Surtax capital computation turns on reserve dividends and Rule 4 of the Second Schedule, both governed by binding precedent.

Dividend paid out of general reserve was treated, on the authority of Vazir Sultan Tobacco Co. Ltd. v. CIT, as relevant to capital computation for surtax purposes, and the question was answered against the assessee. Rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 was held, following CIT v. Century Spg. and Mfg. Co. Ltd., not to require the reduction in capital suggested by the Revenue, and that question was answered in favour of the assessee. The reference was disposed of by applying binding precedent on both issues.

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Issues: (i) Whether dividend paid out of general reserve was includible in computing capital for statutory deduction under the Companies (Profits) Surtax Act, 1964. (ii) Whether rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 applied so as to require reduction of capital by the proportionate sums specified for surtax assessment.

Issue (i): Whether dividend paid out of general reserve was includible in computing capital for statutory deduction under the Companies (Profits) Surtax Act, 1964.

Analysis: The question stood covered by the Supreme Court decision in Vazir Sultan Tobacco Co. Ltd. v. CIT, under which amounts distributed as dividend from general reserve were treated in the manner relevant to the capital computation for surtax purposes.

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

Issue (ii): Whether rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 applied so as to require reduction of capital by the proportionate sums specified for surtax assessment.

Analysis: The issue was covered by the court's earlier decision in CIT v. Century Spg. and Mfg. Co. Ltd., which held that rule 4 of the Second Schedule did not apply on the facts of the case and that the capital was not to be reduced in the manner suggested by the Revenue.

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

Final Conclusion: The reference was disposed of by applying binding precedent, with the first question decided for the Revenue and the second question decided for the assessee.

Ratio Decidendi: In a surtax computation, the treatment of reserve distributions and the applicability of rule 4 of the Second Schedule depend on the governing precedent, and where the precedent excludes such reduction or treatment, the questions must be answered accordingly.

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