Surtax computation rules on depreciation reserves and Chapter VIA deductions upheld for capital employed calculation.
For surtax computation, only the depreciation difference attributable to the relevant assessment year could be deducted from general reserves, not the accumulated shortfall of earlier years, and the assessee succeeded on this point. Deductions allowed under Chapter VIA of the Income-tax Act were treated as deductions in computing total income, not income excluded from total income, so Rule 4 of the Second Schedule could not be used to reduce capital employed on that basis. The appellate computation was therefore upheld, and both revenue challenges failed.
Issues: (i) Whether, for computing capital employed under the Surtax Act, only the depreciation difference relatable to the relevant assessment years, and not the accumulated difference of earlier years, was to be deducted from general reserves; (ii) Whether reductions in capital employed under Rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 could be made on account of deductions allowed under Chapter VIA of the Income-tax Act, 1961.
Issue (i): Whether, for computing capital employed under the Surtax Act, only the depreciation difference relatable to the relevant assessment years, and not the accumulated difference of earlier years, was to be deducted from general reserves.
Analysis: The relevant adjustment was held to be confined to the difference between the depreciation actually allowed under the Income-tax Rules and the depreciation provided in the books for the particular year under consideration. The reasoning followed the principle that the amount attributable to a specific year alone is to be deducted from general reserves, and not the entire accumulated shortfall of prior years.
Conclusion: The deduction was limited to the depreciation difference of the relevant assessment years, and the assessee succeeded on this issue.
Issue (ii): Whether reductions in capital employed under Rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964 could be made on account of deductions allowed under Chapter VIA of the Income-tax Act, 1961.
Analysis: Reliefs granted under Chapter VIA, including sections 80-I and 80J, were treated as deductions in the computation of total income and not as income, profits, or gains wholly outside the total income. On that basis, Rule 4 could not be invoked to reduce the capital employed by proportionate adjustment for such deductions.
Conclusion: Capital employed could not be reduced on account of Chapter VIA deductions, and the assessee succeeded on this issue as well.
Final Conclusion: Both challenges raised by the revenue failed, and the computation adopted by the appellate authority was upheld in full.
Ratio Decidendi: For surtax computation, only the depreciation difference attributable to the relevant year is deductible from general reserves, and deductions under Chapter VIA of the Income-tax Act do not constitute income excluded from total income so as to warrant a reduction of capital under Rule 4 of the Second Schedule.