Capital base computation under surtax law excludes share cost even without dividend receipt in the relevant year.

For computing capital base under rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the cost of shares in Indian companies had to be excluded even where no dividend was received in the relevant year. Rule 2 refers to the category of assets whose income is required to be excluded under rule 1 of the First Schedule, and that description does not depend on actual dividend receipt in the year. The absence of dividend meant the exclusion under rule 1(viii) was nil, but it did not prevent the shares from falling within rule 2. The Tribunal's view requiring actual receipt of dividend was rejected, and the issue was answered in favour of the Revenue.

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Issues: Whether, for computing the capital base under rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the cost of shares in Indian companies from which no dividend was received during the relevant year was required to be excluded.

Analysis: Rule 2 of the Second Schedule directs diminution of capital by the cost of assets the income from which is required to be excluded under rule 1 of the First Schedule. The expression describing such assets is not conditional upon the actual receipt of dividend in the relevant year. The words refer to the category of assets whose income, if any, would fall within rule 1(viii), and not to assets which in fact yielded dividend in that year. If no dividend is received, the exclusion under rule 1(viii) is nil, but the asset still answers the description used in rule 2. The Tribunal's view that actual receipt of dividend was necessary was not accepted.

Conclusion: The cost of the shares had to be excluded from the capital base under rule 2 of the Second Schedule, and the question was answered in favour of the Revenue and against the assessee.

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