Capital computation for bonus shares under tax rules includes capitalised reserves without reducing reserves absent express statutory language.

Under rule 2 of the Second Schedule to the Super Profits Tax Act, 1963, capital for standard deduction was to be computed first under rule 1 as paid-up share capital plus reserves on the first day of the previous year, and then increased proportionately for any rise in paid-up share capital during the year. The plain wording of rule 2 did not permit a corresponding reduction of reserves when bonus shares were issued from capitalised reserves. The expression "paid-up capital" was therefore read to include bonus-share capitalisation without deducting the underlying reserves, and the issue was decided in favour of the assessee.

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Issues: Whether, for computing capital under rule 2 of the Second Schedule to the Super Profits Tax Act, 1963, the paid-up capital was required to be increased by the amount represented by capitalised reserves on issue of bonus shares without making a corresponding reduction in reserves.

Analysis: The capital for standard deduction was required to be computed under rule 1 as the sum of paid-up share capital and reserves as on the first day of the previous year. Rule 2 then required that where paid-up share capital was increased during the previous year, the capital computed under rule 1 must be increased proportionately by the amount of such increase. The language of rule 2 was treated as plain and mandatory. The Court held that the provision permitted addition to paid-up capital on account of bonus shares but did not authorise a corresponding reduction of reserves, since the capital computed under rule 1 had to be taken as a whole and then augmented by the proportionate increase in paid-up share capital.

Conclusion: The issue was decided in favour of the assessee. The expression "paid-up capital" in the Super Profits Tax Act, 1963 includes capitalised reserves arising from the issue of bonus shares, without any corresponding decrease in reserves as at the first day of the previous year.

Ratio Decidendi: In a taxing statute, clear and unambiguous language must be given its plain effect, and where rule 2 requires the capital computed under rule 1 to be increased by the proportionate increase in paid-up share capital, reserves as originally computed cannot be reduced unless the statute expressly so provides.

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