Capital base rectification under surtax law turns on arithmetical error, not a debatable computation; bonus share adjustment was upheld.

A mistake is apparent from the record where the surtax computation is arithmetically wrong on a proper reading of the governing rules, but not where the issue remains debatable. In computing capital base under the Companies (Profits) Surtax Act, the capital account must be viewed as a whole, including corresponding reductions in reserves when bonus shares are issued; on that basis, inclusion of the reserve-capitalised amount was rightly rectified in favour of the Revenue. The proposed reduction of capital base for amounts deducted under section 80E of the Income-tax Act was not finally decided on merits and was left open, as the issue had become largely academic.

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Issues: (i) Whether the omission to reduce the capital base proportionately under rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, in respect of amounts deducted under section 80E of the Income-tax Act, 1961, was a mistake apparent from the record and rectifiable under section 13 of the Surtax Act; (ii) Whether the sum representing increase in share capital on capitalisation of reserves and issue of bonus shares was includible in the capital base under rule 3 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, and whether its inclusion was a mistake apparent from the record rectifiable under section 13.

Issue (i): Whether the omission to reduce the capital base proportionately under rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, in respect of amounts deducted under section 80E of the Income-tax Act, 1961, was a mistake apparent from the record and rectifiable under section 13 of the Surtax Act.

Analysis: Rule 4 was read with the scheme of the Second Schedule and the relevant provisions of the Income-tax Act. The amount deducted under section 80E remained part of the profits and gains of the assessee, though excluded in the computation of total income, and the omission to reduce the capital base on that account was treated by the Tribunal as a patent mistake. The High Court, however, did not find it necessary to finally pronounce on the substantive question because the assessment year provision had since been amended and the issue had become largely academic.

Conclusion: The question was not answered on merits and was left open.

Issue (ii): Whether the sum representing increase in share capital on capitalisation of reserves and issue of bonus shares was includible in the capital base under rule 3 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, and whether its inclusion was a mistake apparent from the record rectifiable under section 13.

Analysis: Rule 3 was construed with rules 1 and 2 of the Second Schedule, so that the capital base had to be computed as a whole and not by isolating the increase in paid-up share capital alone. When bonus shares were issued out of reserves, the increase in share capital was matched by a corresponding reduction in reserves, leaving the aggregate capital unchanged. The error in the original assessment was therefore treated as apparent and arithmetical, not debatable.

Conclusion: The rectification excluding the sum from the capital base was valid and was in favour of the Revenue.

Issue (iii): Whether the inclusion of the sum of Rs. 41,44,658 in the capital base in the original assessment for the assessment year 1967-68 was a mistake apparent from the record and rectifiable under section 13 of the Companies (Profits) Surtax Act, 1964.

Analysis: The same reasoning governing rule 3 applied. The capitalisation of reserves for issue of bonus shares did not create any net increase in the capital base, and the original inclusion of the amount was therefore a mistake apparent from the record capable of rectification under section 13.

Conclusion: The rectification was upheld and was in favour of the Revenue.

Final Conclusion: The reference was answered partly in favour of the assessee on the rectification point relating to rule 4, and partly in favour of the Revenue on the capital-base rectification relating to bonus shares.

Ratio Decidendi: A mistake is apparent from the record where the computation is arithmetically wrong on a proper reading of the governing rules, but not where the issue is merely debatable; in computing capital base under the Surtax Act, the capital account must be viewed as a whole, including corresponding reductions in reserves when bonus shares are issued.

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