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Issues: (i) Whether, for computing capital under the Companies (Profits) Surtax Act, 1964, the excess depreciation allowed in income-tax assessments had to be deducted from reserves under rule 1 of the Second Schedule. (ii) Whether the amount of dividend declared in the relevant years could be taken into account to offset the depreciation difference and enhance the capital computation.
Issue (i): Whether, for computing capital under the Companies (Profits) Surtax Act, 1964, the excess depreciation allowed in income-tax assessments had to be deducted from reserves under rule 1 of the Second Schedule.
Analysis: The depreciation actually allowed in the assessment exceeded the depreciation provided in the books. That excess represented an amount which could not be treated as part of the general reserves for surtax capital computation. The earlier view accepted by the lower authorities was consistent with the affirmed principle that such excess depreciation is excluded from reserves.
Conclusion: The issue was decided against the assessee and in favour of the Revenue.
Issue (ii): Whether the amount of dividend declared in the relevant years could be taken into account to offset the depreciation difference and enhance the capital computation.
Analysis: No factual material was furnished to show that, had proper depreciation been provided, the distributable profits would have been lower than the dividends declared in the relevant years. There was also no basis to conclude that dividends had been paid out of capital rather than profits so as to affect the capital computation.
Conclusion: The issue was decided against the assessee and in favour of the Revenue.
Final Conclusion: The reference was answered in favour of the Revenue on both questions, and the capital computation for surtax purposes was upheld as made by the authorities.
Ratio Decidendi: Excess depreciation allowed in assessment, where it exceeds the depreciation provided in the books, is not includible in reserves for surtax capital computation, and a dividend adjustment can be accepted only on a proved factual basis showing impact on distributable profits or capital.
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