Reopening for audit objection and capital base computation under surtax law fail where change of opinion and reserve treatment are unsupported.

An assessment under section 8(b) of the Companies (Profits) Surtax Act, 1964 cannot be reopened on the basis of an internal audit objection where the original material was already on record and the attempt rests only on a change of opinion, not legally relevant new information. For capital computation, the reduction of the statutory deduction base by amounts linked to paid-up capital and reserve adjustment was held unjustified on the facts, because the excess development rebate reserve had to be treated in accordance with the governing CBDT circular and the surtax scheme. The revised surtax assessment was therefore set aside in favour of the assessee.

---

---

Issues: (i) Whether the assessment could be reopened under section 8(b) of the Companies (Profits) Surtax Act, 1964 on the basis of the internal audit objection and alleged new information; (ii) Whether the capital base for statutory deduction was correctly reduced by the amounts of Rs. 2,22,222 and Rs. 2,87,540.

Issue (i): Whether the assessment could be reopened under section 8(b) of the Companies (Profits) Surtax Act, 1964 on the basis of the internal audit objection and alleged new information.

Analysis: The material necessary for the original assessment was already on record and had been considered by the assessing authority. The audit objection relied on a judicial decision dealing with excess depreciation reserve, which was not the same as the issue of development rebate reserve involved here. A subsequent High Court decision could not validate the reopening when it was not the basis of the original audit objection. The reopening was therefore founded only on a change of opinion and not on legally relevant information.

Conclusion: The reopening under section 8(b) was invalid and against the assessee.

Issue (ii): Whether the capital base for statutory deduction was correctly reduced by the amounts of Rs. 2,22,222 and Rs. 2,87,540.

Analysis: The increase in paid-up capital through bonus issue could not be offset by a corresponding reduction in general reserve on the facts found. The CBDT circular specifically treated excess development rebate reserve as other reserve for capital computation under the surtax scheme, and the relevant statutory framework supported the assessee's treatment of the reserve. The revenue's reduction of the capital base was therefore not justified.

Conclusion: The reduction of the capital base by both amounts was unjustified and against the assessee.

Final Conclusion: The assessee succeeded on both the reopening question and the merits of capital computation, and the surtax assessment as revised by the revenue authorities was set aside.

Ratio Decidendi: An assessment cannot be reopened on a mere change of opinion or on an audit objection that does not furnish legally relevant information on the issue involved, and for capital computation under the surtax law excess development rebate reserve must be treated in accordance with the governing circular and statutory scheme.

---