Depreciation reserve transferred to general reserve was excluded from surtax capital computation base under the applicable rule.

A depreciation reserve transferred to a general reserve was examined for inclusion in the capital computation base under rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The Court noted that the amount represented depreciation actually allowed, though not originally debited in the books, and had been carried in reserve after a change from the straight line method to the written down value method. It further noted that the Tribunal's reliance on an earlier decision was misplaced because that decision had already been reversed, and held that the amount could not be included in the capital computation base.

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Issues: Whether the amount transferred from the depreciation reserve to General Reserve No. 1 was includible in the assessee's capital computation base under rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The amount in dispute represented depreciation actually allowed but not originally debited in the books. It had been carried in a depreciation reserve after the assessee changed from the straight line method to the written down value method, and was later transferred to the general reserve. The Court held that the earlier decision relied upon by the Tribunal had already been reversed, and on the facts of the case the amount could not be included in the capital computation base.

Conclusion: The question was answered in the negative, against the assessee and in favour of the Revenue.

Ratio Decidendi: An amount transferred from a depreciation reserve to a general reserve is not automatically includible in the capital computation base for surtax purposes where the applicable legal position, as finally settled, does not support such inclusion.

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