JUDGMENT

G.N. Ray, J.-Civil Appeal Nos. 1360-61 of 1981 are directed against judgment dated October 21, 1981 passed by the Division Bench of Madras High Court in Tax Case Nos. 743-744 of 1977 arising out of Reference Nos. 495-496 of 1977. Civil Appeal No. 1705 of 1980 is directed against judgment dated November 12, 1986 passed by the Division Bench of Madras High Court in Tax Case Petition No. 367 of 1986. It may be stated here that the Tax Case Petition No. 367 of 1986 was disposed of by the High Court following its judgment passed by the Madras High Court in the said Tax Case Nos. 743- 744 of 1977. It will, therefore, be appropriate to refer to the relevant facts relating to Tax Case Nos. 743-744 of 1977. Which were disposed of by the Madras High Court on October 21, 1981.

2. Tax Case Nos. 743-744 of 1977 arose out of the reference made under Section 256 (1) of the Income Tax Act, 1961. The reference before the High Court raised a short question about the computation of capital under Rule 3 of the Schedule II of the Companies (Profits) Surtax Act, 1964. The origin of the Companies (Profits) Surtax Act, 1964 may be traced back to the Surtax Act, 1940, which was enacted for the purp