Bonus shares from general reserves do not increase capital for surtax computation, as actual book entries control.

For surtax computation under the Companies (Profit) Surtax Act, 1964, bonus shares issued by capitalising general reserves did not create a net increase in capital under rule 3 because the rise in share capital was matched by an equal reduction in reserves. The computation had to follow the actual book entries and the timing of the transactions, so later transfers from the profit and loss account could not be treated as the source of the bonus issue. The assessee's authorities under a different statutory scheme were inapplicable. The Tribunal therefore held that the proportionate amount was not includible as increased capital and rejected the alternative plea.

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Issues: Whether, for computing capital under the Second Schedule to the Companies (Profit) Surtax Act, 1964, proportionate capital attributable to bonus shares issued out of general reserves could be added under rule 3, and whether the assessee could shift the source of that issue to profits transferred later to reserve.

Analysis: The capital computation under the Act had to be made on the basis of the actual composition of capital and reserves as reflected in the books. When bonus shares are issued by capitalisation of general reserves, the amount transferred into share capital is offset by an equal reduction in reserves, so there is no net increase in capital for the purpose of rule 3. The authorities relied on by the assessee were under a different statutory scheme and did not govern the computation under the Companies (Profit) Surtax Act, 1964. The additional plea also failed because the balance-sheet showed that the bonus issue had been made out of the existing general reserves, while the transfer from profit and loss account occurred later.

Conclusion: The proportionate amount of Rs. 6,32,876 was not includible as increased capital, and the assessee's alternative plea was rejected.

Ratio Decidendi: For surtax computation, bonus shares issued by capitalisation of general reserves do not create a net increase in capital, because the reduction in reserves must be given effect to and the computation must follow the actual book entries and timing of the transactions.

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