Revisional jurisdiction and surtax capital base: retained earnings and scientific research reserves were treated as includible in computing capital base.

The note explains that a revisional order under section 16(2) was not invalid merely because the notice and order contained descriptive errors and mixed account figures, where the record showed the authority had applied its mind and the assessee had participated without objection. It also states that, for a foreign company's surtax capital base, retained earnings and unappropriated profits forming part of other reserves were includible, and a reserve linked to capital expenditure on scientific research was not excluded simply because the related expenditure had been allowed in income-tax assessment. On these principles, the original assessments were not shown to be erroneous and prejudicial.

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Issues: (i) Whether the revisional order under section 16(2) was invalid for alleged misdescription of the assessee and want of application of mind. (ii) Whether surplus/unappropriated profits and the reserve arising from capital expenditure on scientific research were includible in the capital base for surtax purposes.

Issue (i): Whether the revisional order under section 16(2) was invalid for alleged misdescription of the assessee and want of application of mind.

Analysis: The notice and order contained several mistakes and mixed up figures from different sets of accounts, but the defects showed a wrong approach rather than absence of consideration. The assessee had participated throughout without objecting to the description, and the record indicated that the authority intended to proceed against the company carrying on the relevant business. An order marred by errors is not necessarily one passed without application of mind.

Conclusion: The challenge based on lack of application of mind failed and the revisional order was not invalid on that ground.

Issue (ii): Whether surplus/unappropriated profits and the reserve arising from capital expenditure on scientific research were includible in the capital base for surtax purposes.

Analysis: For a foreign company, the capital base had to be computed with reference to the head-office accounts. On the first day of the relevant accounting year, retained earnings or earned surplus forming part of the company's other reserves were treated as reserve and not as mere unallocated profits. The reserve relating to scientific research expenditure was also not excluded merely because the corresponding expenditure had been allowed in the income-tax assessment, since the deduction related to the asset/expenditure side and not to the separate reserve entry. The revisional authority therefore had no basis to hold the original assessments erroneous and prejudicial to revenue on these counts.

Conclusion: Both items were includible in the capital base and the revisional authority lacked jurisdiction to revise the assessments.

Final Conclusion: The assessee succeeded in all the appeals and the common revisional order was set aside.

Ratio Decidendi: In computing the capital base of a foreign company under the surtax provisions, retained earnings forming part of other reserves are includible, and a reserve created in relation to scientific research expenditure is not excluded merely because the underlying expenditure was allowed in income-tax assessment; revisional jurisdiction cannot be exercised where the original assessment is not shown to be erroneous and prejudicial on these grounds.

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