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Issues: (i) Whether the amounts shown as reserve for doubtful debts and reserve for bonus could be included in the computation of capital employed for statutory deduction under the Second Schedule to the Companies (Profits) Surtax Act, 1964; (ii) Whether deductions allowed under sections 80G and 80M of the Income-tax Act, 1961 could be treated as sums not includible in total income for the purpose of deduction under rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.
Issue (i): Whether the amounts shown as reserve for doubtful debts and reserve for bonus could be included in the computation of capital employed for statutory deduction under the Second Schedule to the Companies (Profits) Surtax Act, 1964.
Analysis: The question was governed by the principles laid down by the Supreme Court on the character of reserves for surtax computation. On that basis, the sums described as reserve for doubtful debts and reserve for bonus did not qualify for inclusion in the capital base for statutory deduction.
Conclusion: The issue was answered in the negative, against the Revenue and in favour of the assessee.
Issue (ii): Whether deductions allowed under sections 80G and 80M of the Income-tax Act, 1961 could be treated as sums not includible in total income for the purpose of deduction under rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.
Analysis: The deductions under sections 80G and 80M were held not to be sums excluded from total income for the purpose of rule 4. The statutory framework of the surtax computation did not permit those deductions to be treated as non-includible items in the manner suggested.
Conclusion: The issue was answered in the negative, against the Revenue and in favour of the assessee.
Final Conclusion: Both referred questions were resolved in favour of the assessee, and the surtax computation was to proceed in accordance with the negatived answers recorded on each issue.
Ratio Decidendi: For surtax computation, only amounts and deductions falling within the statutory scheme of the Second Schedule can enter the capital base or be excluded from total income as specifically permitted by the relevant rules.
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