the distinction between reserve and provision, the court held that there was no material showing any resolution or clear act converting the unclaimed dividend into a reserve. The amount represented a known liability and could not be treated as part of the general reserve merely by book entry. It was therefore rightly excluded in computing capital employed.

Conclusion: In favour of the revenue. The question was answered in the negative.

Final Conclusion: The reference was answered by following settled law on reserves, provisions, and the computation of capital employed under the surtax scheme, with relief granted on the first two issues and the revenue succeeding on the unclaimed dividend issue.

Ratio Decidendi: For surtax computation, the true commercial character of an amount governs whether it is a reserve or a provision, and a mere book entry does not convert a known liability into a reserve for inclusion in capital employed.

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