Surtax capital computation: asset cost reduction under Rule 2 depends on asset category, not actual income in the year.

Rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 applies to assets falling within the specified categories by description, and their cost must be reduced in computing capital even if they did not yield income during the relevant year. The operation of the rule does not depend on actual receipt of income in that year, because the capital computation scheme is aimed at avoiding artificial year-to-year fluctuation. ICICI debentures, however, did not fall within the excluded asset categories linked to clauses (iii), (vi) or (viii) of rule 1 of the First Schedule, so their cost was not required to be excluded from the capital base.

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Issues: (i) Whether, in computing capital under rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the cost of assets must be reduced even when such assets did not yield income during the previous year and no exclusion of income arose under rule 1 of the First Schedule; (ii) Whether the cost of ICICI debentures was liable to be excluded from the capital base.

Issue (i): Whether, in computing capital under rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the cost of assets must be reduced even when such assets did not yield income during the previous year and no exclusion of income arose under rule 1 of the First Schedule.

Analysis: Rule 2 operates where a company owns assets whose income, under clauses (iii), (vi) or (viii) of rule 1 of the First Schedule, is required to be excluded from total income in computing chargeable profits. The words describing the assets in rule 2 are not dependent on actual receipt of income in the relevant year. Reading the two rules together, the capital base is to be reduced by the cost of such assets if they fall within the specified categories, irrespective of whether they yielded income in that year. This avoids an artificial year-to-year fluctuation in the capital computation and accords with the scheme of surtax.

Conclusion: The reduction of capital by the cost of the relevant assets is required even if no income was actually received from them during the year; this issue is decided against the assessee.

Issue (ii): Whether the cost of ICICI debentures was liable to be excluded from the capital base.

Analysis: The debentures of ICICI did not answer the description of assets whose income fell within clauses (iii), (vi) or (viii) of rule 1 of the First Schedule. They were therefore outside the scope of the exclusion mandated by rule 2 of the Second Schedule.

Conclusion: The cost of the ICICI debentures was not liable to be excluded from the capital base; this issue is decided in favour of the assessee.

Final Conclusion: The principal contention of the assessee fails, but limited relief is granted on the exclusion of the ICICI debentures, resulting in partial allowance of the appeal.

Ratio Decidendi: For surtax capital computation, rule 2 of the Second Schedule applies to assets falling within the specified categories by description, and its operation does not depend on actual income being earned from those assets in the relevant year.

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