General reserves from eligible profits count as capital for surtax computation, despite section 80J relief.

Amounts appropriated to general reserves, including reserves created out of profits eligible for relief under section 80J, were treated as part of the company's capital for computation under rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964. The court noted that such amounts were appropriations out of profits and, as reserves standing in the balance-sheet on the relevant date, remained includible in capital computation. The fact that the underlying profits had qualified for section 80J deduction did not justify excluding the reserves or reducing capital on that basis. The reference was answered in favour of the assessee.

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Issues: Whether amounts appropriated to general reserves, including a reserve created out of profits eligible for relief under section 80J, formed part of the company's capital for computation under rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The amounts credited to the general reserves represented appropriations out of profits and, on the relevant date, stood as reserves in the balance-sheet for capital computation under the surtax scheme. The exclusion of a reserve merely because the underlying profits were eligible for deduction under section 80J was not justified. The applicable legal position did not permit a diminution of capital on that basis.

Conclusion: The amounts credited to General Reserve No. 1 and General Reserve No. 2 were includible in the computation of capital under rule 1(iii), and the reference was answered in favour of the assessee.

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