Capital base under surtax law includes general reserve and goodwill reserve; dividend proposals and Chapter VIA relief do not reduce it.

General reserve continued to form part of the capital base under the Companies (Profits) Surtax Act, 1964 even where dividend was declared after the accounting year, because a dividend recommendation remained only a proposal until valid declaration created an enforceable liability. Relief under Chapter VIA of the Income-tax Act could not be treated as profits and gains not includible in total income for reducing capital under rule 4 of the Second Schedule, so the capital base was not to be reduced on that basis. An amount credited to goodwill reserve was also a reserve, not a provision for a known liability, and was includible in capital computation. The assessee's capital base computation was therefore upheld on all points.

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Issues: (i) Whether dividend declared after the close of the accounting year out of general reserve could be excluded from the reserve while computing the capital base under the Companies (Profits) Surtax Act, 1964; (ii) Whether the reduction of capital by reference to deductions allowed under Chapter VIA of the Income-tax Act while applying rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 was justified; (iii) Whether the amount credited to the goodwill reserve account was a reserve forming part of the capital base.

Issue (i): Whether dividend declared after the close of the accounting year out of general reserve could be excluded from the reserve while computing the capital base under the Companies (Profits) Surtax Act, 1964.

Analysis: Dividend recommended by the board remained only a proposal until declaration by the shareholders. Amounts standing in the general reserve did not lose their character as reserve merely because dividend was later declared out of it after the accounting year. The liability to pay dividend arose only on declaration, and until then the reserve continued to form part of the capital base.

Conclusion: The exclusion of such dividend amounts from the general reserve was not warranted and the assessee succeeded on this issue.

Issue (ii): Whether the reduction of capital by reference to deductions allowed under Chapter VIA of the Income-tax Act while applying rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 was justified.

Analysis: The relief granted under Chapter VIA was part of the total income computation and could not be treated as profits and gains not includible in total income for the purpose of capital reduction. The capital base was therefore not liable to be reduced in the manner adopted by the assessing authority.

Conclusion: The reduction of capital was rightly deleted, and the finding was in favour of the assessee.

Issue (iii): Whether the amount credited to the goodwill reserve account was a reserve forming part of the capital base.

Analysis: The amount in question was not set apart to meet any known liability and did not have the character of a provision. It was a reserve created for general corporate purposes and was therefore includible in the capital computation.

Conclusion: The goodwill reserve was correctly treated as a reserve and included in the capital base, in favour of the assessee.

Final Conclusion: The common legal effect of the decision is that the assessee's computation of capital base was upheld on all contested points and the departmental appeals failed.

Ratio Decidendi: Amounts retained as general reserve or goodwill reserve remain part of the capital base unless they are appropriated to meet a known liability, and dividend proposals do not cease to be reserves until valid declaration creates an enforceable liability.

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