Capital employed under surtax rules cannot be reduced mechanically by higher assessed tax where a reasonable tax provision was already made.

Rule 1-A of Schedule II to the Companies (Profits) Surtax Act, 1964 permits reduction of capital employed only where no provision is made for a current liability or where the provision is unreasonably short. The Explanation specifically addresses dividend liability, but no parallel deeming rule applies to income-tax liability. On the stated facts, a substantial tax provision had been made in the books, and the later assessed tax did not show an abnormally inadequate provision. The excess of assessed liability over the booked provision could not be mechanically substituted to reduce capital employed, so the proposed reduction was not justified.

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Issues: Whether, for computing capital employed under Rule 1-A of Schedule II of the Companies (Profits) Surtax Act, 1964, the Assessing Officer could reduce the capital base by the difference between the tax provision made in the books and the higher tax finally assessed.

Analysis: Rule 1-A contemplates reduction of capital only where no provision is made in respect of current liabilities or where the provision made falls short of the amount which should reasonably have been credited. The Explanation specifically clarifies the position for dividend liability under item (9), while no comparable deeming rule is provided for income-tax liability under item (8). On the facts, the assessee had made a substantial provision for tax, and the later assessed figures did not show an abnormally inadequate provision. The rule therefore had to be applied on the basis of reasonableness, and the excess assessed liability could not automatically be substituted to reduce capital employed.

Conclusion: The reduction of capital employed by the amount of Rs. 4,95,739 was not justified and the assessee succeeded on this issue.

Ratio Decidendi: Under Rule 1-A, tax provision in the accounts can be adjusted only to the extent the credited amount is unreasonably low; the difference between booked provision and final assessment cannot be mechanically added back to reduce capital employed.

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