Bonus share capitalisation and reserve depletion must be read together in surtax capital computation, with rectification allowed for apparent error.

Capitalisation of reserves by issue of bonus shares was treated as a composite adjustment in the capital computation under the Surtax Schedule, so the corresponding depletion of reserves could not be ignored when applying rule 3. On that reading, the increase in paid-up share capital was not includible in the capital base, and the original inclusion was treated as an apparent mistake because it arose from misreading the scheme of the Schedule. The error was therefore held capable of rectification under section 13, and the Revenue's position was upheld on both issues.

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Issues: (i) Whether the increase in share capital resulting from capitalisation of reserves by issue of bonus shares was includible in the capital base under rule 3 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. (ii) Whether the original inclusion of that amount in the capital base was a mistake apparent from the record so as to permit rectification under section 13 of the Companies (Profits) Surtax Act, 1964.

Issue (i): Whether the increase in share capital resulting from capitalisation of reserves by issue of bonus shares was includible in the capital base under rule 3 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The computation of capital under the Second Schedule had to be read as a whole. An increase in paid-up share capital brought about by issuing bonus shares out of reserves necessarily involved a corresponding depletion of reserves. The apparent increase in capital could not be considered in isolation under rule 3, because the reserve component was an integral part of the capital computation. The Court followed its earlier view that treating the increase as includible while ignoring the matching reduction in reserves amounted to a misreading of the scheme of the Schedule.

Conclusion: The amount was not includible in the capital base; the issue was decided against the assessee and in favour of the Revenue.

Issue (ii): Whether the original inclusion of that amount in the capital base was a mistake apparent from the record so as to permit rectification under section 13 of the Companies (Profits) Surtax Act, 1964.

Analysis: The Court held that the error was not a debatable one but an apparent mistake arising from the misreading of the relevant rules. Even if another view was thought possible, such a view would arise only by ignoring the interaction between rule 3 and the other rules governing computation of capital. The mere grant of special leave in another matter did not change the legal position. The error was therefore rectifiable under section 13 as a mistake apparent from the record.

Conclusion: Rectification under section 13 was valid; the issue was decided against the assessee and in favour of the Revenue.

Final Conclusion: The reference was answered in favour of the Revenue on both questions, upholding the rectification and exclusion of the disputed amount from the capital base.

Ratio Decidendi: Where the computation of capital under the Surtax Schedule is affected by the issue of bonus shares out of reserves, the corresponding reduction in reserves cannot be ignored, and a computation made by overlooking that effect constitutes a mistake apparent from the record capable of rectification.

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