Surtax computation and general reserve treatment shaped the capital base issue, while section 80-I affected rule 4 applicability.

For surtax computation under the Surtax Act, the treatment of dividend credited to general reserve was examined and the cited authority was applied to hold that the dividend amount was not to be excluded from the general reserve while computing capital base, with the point answered for the Revenue. The interaction between rule 4 of the Second Schedule and a deduction under section 80-I was also considered; on the stated facts, binding precedent was treated as making rule 4 inapplicable where the deduction formed part of total income, and this point was answered for the assessee. The reference thus produced mixed answers on the merits.

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Issues: (i) Whether the sum of Rs. 14,40,000 being dividend for the 1970 calendar year was required to be excluded from the general reserve while computing the capital base under the Surtax Act, 1964. (ii) Whether rule 4 of the Second Schedule to the Surtax Act applied where the deduction under section 80-I formed part of the total income.

Issue (i): Whether the sum of Rs. 14,40,000 being dividend for the 1970 calendar year was required to be excluded from the general reserve while computing the capital base under the Surtax Act, 1964.

Analysis: The question turned on the treatment of dividend in the computation of capital base under the statutory scheme governing surtax. The controlling authority was applied to hold that the dividend amount could not be excluded from the general reserve for this purpose.

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 Surtax Act applied where the deduction under section 80-I formed part of the total income.

Analysis: The question was treated as covered by binding precedent on the interaction between the deduction under section 80-I and the computation under rule 4 of the Second Schedule. On that basis, the rule was held inapplicable on the facts stated, because the deduction formed part of the total income.

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

Final Conclusion: The reference was disposed of with one question decided for the Revenue and the other for the assessee, leaving the overall result mixed on the merits.

Ratio Decidendi: For surtax computation, dividend standing in general reserve was not to be excluded on the footing contended, and the operation of rule 4 of the Second Schedule depended on the treatment of the section 80-I deduction in the total income.

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