Surtax capital computation turns on whether amounts truly qualify as reserves, excluding disputed general reserves but including doubtful debts reserve.

For surtax capital computation under rule 1 of Schedule II to the Companies (Profits) Surtax Act, only amounts that genuinely retain the character of reserve are includible. The disputed Rs. 26,00,000 out of general reserves was excluded from the capital base, while the undisputed balance remained includible. The reserve for doubtful debts of Rs. 40,732 was treated as includible for capital computation, the point being governed by the assessee's earlier case. The overall position is that reserve classification must be tested by the applicable legal character of the item, not by its label alone.

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Issues: (i) Whether the amount credited as general reserves, to the extent of Rs. 26,00,000, was includible in the computation of capital under rule 1 of Schedule II to the Companies (Profits) Surtax Act, 1964; (ii) Whether the reserve for doubtful debts of Rs. 40,732 was includible for calculating the capital base.

Issue (i): Whether the amount credited as general reserves, to the extent of Rs. 26,00,000, was includible in the computation of capital under rule 1 of Schedule II to the Companies (Profits) Surtax Act, 1964.

Analysis: Only the disputed portion of the general reserves required determination, as the balance was not in controversy. In view of the governing Supreme Court authority, the disputed sum could not be included in the capital computation for surtax purposes.

Conclusion: The Tribunal was not justified in treating the entire amount of Rs. 1,71,70,000 styled as general reserves as includible; only Rs. 1,45,70,000 was includible, and the disputed Rs. 26,00,000 was excluded.

Issue (ii): Whether the reserve for doubtful debts of Rs. 40,732 was includible for calculating the capital base.

Analysis: The question stood covered by the court's earlier decision in the assessee's own case, and the same position governed the present reference.

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

Final Conclusion: The reference was answered by limiting inclusion of the general reserves to the undisputed amount and by recognising the reserve for doubtful debts as includible in the assessee's favour on the second question.

Ratio Decidendi: For surtax capital computation, only amounts properly retaining the character of reserve are includible, while sums covered by binding precedent and not meeting the relevant reserve test are excluded.

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