Surtax capital computation: written-back development rebate reserve stays in capital, but dividend withdrawals reduce reserve balance.

For surtax capital computation, rule 4 of the Second Schedule was treated as already settled in favour of the assessee, so the Revenue's contrary contention failed. The court also held that a development rebate reserve written back to the profit and loss appropriation account did not become part of the general reserve merely because later reserve allocations were made independently; on that basis, it was not excluded from the capital base as an "other reserve" under rule 1(iii). However, amounts actually drawn from the general reserve for dividend payments had to be reduced while computing capital.

---

---

Issues: (i) Whether rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, applies only for computing capital and ascertaining the standard deduction in relation to deductions under section 80 or income exempt under section 10 of the Income-tax Act, 1961. (ii) Whether the development rebate reserve written back to the profit and loss appropriation account is liable to be excluded from the capital base as forming part of 'other reserves' under rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Issue (i): Whether rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, applies only for computing capital and ascertaining the standard deduction in relation to deductions under section 80 or income exempt under section 10 of the Income-tax Act, 1961.

Analysis: The answer was treated as covered by an earlier decision of the same court. The same statutory question had already been decided in favour of the assessee, and no separate contrary reasoning was advanced to depart from that view.

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

Issue (ii): Whether the development rebate reserve written back to the profit and loss appropriation account is liable to be excluded from the capital base as forming part of 'other reserves' under rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The reserve was not transferred directly to the general reserve account. It was first carried to the profit and loss appropriation account, where it became part of the profits available for allocation. The subsequent allocations to general reserve and other reserves for the relevant years were independent of the development rebate reserve. On that footing, no part of the development rebate reserve formed part of the general reserve so as to attract exclusion under rule 1(iii). At the same time, amounts drawn from the general reserve for payment of dividends had to be reduced from the reserve balance while computing capital, in accordance with the governing principle applied in reserve computation.

Conclusion: The development rebate reserve transferred to the profit and loss appropriation account was not liable to be excluded from capital, but appropriate reduction was required for sums drawn from the general reserve for dividend purposes.

Final Conclusion: The reference was substantially answered in favour of the assessee on the main reserve-exclusion question, while directing adjustment of the capital computation for dividend withdrawals from the general reserve.

Ratio Decidendi: For surtax capital computation, a reserve written back to the profit and loss appropriation account does not cease to remain part of distributable profits merely because the company later makes independent reserve allocations, but sums actually withdrawn from general reserve for dividend payments must be deducted from the reserve balance when computing capital.

---