Capital computation under the Surtax Act requires only express Schedule adjustments; post-tax profit reserves cannot be cut for depreciation differences

Capital under the Second Schedule to the Companies (Profits) Surtax Act, 1964 must be computed strictly by the adjustments expressly authorised by that Schedule. A general reserve created out of post-tax profits falls within capital as an includible reserve, and it cannot be reduced merely because depreciation allowed under the Income-tax Act exceeds depreciation provided in the books. The analysis distinguishes contrary authority on its facts and notes support for inclusion of post-tax profit reserves in capital.

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Issues: Whether, in computing the capital of a company under the Companies (Profits) Surtax Act, 1964, the general reserve 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 proceeds on distinct statutory components: chargeable profits under the First Schedule, capital under the Second Schedule, and the rate under the Third Schedule. For capital computation, only the adjustments expressly permitted by Rule 1 of the Second Schedule can be made. The assessee's reserve was created out of profits after tax, and the Second Schedule contained no provision authorising a reduction of reserves merely because the depreciation allowed in income-tax assessment exceeded the depreciation shown in the books. The earlier Calcutta decision was distinguished because it turned on a different factual setting and on Explanation 1 to Rule 2 of the Second Schedule, which was not applicable here. The decision of the Andhra Pradesh High Court supported the view that reserves created out of post-tax profits fall within "other reserves" and are includible in capital.

Conclusion: The general reserve could not be reduced by the difference between the depreciation allowed under the Income-tax Act and the depreciation provided in the books. The adjustment made by the revenue authorities was unsustainable and the assessee succeeded.

Final Conclusion: Capital under the Second Schedule must be computed strictly according to the adjustments expressly provided therein, and a reserve created from post-tax profits cannot be diminished by an unexpressed depreciation differential.

Ratio Decidendi: The Second Schedule to the Companies (Profits) Surtax Act, 1964 is an exhaustive code for capital computation, and reserves created out of post-tax profits cannot be reduced except by an adjustment specifically authorised by that Schedule.

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