Capital base under surtax law cannot be reduced absent dividend income attracting the First Schedule exclusion.

Rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 applies only where the corresponding income exclusion under rule 1 of the First Schedule is attracted. Because the assessee had no dividend income falling within rule 1(viii), there was no basis to reduce the capital base by excluding the cost of shares from the capital computation. On that footing, the assessment was not erroneous or prejudicial to the interests of the Revenue on this point, and the revisional direction under section 16 to recompute capital was unsustainable. The question was answered in favour of the assessee and against the Revenue.

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Issues: Whether rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 could be applied when the assessee had no income by way of dividends falling under rule 1(viii) of the First Schedule, and whether the Commissioner could revise the assessment under section 16 of the Act on that basis.

Analysis: The assessment year involved was 1980-81. The legal position applied was that rule 2 of the Second Schedule operates only where the corresponding exclusion under rule 1 of the First Schedule is attracted. Where the assessee had no dividend income of the kind contemplated by rule 1(viii), there was no basis to reduce the capital base by excluding the cost of shares from the capital computation. The assessment, therefore, could not be treated as erroneous or prejudicial to the interests of the Revenue on that point, and the revisional direction to recompute the capital was unsustainable.

Conclusion: Rule 2 of the Second Schedule did not apply on the facts, and the revisional order under section 16 was rightly cancelled.

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

Ratio Decidendi: Rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 is attracted only when the corresponding income exclusion under rule 1 of the First Schedule applies; absent such income, no reduction from the capital base can be made on that account.

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