Surtax capital computation excludes recommended dividend and requires depreciation allowed in income-tax to reduce general reserves.

Dividend recommended by the board is not part of "other reserves" for surtax capital computation, so it cannot be added to the capital base. Depreciation allowed in income-tax assessment must be deducted from general reserves where the books show a different depreciation figure, because the surtax schedule requires reserves to be taken net of amounts already allowed as deduction in computing income. That adjustment depends on depreciation allowed for the relevant year, not on whether the assessment order was completed before the first day of the previous year. The capital base is therefore computed after excluding the relevant depreciation component from reserves.

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Issues: (i) whether dividend recommended by the board of directors could be treated as part of other reserves for computation of capital under the surtax schedule; (ii) whether the difference between depreciation actually allowed in income-tax assessments and depreciation provided in the books had to be deducted from general reserves for computing capital; (iii) whether depreciation allowed in income-tax assessment could be taken into account for reduction from other reserves even if the assessment order was completed after the relevant first day of the previous year.

Issue (i): whether dividend recommended by the board of directors could be treated as part of other reserves for computation of capital under the surtax schedule.

Analysis: The question was covered by earlier decisions holding that recommended dividend did not form part of the relevant reserves for capital computation under the statutory scheme. The item claimed as dividend could not be brought within other reserves for the purpose of the capital base.

Conclusion: The issue was answered in the negative and against the assessee.

Issue (ii): whether the difference between depreciation actually allowed in income-tax assessments and depreciation provided in the books had to be deducted from general reserves for computing capital.

Analysis: Under rule 1(iii) of the Second Schedule to the Companies (Profits) Surtax Act, 1964, other reserves are to be taken net of amounts credited to such reserves as have been allowed as a deduction in computing income. The reserve balance therefore cannot be treated as the full amount standing in the books where part of it represents depreciation allowed under the income-tax law but not written off in the accounts. The excess depreciation allowed for the relevant year, as compared with the books, had to be deducted from general reserves.

Conclusion: The issue was answered in the affirmative and against the assessee.

Issue (iii): whether depreciation allowed in income-tax assessment could be taken into account for reduction from other reserves even if the assessment order was completed after the relevant first day of the previous year.

Analysis: The decisive enquiry was whether the depreciation had been allowed for the relevant year in computing income, not whether the assessment order had been passed before the critical date. The statutory language and the circular relied upon did not require prior completion of assessment; the allowance related back to the relevant accounting year and was therefore available for the surtax capital computation.

Conclusion: The issue was answered in the affirmative and against the assessee.

Final Conclusion: The capital base had to be computed after excluding the relevant depreciation component from general reserves, and the reference was answered substantially in favour of the revenue.

Ratio Decidendi: For surtax capital computation, other reserves must be reduced by depreciation amounts allowed in income-tax assessment for the relevant year, and the adjustment depends on substantive allowance for that year rather than on the date when the assessment order is completed.

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