Capital computation under surtax rules must reduce reserves for depreciation allowed under income tax law, without implied depletion exceptions.

For computing capital under the Companies (Profits) Surtax Act, 1964, Rule 1(iii) of the Second Schedule requires other reserves to be reduced by amounts credited to reserves in respect of depreciation allowed under the Income-tax Act. The court held that the rule must be applied on its plain terms and does not permit any further adjustment based on later depletion of the reserve through dividend distribution. The earlier binding interpretation of the same rule was followed, and no implied exception was read into the statutory formula.

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Issues: Whether, for the purpose of computing capital under the Companies (Profits) Surtax Act, 1964, the amount representing depreciation differential could be reduced from other reserves under Rule 1(iii) of the Second Schedule, even when the assessee contended that the differential had been depleted by dividend distribution and the conditions in the rule were not satisfied.

Analysis: Section 4 of the Companies (Profits) Surtax Act, 1964 levies surtax on chargeable profits exceeding the statutory deduction, and section 2(8) defines statutory deduction with reference to capital computed under the Second Schedule. Rule 1(iii) of that Schedule requires other reserves to be reduced by amounts credited to such reserves as have been allowed as a deduction in computing income under the Income-tax Act. On a plain reading, the rule does not permit any further addition or subtraction beyond what is expressly provided. The earlier binding decision on the same rule held that where depreciation allowed under the Income-tax Act exceeds depreciation provided in the books, the difference, if forming part of the reserve, must be deducted from other reserves in computing capital. The attempt to distinguish that principle on the basis that the reserve was later depleted by dividends was rejected, as the rule contains no warrant for tracing reserve depletion or reading in an exception not found in its text.

Conclusion: The Tribunal was right in applying the earlier decision and in upholding reduction of the depreciation differential from capital. The questions referred were answered against the assessee and in favour of Revenue.

Ratio Decidendi: In computing capital under Rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, other reserves must be reduced by the amount of depreciation allowed as a deduction under the Income-tax Act to the extent such amount is credited to those reserves, and no further qualification based on subsequent depletion of reserves can be read into the rule.

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