Book reserve from excess depreciation adjustment excluded from capital for surtax deduction under the Companies (Profits) Surtax Act.

An amount transferred to general reserve as adjustment of excess depreciation after a change in depreciation method was held not to form part of a company's capital for surtax computation. The adjustment was treated as a book reserve arising from revaluation or an equivalent upward adjustment of assets, and therefore fell within the express exclusion in Explanation 1 to rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. Accordingly, such reserve could not be included in capital for determining the statutory deduction under the Act, and the issue was resolved in favour of the Revenue.

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Issues: Whether the amount representing adjustment of excess depreciation, transferred to general reserve after a change in the method of depreciation, could be treated as part of the company's capital for computing statutory deduction under the Companies (Profits) Surtax Act, 1964.

Analysis: The amount in question had been shown as an adjustment of excess depreciation on buildings and machinery, being the difference between depreciation provided earlier and depreciation calculated under section 205(2)(b) of the Companies Act, 1956. In substance, the reserve represented a book adjustment arising from revaluation or equivalent upward adjustment of assets and fell within the express exclusion in Explanation 1 to rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, which excludes reserves brought into existence by creating or increasing book assets by revaluation or otherwise from capital for surtax purposes.

Conclusion: The amount of Rs. 70,33,000 was not includible in the capital of the company for determining statutory deduction, and the question was answered in favour of the Revenue.

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