Capital reduction under Rule 2 applies to specified assets even without income, but ICICI debentures were excluded

Rule 2 of the Second Schedule requires capital to be reduced by the cost of assets falling within rule 1 of the First Schedule, and that reduction applies even if those assets did not yield income in the relevant previous year. The descriptive reference to those assets does not make the adjustment depend on actual income receipt; it is enough that they belong to the specified category. Debentures of ICICI did not fall within clauses (vi) or (viii) of rule 1, so their cost was not liable to exclusion. The main contention on rule 2 failed, while exclusion of the debentures was accepted.

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Issues: (i) Whether, for computing capital under rule 2 of the Second Schedule, the cost of assets falling within rule 1 of the First Schedule must be reduced even where those assets yielded no income during the previous year; (ii) Whether debentures of ICICI were assets whose cost had to be excluded under rule 2.

Issue (i): Whether, for computing capital under rule 2 of the Second Schedule, the cost of assets falling within rule 1 of the First Schedule must be reduced even where those assets yielded no income during the previous year.

Analysis: Rule 2 applies where a company owns assets the income from which, in accordance with 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 identifying the assets are descriptive of the category of assets and do not make the operation of rule 2 depend on actual receipt of income in the relevant year. Reading the two schedules together, the capital base must be diminished by the cost of such assets irrespective of whether they in fact yielded income in that year.

Conclusion: The reduction under rule 2 is required even if no income was earned from the relevant assets during the previous year, and this issue is against the assessee.

Issue (ii): Whether debentures of ICICI were assets whose cost had to be excluded under rule 2.

Analysis: The debentures did not answer the description of assets covered by clauses (vi) or (viii) of rule 1 of the First Schedule. On that basis, their cost could not be brought within the diminution required by rule 2.

Conclusion: The cost of the ICICI debentures was not liable to be excluded, and this issue is in favour of the assessee.

Final Conclusion: The appeal succeeded only to the limited extent of excluding the ICICI debentures from the capital reduction, while the main contention on rule 2 was rejected.

Ratio Decidendi: Under rule 2 of the Second Schedule, the capital base is to be reduced by the cost of assets of the relevant category under rule 1 of the First Schedule, and the reduction does not depend on actual income having arisen from those assets in the relevant year.

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