Bonus reserve and capital computation under surtax law: no exclusion without nexus to actual bonus liability.

Rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 was not attracted to a proportionate reduction in capital claimed on account of relief under sections 80-I and 80M, consistent with the earlier Division Bench view. A bonus reserve is treated as part of capital where the balance-sheet material shows no nexus with an actual bonus liability and the amounts were not used for bonus payment; separate debit of bonus payments to the profit and loss account supported that treatment. The commentary concludes that both issues were resolved in favour of the assessee on the stated facts and precedent.

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Issues: (i) Whether proportionate reduction in capital on account of relief under sections 80-I and 80M fell within rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. (ii) Whether bonus reserve was excluded by rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964 or was liable to be treated as a reserve in the computation of capital.

Issue (i): Whether proportionate reduction in capital on account of relief under sections 80-I and 80M fell within rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The Court followed the earlier Division Bench decision which had already concluded that the reduction claimed on account of relief under those provisions did not attract rule 4 of the Second Schedule. The issue was therefore covered by binding precedent and required no fresh departure from that view.

Conclusion: The question was answered in the negative and in favour of the assessee.

Issue (ii): Whether bonus reserve was excluded by rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964 or was liable to be treated as a reserve in the computation of capital.

Analysis: The relevant balance-sheet material showed that the amounts described as bonus reserve had no co-relation with any actual liability for bonus and were not utilised for payment of bonus. Bonus payments had been separately debited to the profit and loss account. On those facts, the amounts could not be excluded from capital as a reserve falling outside the computation.

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

Final Conclusion: Both referred questions were decided against the Revenue and the assessee succeeded on the reference.

Ratio Decidendi: A bonus reserve cannot be excluded from capital computation where it has no nexus with an actual bonus liability and is not used for payment of bonus; proportionate reduction claimed on the strength of relief under sections 80-I and 80M does not fall within rule 4 of the Second Schedule in the manner contended by the Revenue.

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