Capital computation under surtax rules excludes Indian company shares by asset class, even when no dividend arose in the year.

For capital computation under rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, the cost of shares of Indian companies had to be excluded from capital because the rule describes a class of assets by reference to income ordinarily excluded under clause (viii) of rule 1 of the First Schedule. Actual receipt of dividend in the relevant year was not a condition for the exclusion. The capital base was therefore reduced by the cost of the relevant shareholding even where dividend income was nil.

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Issues: Whether, for computing capital under rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, the cost of shares of Indian companies held by the assessee had to be excluded even though no dividend income from those shares had actually arisen in the relevant year.

Analysis: The words in rule 2 referring to assets the income from which is required to be excluded under clause (viii) of rule 1 of the First Schedule were held to be descriptive of the class of assets covered by the rule, and not a condition requiring actual receipt of dividend income in the relevant previous year. The exclusion under rule 2 was treated as dependent on the nature of the asset and the statutory machinery for capital computation, not on the quantum of income earned by that asset in the year. On that view, the diminution of capital by the cost of the shares was held to apply even when the dividend was nil.

Conclusion: The cost of the shares of Indian companies was required to be deducted from the assessee's capital under rule 2, notwithstanding absence of dividend income in the year.

Final Conclusion: The statutory capital base for surtax purposes was reduced by the cost of the relevant shareholding, and the assessee's challenge to that adjustment failed.

Ratio Decidendi: Where a capital-computation provision identifies a class of assets by reference to the type of income ordinarily excluded from chargeable profits, the deduction operates by reference to the asset's statutory description and not to actual income earned in the relevant year.

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