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Issues: Whether, under rule 3 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the capital computed under rule 1 could be increased proportionately because of an issue of bonus shares made during the previous year out of reserves already included in the opening capital computation.
Analysis: Rule 1 fixes the company's capital as on the first day of the previous year, while rule 3 permits an adjustment only where that capital, as so computed, is increased during the year. The relief under rule 3 is limited to the amount by which the capital computed under rule 1 actually goes up during the previous year. Where paid-up share capital is increased merely by capitalising reserves that had already been counted in the opening capital computation, there is no fresh increase in capital as computed under rule 1. The Court rejected the argument that the absence of an express reference to reserves in rule 3 enabled a further step-up of the capital base.
Conclusion: The assessee was not entitled to any additional proportionate increase in capital computation on account of the bonus issue funded from reserves already included in the opening capital.
Ratio Decidendi: Relief under rule 3 is available only to the extent that the capital computed under rule 1 genuinely increases during the previous year, and not where the apparent increase in paid-up share capital is merely a reclassification of reserves already taken into account.
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