Surtax capital computation treats bad debt reserves as reserve and requires declared dividends to be deducted from general reserve.

For surtax capital computation, a reserve for bad and doubtful debts qualifies as a reserve and is included in capital, in line with binding Supreme Court authority. Declared dividends must also be reduced from the general reserve when computing capital for surtax purposes. The note applies settled precedent to both issues and confirms that the relevant capital base is to be computed by treating the bad and doubtful debts reserve as part of reserve capital and by deducting dividends declared from general reserve.

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Issues: (i) Whether reserve for bad and doubtful debts was to be treated as reserve and included in the capital for levy of surtax; (ii) whether dividends declared from the general reserve were to be deducted from the general reserve while computing capital for levy of surtax.

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

Analysis: The question was covered by binding Supreme Court authority holding that such a reserve qualifies as reserve for the purpose of capital computation under the surtax scheme. The controversy had already been authoritatively settled, leaving no room for a different view.

Conclusion: The reserve for bad and doubtful debts had to be treated as reserve and included in the capital for levy of surtax, in favour of the Revenue.

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

Analysis: The question was governed by the Supreme Court decision holding that declared dividends must be reduced from the general reserve in computing capital for surtax purposes. That rule applied directly to the facts and controlled the answer.

Conclusion: Dividends declared from the general reserve had to be deducted from the general reserve while computing capital for levy of surtax, in favour of the Revenue.

Final Conclusion: The reference was answered by applying settled Supreme Court law on computation of capital under the surtax provisions, resulting in acceptance of the first issue and rejection of the contrary position on the third issue.

Ratio Decidendi: For surtax capital computation, a reserve for bad and doubtful debts is a deductible reserve, and declared dividends must be reduced from the general reserve in accordance with the governing judicial precedent.

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