Surtax capital computation requires adjustment for excess depreciation and tax provision shortfall, reducing reserves accordingly.

For surtax capital computation, the shortfall between depreciation actually allowed under the Income-tax Act and depreciation provided in the books had to be deducted from general reserves, because the relevant rule required reserves to be reduced by amounts allowed as deductions in computing income. The Tribunal also held that where assessed tax liability exceeded the provision made in the books, the capital base had to be reduced by the excess, since a tax provision is contingent until final quantification and any shortfall affects the reserve computation. The reduction of capital on both counts was upheld against the assessee.

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Issues: (i) Whether, for computation of capital under the Sur-tax law, the difference between depreciation actually allowed under the Income-tax Act and depreciation provided in the books had to be deducted from general reserves; (ii) Whether the capital base had to be reduced where the tax liability assessed exceeded the provision made in the books.

Issue (i): Whether, for computation of capital under the Sur-tax law, the difference between depreciation actually allowed under the Income-tax Act and depreciation provided in the books had to be deducted from general reserves.

Analysis: The relevant rule required other reserves to be reduced by amounts allowed as deduction in computing income. The depreciation provided in the books was lower than the depreciation allowed for income-tax purposes, and the excess necessarily affected the reserve position. The earlier Bombay High Court interpretation of the same rule and the Tribunal view in a similar case supported deduction of the difference from general reserves.

Conclusion: The reduction of capital by the excess depreciation was valid and the issue was decided against the assessee.

Issue (ii): Whether the capital base had to be reduced where the tax liability assessed exceeded the provision made in the books.

Analysis: The authorities on reserves and provisions show that a provision for taxation is contingent on later quantification, and where the assessed liability is higher than the booked provision, the shortfall affects the capital computation. Rule 1A also contemplated reduction where the amount credited fell short of what should reasonably have been credited.

Conclusion: The capital base was correctly reduced for the excess tax liability and the issue was decided against the assessee.

Final Conclusion: The appeals failed on the substantive surtax computation questions, and the orders reducing capital on both counts were sustained.

Ratio Decidendi: For surtax capital computation, where book depreciation or tax provision is less than the amount properly allowable or assessable, the resulting shortfall must be adjusted by reducing the relevant reserve or capital base under the applicable schedule.

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