Surtax capital base rules: reserve transferred to general reserve stayed includible, and the depreciation adjustment failed on facts.

Book depreciation exceeding income-tax depreciation meant the factual premise for the surtax capital adjustment failed, so the adjustment could not be sustained under the Second Schedule to the Companies (Profits) Surtax Act, 1964. The development rebate reserve, having been transferred to general reserve before the relevant capital computation date, remained to be taken as it stood on that date and could not be excluded from capital base. Rule 1(iii) did not apply on the facts, and Rule 4 could not be used to make a pro tanto reduction where the Act contained no specific authority for it. The original surtax assessment was restored.

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Issues: (i) Whether the adjustment made on the footing that income-tax depreciation exceeded book depreciation was sustainable under the Second Schedule to the Companies (Profits) Surtax Act, 1964. (ii) Whether the amount of development rebate reserve written back to general reserve could be excluded from the capital base by invoking Rule 1(iii) or Rule 4 of the Second Schedule.

Issue (i): Whether the adjustment made on the footing that income-tax depreciation exceeded book depreciation was sustainable under the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: The figures in the balance-sheet showed that the net book value of fixed assets was lower than the written down value as per income-tax records, which meant that book depreciation was higher than income-tax depreciation. On those facts, the premise for the adjustment failed, and the relevant rule could not be applied.

Conclusion: The adjustment was unsustainable and the assessee succeeded on this issue.

Issue (ii): Whether the amount of development rebate reserve written back to general reserve could be excluded from the capital base by invoking Rule 1(iii) or Rule 4 of the Second Schedule.

Analysis: The reserve had already been transferred to general reserve before the relevant capital computation date, and the amount standing to the credit of development rebate reserve as on that date had to be taken as it stood. Development rebate reserve is specifically includible in capital base under Rule 1(ii), and the Act contained no specific provision authorising the reduction adopted by the Assessing Officer. Rule 1(iii) was inapplicable, and Rule 4 could not be used to make a pro tanto reduction on the facts found.

Conclusion: The exclusion from capital base was unjustified and the Department failed on this issue.

Final Conclusion: The assessee's appeal succeeded and the Department's appeal failed, resulting in restoration of the original surtax assessment.

Ratio Decidendi: Where a reserve is specifically includible in capital base under the surtax rules, it cannot be excluded by invoking a provision that does not fit the facts or by treating a duly transferred reserve as having lost its character merely because it was later merged with general reserve after the stipulated period under income-tax law.

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