Capital for surtax purposes cannot be reduced by depreciation differences unless the Second Schedule expressly allows it.

For surtax computation under the Companies (Profits) Surtax Act, 1964, capital is determined only under the Second Schedule, and reserves may be reduced only in the specific situations that Schedule expressly permits. A general reserve shown in the balance sheet could not be reduced merely because depreciation allowed under the Income-tax Act exceeded depreciation provided in the books. The lower assessed profits, by themselves, did not justify a capital adjustment where no express statutory basis existed. A reserve created out of post-tax profits remained includible in capital, and the assessee's computation was therefore correct.

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Issues: Whether, in computing the capital of a company for surtax purposes, the general reserve shown in the balance sheet could be reduced by the difference between depreciation allowed under the Income-tax Act and depreciation provided in the books of account.

Analysis: The computation of surtax under the Companies (Profits) Surtax Act, 1964 proceeds on distinct statutory components, namely chargeable profits, statutory deduction, and capital. Chargeable profits are adjusted under the First Schedule, while capital is determined exclusively under the Second Schedule. The Second Schedule permits reduction of reserves only in the specific situations expressly provided by its rules. No provision in that Schedule authorises deduction from reserves merely because depreciation allowed in income-tax assessment exceeds the depreciation provided in the books. The fact that assessed profits are lower than book profits does not, by itself, justify a reduction in capital where the Schedule contains no express basis for such adjustment. The cited Calcutta High Court decision was distinguishable because it proceeded on a different factual and statutory footing, while the present case involved no applicable provision enabling the proposed reduction. The reserve, being created out of post-tax profits, remained an includible reserve for capital computation.

Conclusion: The reserve could not be reduced by the depreciation differential, and the assessee's computation of capital was correct.

Ratio Decidendi: For surtax computation, capital under the Second Schedule can be adjusted only in the manner specifically authorised by that Schedule, and a reserve created out of profits cannot be reduced by a depreciation difference absent an express statutory provision.

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