Interpretation of Expl. 1 to Rule 2 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, regarding the treatment of reserves created by revaluation of book assets as part of the company's capital for surtax assessment purposes.

( 1 ) THE following question is involved in this reference under Section 256 (1) of the I. T. Act, 1961, read with Section 18 of the Companies (Profits) Surtax Act, 1964:" Whether, on the facts and in the circumstances of the case and on a proper interpretation of Expl. 1 to Rule 2 of the Second Schedule to Companies (Profits) Surtax Act, 1964, the Tribunal was right in holding that the sum of Rs. 70,33,000 being the adjustment made in respect of the excess depreciation charged in the earlier years could not be treated as part of the capital for the purposes of determining the statutory deduction under Section 2 (8) of the said Act ? "

( 2 ) THE question related to the surtax assessment for the assessment year 1970-71. The assessee is a company to which the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as " the Act"), applies.

( 3 ) WHILE computing the capital of the company for the assessment year 1970-71 under the Second Schedule to the aforesaid Act, the ITO included Rs. 94,33,000 in the capital shown as the " general reserve " in the balance-sheet of the company for the period ended 30th June, 1968. In the aforesaid general reserve of Rs. 94,33,000, a sum of Rs. 70,33,000 was included describing it as "add balance of excess depreciation provided in past transferred from profit and loss a/c. " and in Schedule D (Part I) of the balance-sheet Rs. 70,33,000 was shown as adjustment of excess depreciation on buildings, machinery, etc. , being the difference between the amount provided and the amount calculated under Section 205 (2) (b) of the Companies Act, 1956, up to 30th June, 1967.

( 4 ) THE company was claiming depreciation according to the written down value method adopted up to the earlier assessment year. But in this year it changed the said method and adopted the straightline method and adjusted the excess depreciation of Rs. 70,33,000 as computed under Section 205 (2) (b) of the Companies Act, 1956.

( 5 ) THE ITO deducted the statutory deduction of Rs. 94,33,000, being " general reserve ", which included Rs. 70,33,000, being the adjustment of excess depreciation.

( 6 ) THE Addl. Commissioner, acting under Section 16 of the Act and after hearing the company, held that the general reserve to the extent of Rs. 70,33,000 was created by the company by revaluation of the assets and it was brought into existence by creating or increasing by revaluation or otherwise the book assets and, therefore, the aforesaid amount was erroneously included by the ITO in the computation of the capital of the company for the purpose of the aforesaid Act which was prejudicial to the interests of the revenue. He directed the ITO to modify the assessment by excluding Rs. 70,33,000 from the computation of the capital of the company for the purpose of assessment under the Act.

( 7 ) THE assessee then filed an appeal which was dismissed by the Tribunal in view of Expl. 1 to Rule 2 of the said Schedule to the Act. The material portion of the Explanation reads as follows :" Explanation 1,- -. . . . . . reserve brought into existence by creating or increasing (by revaluation or otherwise) any book asset is not capital for computing the capital of a company for the purposes of this Act. "

( 8 ) MR. R. N. Bajoria, counsel for the assessee fairly and rightly submits that this case falls within the Explanation and, therefore, we answer the question in the affirmative and in favour of the revenue. There will be no order for costs.