Surtax capital computation requires deduction of depreciation excess from reserves, and mixed-profit appropriation cannot defeat the statutory scheme.

Where book depreciation is lower than depreciation allowed under the Income-tax Act, the excess must be deducted from the general reserve while computing capital under the Companies (Profits) Surtax Act. The article rejects the contention that the assessee may, as of right, treat mixed profits as first applied towards dividend and investment allowance appropriations to avoid that reduction; such allocation must yield to the statutory computation scheme. It also rejects a year-wise limitation, treating the cumulative depreciation difference as the relevant figure for surtax purposes. The practical effect is that the depreciation difference is excluded from reserves used in capital base computation.

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Issues: Whether the difference between depreciation allowed under the Income-tax Act and depreciation shown in the books was required to be deducted from the general reserve while computing the capital base under the Companies (Profits) Surtax Act, and whether dividend and investment allowance appropriations could be treated as having come out of that depreciation difference.

Analysis: The assessee maintained its books on the straight-line method, while depreciation was allowed under the Income-tax Act on the reducing balance method, resulting in a higher tax depreciation than book depreciation. The resulting excess formed part of the general reserve and, on the authority of the binding High Court decision relied upon, the difference had to be deducted from other reserves for surtax purposes. The contention that the assessee could choose to appropriate the mixed funds first towards dividend and investment allowance was rejected, because such choice is not absolute and must yield to the statutory scheme. The view that the deduction should be confined only to year-wise differences was also rejected, the cumulative difference being the relevant figure.

Conclusion: The difference in depreciation was rightly excluded from the general reserve while computing capital, and the assessee's claim regarding dividend and investment allowance appropriation failed.

Ratio Decidendi: Where book depreciation is lower than the depreciation allowed for income-tax purposes, the excess must be deducted from other reserves for surtax computation, and the assessee cannot as of right allocate mixed profits to avoid that statutory reduction.

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