Surtax capital computation: dividend items, reserves, and devaluation liability were treated according to their legal character under the schedule.

For surtax capital computation under the Second Schedule, dividend on cumulative preference shares and equity shares was treated as includible in capital, while reduction of capital in proportion to section 80-I relief was not justified on the facts considered. Debenture redemption reserve was treated as not constituting a reserve for surtax purposes, and gratuity reserve counted only to the extent it exceeded the assessee's actual gratuity liability determined on an actuarial or other scientific basis. The increase in liability arising from rupee devaluation was also treated as includible in the capital computation. One component of the gratuity reserve question was left for fresh examination by the Tribunal.

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Issues: (i) Whether dividend on cumulative preference shares and on equity shares was includible in the capital computation for surtax purposes; (ii) whether the capital was required to be reduced in proportion to the relief allowed under section 80-I of the Income-tax Act, 1961; (iii) whether debenture redemption reserve and gratuity reserve were includible in computing capital under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964; and (iv) whether the increase in liability arising from devaluation of the rupee was includible in the capital computation for surtax assessment.

Issue (i): Whether dividend on cumulative preference shares and on equity shares was includible in the capital computation for surtax purposes.

Analysis: The questions were treated as covered by binding authority on the computation of capital under the surtax scheme. The dividend paid on cumulative preference shares and the dividend on equity shares were held to be part of the capital computation in the manner accepted by the earlier decisions applied by the Court.

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

Issue (ii): Whether the capital was required to be reduced in proportion to the relief allowed under section 80-I of the Income-tax Act, 1961.

Analysis: The Court followed its earlier decision on the effect of section 80-I relief on surtax capital computation and held that rule 4 of the Second Schedule did not justify the proposed reduction of capital in the facts of the case.

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

Issue (iii): Whether debenture redemption reserve and gratuity reserve were includible in computing capital under rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The debenture redemption reserve was held not to be a reserve for surtax purposes. The gratuity reserve was held to be a reserve only to the extent it exceeded the assessee's actual gratuity liability as valued on an actuarial or other scientific basis, and the Tribunal was directed to examine whether such excess existed.

Conclusion: The issue was partly in favour of the assessee, with the gratuity component requiring further determination by the Tribunal.

Issue (iv): Whether the increase in liability arising from devaluation of the rupee was includible in the capital computation for surtax assessment.

Analysis: The matter was treated as concluded by the Court's earlier decision in the assessee's own case, under which the disputed amount was includible in the capital computation for surtax purposes.

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

Final Conclusion: The reference was disposed of by answering two issues against the assessee, two issues in its favour, and by leaving one component of the reserve question to be examined afresh by the Tribunal on the limited question of excess gratuity liability.

Ratio Decidendi: For surtax capital computation, dividend and reserve items are to be included or excluded according to their legal character under the relevant schedule, and gratuity provisions count as reserves only to the extent they exceed the actual liability determined on a proper actuarial or scientific basis.

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