Capital base computation includes realised reserve gains and foreign government borrowing under the surtax schedule.

Explanation 1 to Rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 excludes reserves created by revaluation of book assets, but not a reserve reflecting a realised increase in asset value arising from devaluation-related gain. On the facts stated, the amount credited to reserve was not treated as a revaluation reserve and remained includible in the capital base. Rule 1(v) likewise applies broadly to moneys borrowed from any person in a country outside India; the term "person" was read with wide amplitude and was taken to include a foreign governmental department. The USAID loan was therefore includible in the capital base.

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Issues: (i) Whether the amount credited to the reserve on account of devaluation of the rupee was a reserve brought into existence by revaluation of a book asset and hence excluded by Explanation 1 to Rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964; (ii) Whether the loan borrowed from USAID was includible in the capital base as moneys borrowed from any person in a country outside India under Rule 1(v) of the Second Schedule, and whether a foreign governmental department is a "person" for that purpose.

Issue (i): Whether the amount credited to the reserve on account of devaluation of the rupee was a reserve brought into existence by revaluation of a book asset and hence excluded by Explanation 1 to Rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964

Analysis: Explanation 1 excludes paid-up share capital or reserve brought into existence by creating or increasing, by revaluation or otherwise, any book asset. The provision was held to apply independently of Rule 2 and to cover reserves created by revaluation of assets appearing in the books. On the facts found, the increase in value arose from actual devaluation-related gain and not from any revaluation of the book asset. The amount represented a realised increase in the value of the asset and not an unrealised increase created by book revaluation.

Conclusion: Explanation 1 had no application and the amount was includible in the capital base in favour of the assessee.

Issue (ii): Whether the loan borrowed from USAID was includible in the capital base as moneys borrowed from any person in a country outside India under Rule 1(v) of the Second Schedule, and whether a foreign governmental department is a "person" for that purpose

Analysis: Rule 1(v) includes moneys borrowed from any person in a country outside India. The expression "person" was read in the light of the inclusive definitions in section 2(31) of the Income-tax Act, 1961 and section 2(42) of the General Clauses Act, 1897, and was treated as having wide amplitude. A foreign government department was held not to be excluded merely because it was governmental in character, since the statutory language was broad enough to cover such borrowing.

Conclusion: The loan from USAID was includible in the capital base and a foreign governmental department was a person for Rule 1(v), in favour of the assessee.

Final Conclusion: The reference was answered wholly in favour of the assessee, with both disputed capital-base inclusions sustained and the Revenue made liable for costs.

Ratio Decidendi: A reserve created on account of a realised increase in asset value, not arising from revaluation of a book asset, is not hit by Explanation 1 to Rule 2; and the expression "person" in Rule 1(v) of the Second Schedule to the Companies (Profits) Surtax Act, 1964 is of wide amplitude and may include a foreign governmental department.

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