Surtax capital computation excludes revaluation reserves and debenture redemption funds, while gratuity reserves count only above actuarial liability.

For surtax capital computation, a reserve created by revaluation of fixed assets is excluded because it arises from increasing a book asset by revaluation, so the asset replacement reserve was not includible. A debenture redemption fund was also excluded, since debentures are borrowed moneys and the statutory scheme did not treat them as part of capital for the relevant year. A staff retirement gratuity reserve was includible only to the extent it exceeded the actuarially determined liability, because the actuarial liability represents a present obligation and not a reserve.

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Issues: (i) whether the asset replacement reserve could be included in the capital for surtax purposes, (ii) whether the debenture redemption fund could be included in the capital for surtax purposes, and (iii) whether the staff retirement gratuity reserve could be included in the capital, and if so to what extent.

Issue (i): whether the asset replacement reserve could be included in the capital for surtax purposes.

Analysis: The reserve arose because the fixed assets had been revalued, and the amount was set apart in consequence of that revaluation. Explanation 1 to rule 2 of the Second Schedule excludes from capital any reserve brought into existence by creating or increasing a book asset by revaluation. The earlier broad distinction between reserve and provision was held insufficient in light of the later Supreme Court explanation of the true character of such appropriations.

Conclusion: The asset replacement reserve was not includible in the capital and the finding was in favour of the Revenue.

Issue (ii): whether the debenture redemption fund could be included in the capital for surtax purposes.

Analysis: Debentures are borrowed moneys and do not ordinarily form part of share capital. The statutory scheme of the Second Schedule, as amended, excluded debentures from the capital base for the relevant assessment year. A fund created for redeeming debentures cannot be treated more favourably than the debentures themselves.

Conclusion: The debenture redemption fund was not includible in the capital and the finding was in favour of the Revenue.

Issue (iii): whether the staff retirement gratuity reserve could be included in the capital, and if so to what extent.

Analysis: Gratuity liability determined on a scientific or actuarial basis represents a present liability and is to that extent not a reserve. Only the amount, if any, standing in excess of the actuarially determined liability can be treated as an excess provision and therefore as a reserve for capital computation.

Conclusion: The reserve was includible only to the extent it exceeded the actual actuarial liability, and the finding was partly in favour of the Assessee.

Final Conclusion: The reference was answered against inclusion of the asset replacement reserve and debenture redemption fund, but in favour of inclusion only of the excess, if any, in the staff retirement gratuity reserve for capital computation under the surtax scheme.

Ratio Decidendi: An appropriation created by revaluation of assets is excluded from surtax capital under the statutory exclusion, a debenture redemption fund cannot be included where debentures themselves are outside capital, and a gratuity reserve is includible only to the extent it exceeds actuarially determined liability.

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