Surtax capital base treatment of memorial fund amounts and section 80G deduction reduced by no corresponding capital adjustment

Amounts set apart to the Ramaraju Memorial Fund, shown in the balance-sheet under "Current Liabilities and Provisions", were not a reserve for surtax capital computation because the Second Schedule excludes sums so classified and the amounts were held under a binding obligation rather than as shareholders' funds. The issue was decided against the assessee. Deduction allowed under section 80G did not require any proportionate reduction in capital base under Rule 4 of the Second Schedule, following Supreme Court authority approving the jurisdictional High Court view. That issue was decided against the Revenue.

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Issues: (i) Whether amounts set apart to the Ramaraju Memorial Fund were a reserve includible in the capital base for surtax, or a liability excluded from capital computation. (ii) Whether deduction allowed under section 80G of the Income-tax Act, 1961 required a proportionate reduction in the capital base under Rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Issue (i): Whether amounts set apart to the Ramaraju Memorial Fund were a reserve includible in the capital base for surtax, or a liability excluded from capital computation.

Analysis: The amounts were carried in the balance-sheet under the head "Current Liabilities and Provisions". The Explanation to Rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 expressly excludes from reserve any amount shown under that heading in the prescribed balance-sheet form. Independently, once the company set apart the sums for the memorial fund under the articles, the amounts ceased to be shareholders' funds and were held for the fund under legal obligation. The company's control over the fund did not convert the amounts into reserve, and the sums partook the character of liability or borrowed funds for surtax computation.

Conclusion: The issue was decided against the assessee and in favour of the Revenue.

Issue (ii): Whether deduction allowed under section 80G of the Income-tax Act, 1961 required a proportionate reduction in the capital base under Rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964.

Analysis: This question was governed by the Supreme Court authority approving the jurisdictional High Court view that deduction under section 80G did not warrant the proposed reduction in capital base under Rule 4.

Conclusion: The issue was decided against the Revenue and in favour of the assessee.

Final Conclusion: The departmental appeals failed on the second issue but succeeded on the principal surtax-capital-base issue, resulting in a partial allowance of the appeal for the relevant year and allowance of the remaining appeals.

Ratio Decidendi: Amounts shown in the balance-sheet under "Current Liabilities and Provisions" cannot be treated as reserve for surtax capital computation, and sums appropriated to a fund under a binding obligation are not shareholders' funds for that purpose.

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