Capital base under surtax depends on proper year-wise attribution, section 80J relief, and treatment of dividend from reserves.

In computing capital base for surtax, only amounts properly attributable to the relevant previous year could be excluded. The gratuity reserve amount of Rs. 2,128 was not treated as an earlier-year gratuity liability and therefore was not reduced from the capital base for assessment year 1971-72, in favour of the assessee. Rule 4 of the Second Schedule could not be used to diminish the capital base where relief under section 80J had been allowed, again in favour of the assessee. Dividend declared out of general reserve was required to be reduced in computing capital base for assessment year 1972-73, in favour of the Revenue.

---

---

Issues: (i) Whether the sum of Rs. 2,128, being part of the gratuity reserve, was liable to be reduced in computing the capital base for the assessment year 1971-72; (ii) whether rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 could be invoked to reduce the capital base where relief under section 80J of the Income-tax Act, 1961 had been allowed for the assessment year 1971-72; (iii) whether dividend declared out of the general reserve was liable to be reduced in computing the capital base for the assessment year 1972-73.

Issue (i): Whether the sum of Rs. 2,128, being part of the gratuity reserve, was liable to be reduced in computing the capital base for the assessment year 1971-72.

Analysis: The amount did not represent gratuity liability for any earlier assessment year and was attributable to the assessment year 1971-72. The capital computation had to be made as on the first day of the previous year, namely the last day of the earlier period relevant to assessment year 1970-71. On that footing, the amount could not be treated as part of the gratuity reserve to be reduced from the capital base.

Conclusion: The issue was decided in favour of the assessee.

Issue (ii): Whether rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 could be invoked to reduce the capital base where relief under section 80J of the Income-tax Act, 1961 had been allowed for the assessment year 1971-72.

Analysis: The question stood concluded by the Supreme Court decision relied upon by the parties, and the Tribunal's view that the capital computed under rules 1, 2 and 3 of the Second Schedule should not be diminished was accepted.

Conclusion: The issue was answered in the affirmative and in favour of the assessee.

Issue (iii): Whether dividend declared out of the general reserve was liable to be reduced in computing the capital base for the assessment year 1972-73.

Analysis: The question stood concluded by the Supreme Court decision relied upon by the parties, and the Tribunal's view that such dividend had to be reduced in computing the capital base was not accepted.

Conclusion: The issue was answered in the negative and in favour of the Revenue.

Final Conclusion: The reference was disposed of by answering the questions on surtax capital computation partly in favour of the assessee and partly in favour of the Revenue, with no order as to costs.

Ratio Decidendi: In computing capital base for surtax purposes, only amounts properly chargeable to the relevant previous year can be excluded, and questions governed by settled Supreme Court authority must be answered consistently with that authority.

---